American & US Airways Merger: Bigger Airlines and Less Competition

By: Zachary I. Gold

On February 14, 2013, US Airways and American Airlines (American) announced their intention to merge. US Airways shareholders approved the deal on July 12. This merger will result in a new airline with the American Airlines’ logo and US Airways’ CEO Doug Parker at the helm. The $11 billion dollar deal will create the world’s biggest airline, raising some concerns among elected officials and federal regulators. The “new American Airlines,” along with Delta Air Lines and Southwest Airlines will control seventy percent of the U.S. air travel market; analysts and industry members worry that fares will rise as competition decreases. The airlines, which are looking to merge to better manage rising costs and, in American’s case, to emerge from bankruptcy, claim such fears are unfounded.

The Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy, and Consumer Rights held hearings on March 19 to investigate the likely impact of the proposed merger. Senators pushed American’s CEO Tom Horton to promise that there would be no decrease in service, loss of jobs, or fare increases; Mr. Horton made that promise, but with some caveats regarding reductions in service to some airports.

William McGee, a representative of the Consumers Union, the policy arm of Consumer Reports, testified before the Subcommittee, noting that previous airline consolidations have brought “substantial harm to consumers, communities, and the economy.” According to Mr. McGee, this merger would leave the U.S. with only four full-service national airlines, along with some smaller regional or low-cost airlines. This would result in the four major airlines controlling eighty-seven percent of the domestic market – a market share previously held by ten airlines in 1985.

Mr. McGee also noted that all previous major airline mergers led to reductions in service because airlines eliminated unprofitable redundancies that, before the merger, were “competitive niches.” Such mergers have also resulted in higher fares, lower quality of service, higher barriers to enter into the market, and the risk of creating companies that are “too big to fail.”

Others providing testimony to the committee echoed these concerns. Diana Moss, Vice President of the American Antitrust Institute (AAI), worried that reducing the number of airlines would make it easier for airlines to reduce service to areas and charge more once the supply is lower. A white paper produced by the AAI (discussed in Ms. Moss’ testimony) showed that the 2008 Delta-Northwest and 2010 United-Continental mergers affected twenty-one routes that were “among the largest city-pair markets in the U.S.,” eliminating substantial amounts of competition on hub-to-hub routes.

Despite potential harms to competition, the deal is set to move forward. American Airlines has been in bankruptcy for over a year while the merger, already approved by the bankruptcy judge handling American’s case, must still be approved by US Airways shareholders as well as the Department of Justice (DOJ). [1] The DOJ reviews mergers to ensure there is no impermissible reduction of competition pursuant to § 7 of the Clayton Act. The key inquiry is whether the merger will “create or enhance . . . the ability to profitably raise prices over the long term, without losing sales such that the price increases become unprofitable.” The DOJ has stopped mergers from moving forward in the past: in 2001, the DOJ announced its intent to block the merger of United and US Airways because it would result in the new airline having near complete control over some hub-to-hub markets, some major eastern cities (including Washington, D.C.), and would lessen transatlantic competition. Meanwhile, nineteen states have joined the DOJ’s review of the proposed merger in an effort to protect their own interests.

During the Subcommittee’s hearing, senators expressed concern over airlines’ current high fees and ticket fares, and wondered what might happen to those prices after a merger and the resulting decrease in competition. Given the Senate’s concerns about the effect of a merger on consumers, it cannot be said that the DOJ will necessarily approve the merger; it will look to the effect the merger will have on competition on particular routes, as it did when considering the United-US merger in 2001. Last month, the DOJ asked American and US Airways for more information in a “second request,” a common occurrence in anti-trust reviews.

American and US Airways certainly have good reasons to merge, including satisfying American’s outstanding debts, pulling American out of bankruptcy, and possibly creating an airline that can better compete in light of new market realities like higher fuel costs. The merger is also expected to generate an estimated $47.8 billion in revenue by 2017.

However, the DOJ should be wary of approving this new merger. Past mergers have led to decreased competition and have allowed airlines to limit the supply of seats and focus on accommodating more business travelers who can typically afford to spend more. This has helped increase airline profits, but it has also increased fares. Moreover, giving control of such a large market share to so few airlines will hurt consumer choice and likely result in higher fares. The DOJ should act to halt the consolidation of American Airlines and US Airways to preserve competition in the marketplace.