Why the Texas AG Opposes American's Merger

Texas Attorney General Greg Abbott is no fan of Big Government. As he proudly declares, "My history of taking on the Department of Justice is well documented. I have sued the Obama administration about 28 times and have repeatedly battled against overreaching actions by the federal government."

Yet he was one of six state attorney generals who joined the Department of Justice in a lawsuit filed on Tuesday to block the proposed merger between American, which is headquartered in his home state, and US Airways.

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Likely anticipating questions and consternation about his out-of-character move, Abbott laid out his case against the merger in the Opinion section of the Dallas Morning News.

So, why does he object to the merger?

The answer is simple: We believe that actions by the airlines and their officials violate antitrust laws. In fact, the legal violations appear so overt that it would offend my oath of office not to take action.

In particular, Abbott considers the merger to be anti-competitive—not pro-competitive as the airlines themselves would have it. "What the proposed merger seeks is not competition in the free market, but it expressly seeks the elimination of competition so the airlines no longer need to compete for customers. It turns the free market on its head." He continues:

When you have fewer competitors—in this case, just three legacy airlines—it's much easier for them to play follow-the-leader. One takes the bag fee up, and the others go along. If you reduce the number of airlines, you make it easier for the remaining players to participate in tacit coordination rather than real competition. For airlines, the free market is morphing into an oligopolistic market. Competition is giving way to price and market control by a limited number of players who appear intent to agree on price increases rather than competing for customers. That is what typically happens when competition is removed from the marketplace.

Finally, Abbott points out that American is doing just fine without partnering with US Airways, having just reported record quarterly revenue and a $357 million profit.

There's nothing new or novel about Abbott's thinking on this issue. His points have all been made before, by consumer advocates and by the Justice Department, among others. What makes his comments noteworthy is that they're coming from a self-styled pro-business advocate, who might reasonably have been expected to come down on the side of his home-state airline.

Merger Cheat Sheet

  • The new company will retain the "American Airlines" name and be based at American's Ft. Worth headquarters.
  • US Airways chief Doug Parker will be the new CEO. American chief Tom Horton will be named chairman of the new board and remain in that position until the spring of 2014 when the company's first annual shareholder meeting will be held. When Horton departs the board, Parker will assume his position as chairman.
  • American's creditors would own around 72 percent of the new company; US Airways shareholders would get the rest.
  • Based on 2012 results, the new company would have generated $38.7 billion in revenue.
  • The merger is expected to generate around $1 billion in combined extra revenue and cost savings for the new company.
  • The new company will be valued at around $11 billion.
  • Combining the third- and fifth-largest U.S. carriers will create the world's largest airline, in terms of passenger traffic.
  • Prior to any post-merger rationalization, the two airlines will have around 94,000 employees, 950 planes, 6,500 daily flights, and eight major hubs (American: Dallas, Miami, Chicago, Los Angeles, New York; US Airways: Phoenix, Philadelphia, Charlotte). Although the carriers promise to maintain all current hubs, Phoenix and Philadelphia are likely to be downsized in the post-merger "rationalization."
  • The new American will be a member of the oneworld alliance, not the Star Alliance.
  • The merger is subject to review and approval by U.S. regulators. That wasn't expected to be a problem since there is relatively little overlap between the two airlines' networks.
  • The actual merger won't happen overnight. United and Delta required five and seven months respectively to secure the necessary approvals for their mergers.
  • It was 22 months after their merger closed before United and Continental finally merged their frequent flyer programs. Expect a similar post-close interval before American and US Airways consolidate their programs.
  • Comparisons between American and US Airways' current mileage programs are probably moot since there's a high likelihood that an entirely new revenue-based program (like Southwest's) will be introduced to replace both programs.
  • After the merger, 83 percent of U.S. domestic air traffic will be in the hands of just four airlines (American 26 percent, United 19.3 percent, Delta 19.2 percent, Southwest 17.3 percent).

Reader Reality Check

Which side of the merger debate are you on?

This article originally appeared on FrequentFlier.com.

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