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Lawmakers fear loss of hubs from airline merger

by William McConnell In Washington  |  Published February 27, 2013 at 3:57 PM
Airline executives and advocates for business travelers and other consumers painted two very different pictures of the consumer impact of allowing American Airlines Inc. and US Airways Group Inc. to follow through with their plans to merge during a U.S. House of Representatives hearing on the air carriers' $11 billion deal.

The companies have pitched the deal as a way for them to build a third legacy carrier on a scale that can compete with Delta Air Lines Inc. and United Continental Holdings Inc. Both of those carriers completed massive acquisitions in the past five years -- Delta by merging with Northwest Airlines Corp. and United by acquiring Continental Airlines Inc.

The latest merger plan, announced Feb. 14, resulted from nearly a year of negotiations between the companies and would be included as part of American's emergence from bankruptcy.

The deal doesn't need congressional approval but must win antitrust clearance from the Department of Justice.

Officials from US Airways and AMR Corp.'s American conceded that both airlines would survive without the deal. But they argued that because of their limited overlaps in routes, they'd be able to build a much more extensive national network featuring bigger hubs that fly to more destinations.

"Our customers tell us they want a bigger network with more choices and more opportunities," Stephen Johnson, US Airways' executive vice president for corporate and government affairs, told the House Judiciary's antitrust subcommittee Tuesday. "They are telling us that by leaving to fly on United and Delta."

Johnson said plenty of competition will remain to keep ticket prices in check, and not just from Delta and United. He said low-cost carriers such as Southwest Airlines Co., JetBlue Airways Corp., Virgin America Inc. and others are also market factors. In the meantime, travelers will get the benefit they want most -- the ability to reach their destination with fewer plane changes and shorter travel times.

"When we talk to people in our hubs, they talk not about pricing but how to expand the hub," Johnson said, insisting that combining US Airways and American will add more flights to their hubs.

"This is the most competitive business on the planet. It is ultra-competitive," testified Gary Kennedy, American's senior vice president and general counsel. "When these airlines combine, that competition will remain. We are tying to become a stronger, more vibrant competitor against those carriers already in place."

Kennedy said the merger also will enable the two carriers to strengthen their international alliances with carriers overseas, further increasing their ability to compete with Delta and United.

But critics of the deal challenged the companies' assertion that US Airways and American have overlaps on only 12 routes and warned that the deal is likely to result in reduced service and higher fares.

Christopher Sagers, a law professor at Cleveland State University in Ohio, said that the traditional antitrust analysis used to gauge the effect of airline mergers understates the harm to consumers by relying too much on overlaps in city-to-city routes. Because of carriers' reliance on hubs to get from one destination to another, the harm caused by the deal would be much greater than a simple look at overlapping routes would suggest.

"There are hundreds of cities where the two airlines compete. It works out to around 4,900 routes," he said.

Kevin Mitchell, chairman of the Business Travel Coalition, said the benefits to merging are overstated. "American is exiting bankruptcy reorganized as a lower-cost carrier with billions of dollars in cash and equivalents, new aircraft on order and their CEO has said countless times they will be profitable as a standalone carrier."

He said that US Airways, on the other hand, is experiencing "some of its most successful earnings in its history. So, I don't buy into the notion that these are failing firms."

While questioning the executives of both airlines, many lawmakers focused on how the deal will lead to service cuts at their local airports, particularly regional hubs such as Memphis, Pittsburgh and Charlotte, N.C., which have either seen cutbacks from previous mergers or are vulnerable as a result of this deal.

Rep. Steve Cohen, D-Tenn., said he feels Delta executives misled him by promising to maintain traffic through Memphis, which had been a major Northwest hub.

Subcommittee Chairman Spencer Bachus, R-Ala., however, endorsed the deal as a way of breaking the cycle of bankruptcy and reorganization that has plagued the legacy carriers for years.

Rep. John Conyers of Michigan, the Judiciary Committee's ranking Democrat, countered that it's time to assess whether the megamergers of the past half-decade have delivered for consumers. "Both parties to this merger bear a high burden in demonstrating that further consolidation in the airline industry is warranted," he said.

With the mergers of Delta and Northwest and of United and Continental, Conyers questioned whether US Airways and American can legitimately argue that there remains excess capacity in the system and unprofitably low fares.

"Both airlines are, in fact, perfectly capable of surviving, even thriving as standalone companies. Industry consolidation may benefit airlines that remain by giving them power to raise fares and fees but it comes with costs to the consumer that may result in raised fares and fewer consumer choices, particularly in hubs and city pairs where the two carriers overlap," he said.

In the Senate on Tuesday, Antitrust Subcommittee Chairwoman Amy Klobuchar, D-Minn., said her panel will hold a hearing on the deal March 19. In a letter she and subcommittee ranking Republican Mike Lee of Utah sent to the DOJ, they called on the antitrust regulators to conduct a robust analysis of the deal by putting the mergers between Delta and Northwest and United and Continental in context.

"Specifically, it will be important to determine how these mergers affected consumer prices, baggage and other fees, frequent flier programs, and airline service," Klobuchar and Lee wrote. "It will likewise be critical to determine whether the airlines have realized the efficiencies they claimed as the basis for the mergers."

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Tags: American Airlines Inc. | AMR Corp. | Amy Klobuchar | Business Travel Coalition | Continental Airlines Inc. | Delta Air Lines Inc. | JetBlue Airways Corp. | John Conyers | Kevin Mitchell | Northwest Airlines Corp. | Southwest Airlines Co. | Spencer Bachus | Stephen Johnson | Steve Cohen | United Continental Holdings Inc. | US Airways Group Inc. | Virgin America Inc.

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William McConnell

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