In a study of a potential tie-up of US Air and AMR Corp., the bankrupt parent of American, the American Antitrust Institute and the Business Travel Coalition argued that the deal would likely lead to complications they said have resulted from the six previous major airlines mergers that have occurred since 2005, including costly post-merger integration problems, reduced rivalry on important routes, above-average fare increases and reduced service to smaller communities. They urged the Department of Justice, which would conduct the antitrust review of the merger, to examine the impact previous airline deals have had on competition.
The AAI and the BTC also challenged the notion that a US Air-American tie-up would help flyers by creating a third giant carrier to compete against behemoths Delta Air Lines Inc. and United Continental Holdings Inc.
"The merger could ... hasten a troubling metamorphosis of the domestic airline industry from one in which hub airports were designed to accommodate multiple, competing airlines to a few large, closed systems that are virtually impermeable to competition," according to the report, which was written by AAI vice president Diana Moss and BTC chairman Kevin Mitchell.
In a speech to the National Press Club in July, US Airways chairman and CEO Douglas Parker said a merger with his carrier is the best to way to ensure American's financial viability as it emerges from bankruptcy because it gives American the comprehensive route structure it now lacks. "American's network weakness and consequent revenue challenges can only be fixed through a merger -- and only through a merger with US Airways," he said.
Several antitrust lawyers have argued that a takeover by US Airways would not pose sufficiently important antitrust concerns to warrant the DOJ's blocking the deal because the airlines have few significant overlaps in routes.
However, there are route overlaps that under traditional airline merger review practices would likely lead to a government order to shed routes. The DOJ makes merging carriers divest routes when they serve the same city pairs and few other competitors offer similar flights. The antitrust lawyers said US Airways might be able to defend keeping routes that otherwise might have to be divested if the DOJ can be convinced the deal creates a third nationwide airline network that would compete with the two megacarriers formed by the mergers of UAL Corp. and Continental Airlines Inc. in 2010 and of Delta Air Lines and Northwest Airlines Corp. in 2008.
US Airways spokesman Andrew Christie Jr. said Wednesday that both consumers and communities will benefit from a tie-up with American.
"American Airlines as a standalone company can't be competitive with Delta, United and others," he said. "A combined US Airways-American Airlines brings together two complementary networks and will increase competition in the airline industry. The number of passengers served will increase, all hubs will be maintained, capacity will not be cut, and service will be restored to nine communities where American Airlines previously canceled operations."
Critics said that the benefits of a large network are overstated and the precariousness of American's ability to survive overblown.
AAI and BTC noted that the merger would combine the fourth-largest U.S. carrier (American) with the fifth-largest. The combination would form the country's largest airline with a 20% market share. The big four -- which also would include Southwest Airlines Co., United Continental and Delta -- would control more than 70% of the national market.
With Southwest's takeover of AirTran Airways Inc., the groups said that only a "dwindling fringe" of low-cost carriers remain to impose pricing discipline on the major carriers: JetBlue Airways Corp., Frontier Airlines Inc., Spirit Airlines Inc., Virgin America, Allegiant Air and Sun Country Airlines.
Although the previous major mergers were approved by the Department of Justice based in part on speculation about efficiency gains likely to be created by the combinations, the groups said there is now enough evidence to actually measure whether those purported benefits materialized. "The proposed US Airway-American transaction presents a unique opportunity for the DOJ to analyze evidence on previous airline mergers," they said.
According to the AAI-BTC analysis, which the groups concede isn't complete because it is pulled from only publicly available sources, the benefits have largely flowed to the carriers and not to fliers.
They noted that the Delta-Northwest and United-Continental mergers "substantially eliminated competition on hub-to-hub routes" and led to service reductions or fare increases to flights in or out of Detroit; New York's JFK; Newark, N.J.; San Francisco; Chicago's O'Hare; Denver; Atlanta; Memphis; Salt Lake City; Minneapolis-St. Paul; and Houston.
They also found that over half of the Delta-Northwest routes and all of the United-Continental routes examined showed fare increases.
By increasing the traffic between large hubs, the groups also found that mergers have resulted in cutbacks to service at smaller hubs or nonhub cities. At Cincinnati, for instance, departures declined by 40% between 2007 and 2011. Similarly, cutbacks were experienced at St. Louis after the 2001 takeover of Trans World Airlines Inc. by American and at Las Vegas after the 2005 takeover of America West Airlines by US Airways.
Looking at a US Air-American deal specifically, the groups found that a merger would solidify the merged carriers' control at hubs in New York's JFK and LaGuardia; Philadelphia; Reagan-National in Washington; Charlotte, N.C.; and Miami. They noted that such an increase hold on regional hubs was considered grounds by the DOJ to block United's attempt to acquire US Air in 2001.
Finally, the groups said the merger would lead to a U.S. Airways-American monopoly of more than half of the routes where the two carriers currently overlap; increase the market power of all the big carriers to raise prices on their own or in concert; give all the major carriers more leverage over travel agencies, airports, supply distribution system, parts suppliers and caterers; and reduce transparency in setting of baggage handling, preferred seating and other ancillary fees.
Recognizing that US Air might ask the DOJ to overlook anticompetitive effects on grounds that a merger with US Air is the best way for American to exit bankruptcy, the groups insisted that American does not fit the antitrust regulators' definition of a "failing firm" and is not entitled to special treatment. "It is clear that the failure of American is not imminent, even though it is in bankruptcy," they wrote. They noted that a number of airlines have moved in and out of bankruptcy over the years. "This lends some support to the notion that bankruptcy has become something of a 'business as usual' condition unique to the highly cyclical airline industry whereby the firm remains a viable economic entity."
The groups conceded that antitrust approvals of previous major airline deals might make it hard for the DOJ to block a US Air-American union. Absent a DOJ decision to block the merger or force route divestitures, the groups said Congress and regulators should consider new rules to reduce the power of global airline alliances, permit collective bargaining by travel agents with airlines, establish greater consumer protections and require more transparency in ancillary fees.
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