Merger blocked: Do American and US Airways have a case?

Courtesy Associated Press

Courtesy Associated Press

The long awaited merger between American Airlines and US Airways has been blocked by the US Justice Department – after sanctions by a federal judge early in the year and by the European Union.

Head of the Justice Department Bill Baer said the merger would “eliminate competition between US Airways and put consumers at risk of higher prices and reduced service.” He added: “Both airlines have stated they can succeed on a standalone basis, and consumers deserve the benefit of that continuing competitive dynamic.”

In refuting Mr Baer’s concerns, US Airways CEO Doug Parker said the airlines would “fight them. We are confident that by combing American and US Airways we are enhancing competition, providing better service to our customers and improving the industry as a whole.”

The US$11-billion merger would have made the American and US Airways the largest airline alliance in the world.

The irony is that American initially snubbed the merger proposal by US Airways, and insisted it could emerge from bankruptcy without help from the latter. So, Mr Baer had been listening, but his concern is one of protecting the consumer. The timing is unfortunate for American and US Airways, coming after the other compatriot airlines have done their deals that saw Delta Air Lines acquiring Northwest Airlines in 2008, United Airlines merging with Continental Airlines in 2010, and Southwest Airlines acquiring AirTran Airways.

So too has Mr Baer learnt a lesson, it would appear. He said: “We learned what happened to competition in prior acquisitions.” While that may seem unfair to American and US Airways, allowing the merger would mean aggravating the problem, instead of reducing it. Two wrongs do not make a right.

US Airways – more than American – may feel targeted by the Justice Department. In 2001, its proposed alliance with United Airlines was shot down. It had to also abandon a proposal to merge with Delta under circumstances. But the Justice Department approved its acquisition of America West Airlines in 2005, which but only demonstrates the Department’s concern about how consolidation of large entities can be bad for the consumer even though it had sanctioned the mergers between the other big names.

Mr Baer’s concerns are real. Merged airlines will find it easier to push up prices in the context of absent or limited alternatives for the consumer. Reeling from years of losses, they have shown that by cutting capacity in the present far-from-being-exciting times, coupled with higher fares, they have managed to turn their performances round. The greater fear is not confined to the merger of American and US Airways, but that with only three big blocs left in the market, it would be easier for all of them to collude, in an environment that prefers “tacit coordination over full-throated competition.”

In response, American/US Airways may make out a case for survivorship; Mr Parker said the merger was necessary to build a global network. It is a valid argument since this has become a global trend across the industry, and American carriers cannot stay out of the loop to effectively compete with foreign carriers in the international arena. However, for now and within the US at least, Mr Baer is convinced that both American and US Airways would thrive financially and that neither needs the merger in order to succeed.

In Australia, when Virgin Australia applied to acquire a 60-per-cent stake in Tigerair Australia, the Australian Competition and Consumer Commission granted its approval on the ground that objecting might result in the exit of Tigerair and that would mean reduced competition and therefore not a desirable outcome for the consumer.

A case of the lesser evil?

While American and US Airways hold out the hope that the Justice Department will eventually allow the merger, it is unlikely that any final decision will come before the year is out. That will give the Department more time to determine if indeed there is an even stronger basis to its fear, and for the two airlines to offer reassurances and convince it otherwise. This is an industry that is constantly in a state of flux – more so in present times than ever = and things can change.

American and US Airways merge: Will fares go up?

Getty Images

Getty Images

FINALLY, American Airlines and US Airways have agreed to a marriage that will make it the world’s largest airline, surpassing United which hooked up with Continental, and Delta which merged with Northwest. The new airline will retain the American name but be headed by US Airways chief Doug Parker. The new airline will be headquartered in Dallas-Fort Worth

American which went into bankruptcy more than a year ago had initially resisted the merger while profitable US Airways was keen on the proposal, having been missed in the wave of mergers among compatriot carriers.

So what changes will the US$11bn merger bring?

The rationale for mergers must be more efficient operations, which can be translated into a tighter ship; hence some job redundancies are expected. It can also mean reduced capacity to some destinations, hence more crowded planes and fewer choices for the customer. American and US Airways will consolidate their operations in nine hubs: Dallas-Fort Worth, Miami, Chicago, Los Angeles, New York, Phoenix, Charlotte, Philadelphia and Washington.  The first five are American’s major hubs, and the other four US Airways’ dominant hubs.

Both airlines are expecting savings of more than $1bn a year. Mr Parker said: “The combined airline will have the scale, breadth and capabilities to compete more effectively and profitably in the global marketplace. Our combined network will provide a significantly more attractive offering to customers, ensuring that we are always able to take them where they want to go.”

An interesting development pursuant to the merger will be US Airways’ exit from Star Alliance since American is a partner of OneWorld. As the alliance partnership goes, the transition is not likely to cause any major upsets one way or the other. But with reduced competition, the one question on most customers’ lips is apt to be: Will the fares go up?

No doubt American and US Airways together will be in a stronger position to raise fares, but as a general trend across the industry, fares are expected to head north this year, supported by increased demand for seats in the expected, albeit slow, economic recovery and against a background of reduced capacity, and of course there is always a ready trigger if fuel prices continue to rise.

Initially, the merger may be more about American’s revival and the partnership’s competitive edge against the other big three: United/Continental, Delta/Northwest and Southwest which bought rival discount operator AirTrans Holdings in 2011. There is no more surprise left in the bag.