Cleared for Takeoff: The Department of Justice and the American Airlines/U.S. Airways Merger

By: Andrew Strauss

Earlier this week, the Department of Justice announced a settlement with American Airlines that will allow the company to go ahead with its proposed purchase of U.S. Airways. The Department of Justice (DOJ) made headlines earlier in the year when it announced it had decided to block the potential merger, citing its antitrust authority. The DOJ used its power under the Clayton Act to challenge the proposed merger. The Clayton Act was passed in 1914 and aimed to stop anti-competitive business deals in their infancy.  The Act outlaws price discrimination, conditioning sales on exclusive dealing, mergers and acquisitions that reduce competition, and service on the board of directors for two competing companies. Under the Clayton Act, the DOJ said that the American Airlines/U.S. Airways merger would reduce competition. If the deal were allowed to go through, there would only be four domestic airlines in the United States; American, Delta, United, and Southwest. More than 80% of the U.S. domestic market would be controlled by these four airlines.

The DOJ, however, worked with American Airlines to procure a deal that allowed the merger to go through without substantially harming competition for consumers. The central theme  in airline mergers, and issue analyzed here, is airport slots.  Every airport in America has slots that airlines must acquire before they can take off or land there. Antitrust plays a big role in these slots, because if one airline has substantially more slots at a major airport than its competitors, that airline can charge higher fares. These airlines will also be able to dictate which routes the airline flies, and less competition means less pressure to fly to unique destinations. When Delta merged with Northwest last year, Congressman Steve Cohen (D-TN) wanted assurance that the airline’s operations in Memphis would not be substantially affected. Not long after the merger was finalized, Delta cut its operations in Memphis. The airline once flew 64 routes from the city, but reduced operations to only 40 flights after the merger. The city lost international and domestic routes that were popular with customers. The Congressman remarked that Delta should consider changing its name to “Wings over Atlanta” due to every flight seemingly flying to that city. The consolidation of airlines, Cohen argued, would lead to less commuter and domestic routes and move the industry toward a spoke and wheel approach. This means that to fly from one city to another, it is very likely that you would need to connect in a central hub city.

In order for the DOJ to approve the American Airlines merger, it needed concessions from the company on these coveted airport slots. The airline decided to appease the DOJ and forfeited coveted slots at National Airport in Washington D.C. and at LaGuardia Airport in New York City. As the two airlines stand today, they operate 290 daily flights from National Airport and 175 daily flights from LaGuardia. Under the agreement, the new airline will lose 52 slots at National Airport and 17 slots at LaGuardia. The airline will also lose slots in Boston, Chicago, Dallas, Los Angeles, and Miami. The DOJ says that these coveted slots will be bought by other airlines, like Southwest or Virgin America, thus forcing competition and competitive rates. Aviation experts, however, say that many of the smaller airports that lose flights due to this merger, like Akron or Chattanooga, will not see those flights replaced by new airlines because they do not have planes small enough to service those airports. The residents of these cities will, effectively, lose the ability to travel as freely as they once did.

I think it is quite clear that airline mergers rarely have a good outcome when it comes to consumers. In today’s world of seemingly endless additional fees, everything from baggage fees to check in fees, a lack of competition will not alleviate the pain travelers are feeling. While those of us who live in a major city might not necessarily feel the pain of a lack of travel options, we may see the average price of a flight jump. I think that the Department of Justice wanted to save face by letting American Airlines meet them halfway. The DOJ has let airlines give up slots at major airports before, and has watched as smaller cities go unserviced because there is no competition and no reason for a major airline to fly there. I think that anytime 80% of an industry is controlled by such a limited number of competitors, it will never benefit consumers. An interesting suggestion would be to let foreign airlines compete with the domestic ones on domestic routes. For example, allowing British Airways to fly from Washington D.C. to Seattle. While it is probably a long-shot, it is worth investigating. I think if we continue on the path we are on, soon there will only be one or two domestic airlines. Think of the fees when that happens.

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