Until this week, American Airlines looked set to merge with US Airways, and become the largest carrier on the planet. The leaders of both companies were on board and American’s unruly unions had bought in. The past decade, meanwhile, has seen a series of huge mergers in the U.S. airline industry without stiff resistance from government antitrust regulators.
But the Justice Department balked this time. The antitrust division this week announced that it is joining attorneys general from six states and Washington, D.C., in a suit to block the merger. The government’s 56-page complaint argues that the corporate consolidation it watched over the past handful of years has “left fewer, more-similar airlines, making it easier for the remaining airlines to raise prices, impose new or higher baggage and other ancillary fees, and reduce capacity and service.” Allowing another mega-merger would “continue the trend — at the expense of consumers.”
Justice points to US Airways’ current practice of offering low-price fares on flights that connect through its hubs, claiming that it wouldn’t have the same incentive to offer these cut-rate tickets after merging with American. Instead, the new airline would engage in an uncompetitive system in which a few big firms decline to go after each other. The government points to hundreds of routes that would have fewer competitors after the proposed union unless another player took the challenging step of trying to hack into these markets. And antitrust lawyers point out that the new airline would have a near-lock on Reagan National Airport, claiming two-thirds of the Washington-area airport’s slots. These aren’t trivial considerations.
The companies fire back that their corporate union would save them half a billion dollars annually, after doing things like linking up networks, merging plane fleets and closing duplicative operations. They say that they will be better able to offer lower prices to consumers under those circumstances. Or at least a better product — US Airways and American customers would have more routing and timing options after the merger. Without merging, the carriers would have a much harder time diverting business from Delta and United’s massive networks.
The bigger argument for airline consolidation, though, is that it brings stability to an industry that has seen massive bankruptcies and restructurings over the past decade. Following large mergers, airlines have reduced capacity in the business, which, despite low profit margins, has begun to recover from the 2008 recession and fuel price shocks.
Fine, but that process must be tolerable to consumers. Justice argues that blocking yet another merger is the way to limit negative effects, such as price hikes. But a settlement would avoid the risk of losing in court, could iron out some of the largest potential harms to consumers and would satisfy the companies’ legitimate desire to compete toe-to-toe with giants United and Delta instead of penalizing them for being the last ones to merge. The airlines can start the process by offering to release their hold on National.