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American-US Airways merger: Grounded?

By Mark Hamrick · Bankrate.com
Tuesday, August 13, 2013
Posted 4 pm ET

The U.S. government and six state attorneys general are hoping to clip the wings of the proposed $11 billion merger of American Airlines parent AMR Corp. and US Airways. The Justice Department has filed an antitrust lawsuit charging that the combination would lead to higher airfares and fees paid by consumers. If the deal were to go ahead, the new American would leapfrog United to become the largest U.S. passenger carrier by several measures, according to the Government Accountability Office.

The suit, filed in federal court in Washington, D.C., attempts to prevent the airline marriage and to preserve "the existing head-to-head competition between the firms that the transaction would eliminate."

In reply, AMR Corp. and US Airways Group announced they "intend to mount a vigorous and strong defense" to the effort to block the merger.

Worry about higher fares, fees

In a written statement, Attorney General Eric Holder says, "This transaction would result in consumers paying the price -- in higher airfares, higher fees and fewer choices." He says the action proves the government's "determination to fight for the best interests of consumers by ensuring robust competition in the marketplace."

Specifically, the Justice Department says the two carriers compete directly on more than a thousand routes "where one or both offer connecting service, representing tens of billions of dollars in annual revenues."

Control of Reagan National

Part of the concern resides inside Washington's Beltway at Reagan National Airport. The department says "the merged airline would have a monopoly on 63 percent of the nonstop routes served out of Reagan National Airport," which is one of three airports serving the Washington area, along with Dulles International Airport and Baltimore-Washington International Thurgood Marshall Airport.

Critics: What about 3 earlier deals?

Critics of the government's intervention wonder where it has been in recent years.

Says former FAA Inspector General Mary Schiavo, "American and US (Airways) waited too long. For decades airline economists have suggested eventually the market would shake down from dozens of majors in years gone by to just to four majors. The Justice Department has drawn the line in the sand."

The government's attempt to stop airline consolidation is too little, too late, according to Tom Parsons, founder and CEO of travel website BestFares.com. "If they wanted to put a stop to this, they should have done it way back when Delta and Northwest did their merger. They should have done the same thing when Southwest and AirTran did their merger and they should have also done it when Continental and United did their merger," said Parsons. "There were so many crossover routes between those three sets of airlines than there ever has been here with American (and US Airways)," he said.

Parsons says it appears that the government's concern centers on Reagan National, which is a favorite airport among members of Congress looking for a quick getaway out of the nation's capital. Parsons says he suspects "the Justice Department is trying to put pressure" on the two airlines to free up some of their takeoff and landing slots at the Washington, D.C., airport. In its statement, the department said that the merged carrier would control "69 percent of the takeoff and landing slots" at Reagan National (in addition to the aforementioned 63 percent of nonstop routes).

In a report issued in June, the Government Accountability Office said "combining these airlines would result in a loss of one effective competitor (defined as having at least 5 percent of total airport-pair traffic) in 1,665 airport-pair markets affecting more than 53 million passengers."

The Business Travel Coalition hailed the Justice Department's decision. Chairman Kevin Mitchell issued a statement saying, "In recent years … the major airlines have, in tandem, raised fares, imposed new and higher fees, and reduced service. Competition has diminished and consumers have paid a high price. DOJ shines a spotlight on how uncompetitive and cozy U.S. airlines have become." The group says it "represents the interests of the managed travel community."

American, US Airways' defense

In their combined announcement, the two airlines said, "We believe that the DOJ is wrong in its assessment of our merger. Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together. Blocking this procompetitive merger will deny customers access to a broader airline network that gives them more choices."

States involved

Attorneys general participating in the suit are from Texas, home to American Airlines' headquarters, Arizona, where US Airways is based, as well as Florida, Pennsylvania, Tennessee, Virginia and the District of Columbia.

The proposed merger was announced in February. American has been operating under bankruptcy protection. The Justice Department says, "Absent the merger, American is likely to exit bankruptcy as a vigorous competitor, with strong incentives to grow to better compete with Delta and United."

Follow me on Twitter @hamrickisms.

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1 Comment
Eddie Sansone
September 20, 2013 at 4:31 am

My dad won't let me fly because of 911. I spend most of my time with Orbeez. We just had an Orbeez foot spa party and Mike from Philly came down. Mike kept faking his death and sitting on my lap. We invited all the neighbors and the CMPD. Ralph from Scorpios brought pizza and the strippers gave free lap dances. Mike got hard quick. Hawaiian Airlines is better than US Airways. Mike has a fake wife but that is life.