Why is the Department of Justice trying to block the American-US Airways merger from takeoff?

Mitchell Hartman Aug 13, 2013

Why is the Department of Justice trying to block the American-US Airways merger from takeoff?

Mitchell Hartman Aug 13, 2013

“It’s time to make a change,” is how a promotional video introduced the proposed merger of American Airlines and US Airways back in February 2013. “The new American is arriving.”

Not so fast, says the U.S. Justice Department. The DOJ’s antitrust division sued in federal court today to block the proposed $11 billion merger. A DOJ spokesman said the combination, which would create the world’s biggest airline, would “eliminate competition” and “put consumers at risk of higher prices and reduced service.”

The DOJ said that each airline has said it could stand on its own, and “consumers deserve the benefit of that continuing competitive dynamic.” American is currently in bankruptcy and the proposed merger has been part of its reorganization plan, though analysts say American will still be fairly strong after emerging from bankruptcy even if the merger does not go forward.

Today’s DOJ action follows the government’s approval of previous mergers between other major air carriers that also cited the need for consolidation to create companies with stronger balance sheets and more competitive market clout. Those mergers have include United and Continental, Delta and Northwest, and Southwest and AirTran. European Union regulators gave their approval to the merger last week, after the airlines agreed to surrender slots in London (at Heathrow) and Philadelphia.

But antitrust lawyers at the U.S. Department of Justice apparently shared concerns raised by U.S. consumer advocates in this case, that fare increases and cancelled routes could result from reduced competition. For instance, the combined American-US Airways would control 69 percent of takeoff and landing slots at Reagan National Airport in Arlington, Virgina. 

“That’s a slot-controlled airport that politicians use,” says Darryl Jenkins, chairman of the American Aviation Institute. He says the DOJ may be sensitive to dominance of air traffic by one carrier in the nation’s capital. When sequestration budget cuts threatened to lead to furloughs of airport staff at Reagan National, Congress engineered a compromise to restore funding and reduce air traffic disruptions.

“Generally, something like the slots at National would be a negotiation between DOJ and the airlines, and some sort of compromise would be worked out,” says Jenkins, who supports the merger. He says he’s surprised that hasn’t happened in this case, with the combined companies offering to reduce their inventory of slots at Reagan National to ensure more competition there.

But aviation analyst Michel Merluzeau at G2 Solutions in Seattle says the anti-trust concerns that the DOJ and others have raised for this merger aren’t only about competition in Congress’s back yard.

“I think there are some other routes that are also of concern — Charlotte to Dallas, for example, and Phoenix to Dallas,” says Merluzeau, “the major hubs that are currently served by either US Airways or American Airlines.”

Merluzeau says the smaller secondary and tertiary cities that passengers reach from major hub airports could see service cuts and higher fares.

But some of the same competition problems that are surfacing now with US Airways and American came up when United and Continental, and Delta and Northwest, merged.

“You just don’t want to be the last one” to merge, says Mark Ostrau, an antitrust expert and partner at Silicon Valley law firm Fenwick & West.

Ostrau says late-comer mergers have also been blocked on anti-competitive grounds in the wireless telecommunications and computer disk-drive industries.

“The agencies count the number of significant competitors,” Ostrau says. “And when the number gets too small, that’s when they step in.”

Ostrau says ‘too small’ is usually three or four major competitors in a national networked market — which is about where the U.S. airline industry is right now.

American and US Airways issued a joint press release today saying they “intend to mount a vigorous and strong defense to the U.S. Department of Justice’s effort to block their proposed merger.”

The airlines’ statement went on to say: “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. Further, this merger provides the best outcome for AMR’s restructuring. The widespread support from the employees and financial stakeholders of both airlines underscores the fact that this is the best path forward for both airlines and the customers and communities we serve.”

But if the Department of Justice wins its case, US Airways and American (once it emerges from bankruptcy) may have to go it alone in an increasingly cutthroat industry.

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