American Airlines/US Airways merger cleared hurdles: Will fares increase?

Courtesy Bloomberg

Courtesy Bloomberg

American Airlines expects to formalize its merger with US Airways by 9 December now that it has cleared the legal anti-competition hurdles by giving up slots at several airports including Reagan National Airport in Washington DC and LaGuardia Airport in New York City. Low-cost carriers like JetBlue and Southwest will vie for these slots.

The AA/US Airways merger is the third and last of the mega mergers after United Airlines/Continental and Delta/Northwest, making it the world’s biggest airline.

Size matters. The crux of the case seemed to have hinged on the survival of AA that would otherwise go under, and this in itself might be worse for consumers. AA declared bankruptcy in November 2011. The task then was to ameliorate consumers’ post-merger concerns about the ability of not only AA/US Airways but also other strengthened collaborative entities to muscle in on higher airfares since logically, where once there were six big competing carriers and now only three, the competition has been reduced by half. The corollary is the reduction of choices for consumers through consolidation which can by the first economic principle of supply and demand mean the propensity for prices to rise rather than fall.

With more slots allotted to low-cost carriers, it would suggest renewed faith in the battle between David and Goliath. Not to be disparaged, the threat by these carriers to legacy airlines have brought about new angst among the latter, many of whom by their very size are saddled with inflated costs, low productivity and union problems. The game gets amplified. At the same time, the giants may become more aggressive in their own turf. Yet history has also shown that whatever the number of airlines – so long as there is competition and in spite of that – the nature of the industry is such that all it needs is for one bold airline to initiate a price increase or additional surcharges, others naturally follow suit. Ordinarily, you would say with resignation, c’est la vie.