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The Big Merger: Fluff or Fact?

The Department of Justice’s move to shelve the American-US Airways merger surprised just about everybody in the business. And it unleashed a flood of facts, opinions pretending to be facts, and outright fluff into the public discourse. Here’s my attempt to separate what’s real and what isn’t.

The merger will be good for consumers: pure fluff.

The various industry apologists are trying to sell the merger as beneficial, but their assertions are embarrassingly weak.

  • The main argument for consumer benefit seems to be “scope,” meaning that travelers can fly the merged airline to more places than they can on either airline separately. Although that might be true, it doesn’t matter. If you want to go somewhere that American flies, fly American; for a US Airways route, fly US Airways; and in the few cases where you’d need both, get a through ticket or fly some other airline. Scope makes a big difference to an airline; bupkis to consumers.
  • The merged airline will belong to the Oneworld alliance, so US Airways travelers will lose the benefit of association with the much stronger Star Alliance.
  • The new airline will be run mainly by US Airways managers, and US Airways has been the least innovative among all the “legacy” airlines; it is also notorious for gouging travelers on flights to/from its main hubs.

Make no mistake: The merger might be good for the airlines, for Wall Street, and for American’s creditors, but it is bad news for consumers.

The merger will lead to increased fares and fees: generally fact.

Although the two lines compete on only a handful of nonstop routes, they compete on a great many connecting routes. And one less legacy line makes it easier for the remaining lines to orchestrate fare increases and to limit price cuts. However, to be fair, over the last decade the giant legacy lines have found profits elusive, and even now—with relatively high fares—profits are low by the standards of just about any other industry. Airlines need to earn enough profit to stay in business, and clearly no giant line is currently making “excessive” profits. But the threat remains that the remaining legacy lines like to gouge travelers and the merger will make gouging easier.

Neither American nor US Airways can survive without merging: pure fluff.

Both lines are currently making profits, and smaller lines manage to do well without merging. Think Alaska, Hawaiian, and JetBlue; even Virgin America posted a profit. Although US Airways currently is the stronger, I’d worry more about its survival than American’s. US Airways has very few lucrative long-haul international routes and weak U.S.-international gateway hubs, whereas American has some strong routes and hubs and its lash-up with British Airways makes it a blockbuster competitor across the Atlantic. If the merger fails, I would hope that competing with much larger Delta and United would motivate American and US Airways to innovate with service levels and prices.

The Department of Justice will win the case: anybody’s guess.

Industry insiders generally express the opinion that DOJ will lose, as:

  • The economic case against American-US Airways is weaker than it was for the Delta-Northwest and Continental-United mergers. Nixing the American-US Airways merger while accepting the others is inconsistent and unfair.
  • The legal case is also weak; if measured by the same yardsticks as prior mergers, this one would pass muster.
  • At worst, DOJ will require the merged line to lose a few slots at Washington/Reagan National.
  • The DOJ’s track record on airline antitrust cases make the Chicago Cubs look like champs.

On the other hand, consumer advocates are increasingly optimistic that DOJ will prevail. They cite this case as evidence of recent changes in the attitude toward horizontal mergers and as a stronger DOJ position. And, in any case, the immediate result will be as it is with so many such proceedings: delay.

All in all, the chances favor the merger, but maybe not by a large margin. If I were betting, I’d want some odds on either side.

Ed Perkins on Travel is copyright (c) 2012 Tribune Media Services, Inc.

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