AA-US_merger
US Airways and American Airlines in their quest to get their merger approved, requested all of the records retained by the Department of Justice (DOJ) regarding their approval of precious mergers. Where on one hand, the airlines demanded an early trial date because speed was of the essence, this request will take time and may slow the airlines’ trial.

Previous merger cases are not comparable to this giant merger. To begin with, this is the biggest airline merger ever attempted and each of the prior mergers changed the aviation landscape.

1. Not as many airlines. This means more loss of competition

Each of the previous mergers were approved during a period of time when there were more legacy carriers. Basing a legal case on approving mergers because earlier mergers were approved is absurd. At some point the industry arrives at a point where there are no more companies to be merged.

2. Growth of airline fees

Previous airline mergers were all approved prior to the days of ancillary fees. These ancillary fees have clearly demonstrated that there is already too little competition between legacy carriers. Low-cost-carriers pitch to a different market. Otherwise, larger network carriers such as American, Delta, United and USAirways could not charge the baggage fees and change fees that they charge if competition was healthy and effective from Southwest Airlines and JetBlue who have different fee structures.

3. Loss of customer service

Previous mergers were approved during a period where customer service was still a competitive element across airlines. The current environment is focused only on extracting as much money as possible from passengers while providing the least possible service. Allowing even more market power to airlines detracts from competition via customer service.

4. Both airlines are making money hand over fist

Last year, US Airways reported their highest profits on record. AA has reported record-breaking profits for the past two quarters. Plus, AA has just announced a recall of pilots. Hardly a signal of weakness. Neither airline is failing or flailing.

5. It’s the economy stupid

The previous mergers were approved and hearings were held during a period when the US economy was suffering. The specter of having a major airline go bankrupt (Chapter 7) and the resulting damage to the economy and the increase in unemployment rates affected how the mergers were seen by legislators and regulators. DOJ’s complaint against the AA/US merger shows signs of remorse about previous mergers.

6. Too big to fail

Consolidating the four US network carriers would create three too-big-to-fail airlines with approximately 20+ percent of the airline economy in the hands each airline. The failure of one of these airlines would be catastrophic for the economy and the possibility of a strike at one of the airlines would be untenable for the US economy.

7. More overlapping connecting routes

According to the GAO study on this merger, the AA/US system of overlapping connecting routes is 30 percent greater than similar overlapping connecting routes that existed with the UA/CO merger. These overlapping connecting routes demonstrate the nationwide loss of competition and the increased likelihood of the merged carrier reducing service in “rationalizing” their route structures.

8. More loss of non-hub service

Every other major merger has resulted in losses of service as airlines “right-size” their service. In fact, much of the savings from mergers comes from elimination of redundant service between existing hubs and spoke routes. For instance, AA has 4 connecting flights between Seattle and Austin and US Air has the same number. However, AA flights connect in Dallas and US flights connect in Phoenix. Right-sizing the route may mean eliminating one or more of the flights since the new combined airline may have excess capacity.

9. Probable loss of hub service

Every recent airline merger has resulted in former hubs being downsized or eliminated. Delta has eliminated Cincinnati and Memphis as hubs. USAir shut down its big operation in Pittsburgh. Continental was forced to sign an agreement with Cleveland guaranteeing certain levels of service. With this merger, Phoenix will probably see a downsizing as Los Angeles and Dallas pick up the originating traffic and connecting traffic once served by Phoenix. The story is yet to be written in terms of Charlotte and Miami. Both can serve as hubs, but both are not necessary. Will Philadelphia continue to be the main European gateway as it is for US Airways; or, will those flights shift to JFK? These final hub configuration are fraught with questions.

Screen Shot 2013-10-09 at 6.56.07 AM10. History of price increases

DOJ which approved previous mergers based on airline executive promises and airline-provided studies noticed that such statements and studies did not bear out after mergers were complete. Hubs were closed or downsized. Service was cut back. Staff was laid off. Prices on routes with less competition were increased. And, deceptive fees became a staple of airline cash flow.

Since the Delta merger fares have increased 33 percent according to the Wall Street Journal. United flights between former United and Continental hubs have seen an increase of 35 percent according to United itself. Some airfares on those routes increased by 66 percent. [Chart from WSJ.]

11. Airline collusion

As fees grew in importance legacy airlines introduced new fees in unison. This did not allow consumers “vote with their wallets.”

Airfares were raised uniformly via signaling. The process when there were more airlines was deemed acceptable; there were enough competing airlines to maintain pricing discipline. With only three network carriers, such practices would become oligopolistic price matching. Each reduction in the number of carriers increases carriers’ incentives to proceed with increases, and reduces carriers’ incentives to offer lower prices and lower fees.

Plus, competition does not only come in the form of airfares, but also in the form of ancillary fees where most airlines did not even claim competition and moved fees in concert. And, capacity discipline became another anticonsumer action where the legacy carriers would refrain from raising capacity since it would harm joint industry pricing power. The DOJ complaint specifically called out this anticompetitive environment with its citing of emails between airline executives.

12. Loss of the legacy carriers’ low cost leader

Unlike other mergers, this merger involves the one airline that lead on the low-cost front — US Airways. The DOJ complaint pointed directly to low fares that would disappear. Consumers would lose the only airline that consistently bucked the other legacy carrier fare structures with special pricing on connecting routes.