This proposed merger between American Airlines and US Airways comes in the wake of dramatic consolidation in the aviation industry. Over the past decade the airline industry has seen seven major carriers reduced to five, and if this current merger is approved, the U.S. will have four major domestic carriers. Antitrust regulations were created to protect consumers, not to facilitate industry consolidation.
Internationally, only three airline alliances, each of which operates much like a single airline, control more than 80 percent of international airline traffic. This international system oligopoly will not change, the players will only be rearranged. It is not a healthy economic environment from a consumer’s point of view. It brings us only one or two mergers away from having a dominant, national carrier.
The claim that this merger will provide more destinations is hollow. Whatever new cities are added by a future AA/US network are subtracted from the current airline alliance network that US Airways enjoys with United. The net effect is that, overall, consumers are left with nothing new and no improvement to the status quo.
Given this past history of airline mergers and anti-trust exemption approvals within the airline industry, many are assuming that this merger is a foregone conclusion. If the merger is looked at from the benefit-to-the-consumer point of view, it should not be approved.
After the following objections, CTA also outlines a series of recommendations that will help competition and protect consumers should the AA/US merger be approved. These common-sense conditions should be part of any approval of this merger.
Consumer Travel Alliance Objections
1. No compelling economic reason for this merger. This merger is unique in the airline industry among recent mergers. In the past, one of the major airlines being merged has always been in financial distress. Delta merged with cash-strapped Northwest. Continental merged with struggling United. American West merged with bankrupt US Airways. In this case neither airline is in danger of collapse — US Airways is reporting record profits and AA should be able to stand alone after emerging from Chapter 11.
The antitrust laws and review should be used to benefit consumers, not to make creditors whole. That is a basic difference between antitrust and bankruptcy issues.
2. No discernible consumer benefits from this merger. No new routes, no new competition, no savings that can be passed on to consumers. Even if there were significant savings created by synergies in this merger, they would be overwhelmed by the negative consequences of higher airfares and reduced competition. Furthermore, new contracts with a unified workforce would increase the merged carrier’s costs and no airline has shown a willingness to share possible profits with a reduction in airfares or fees.
AA and US will argue that there is no consumer harm. But, is there a consumer benefit?
Perhaps a strong aviation market with viable airlines can be seen as a consumer benefit; however, neither company is in danger of collapse. US Airways enjoys record profits. American, if left independent, will emerge from bankruptcy protection with billions in cash and major new aircraft contracts.
3. Reduced competition across airlines will harm consumers. The total number of national, domestic carriers will be reduced from five to four — a 20 percent reduction. Consumers will be faced with less choice, less service, fewer non-stop flights and higher airfares.
The system of “signaling” airfare increases only requires one airline belonging to the “Big 5” to decline to participate in an airfare increase. When all the majors do not agree, tested airfare increases are rolled back. Several years ago, there were seven airlines in this fare-setting universe. If the AA/US merger is approved, we will only have four domestic airlines participating and, effectively, only three international airline alliances (protected by anti-trust immunity). Airline passengers will lose 20 percent of their competition dynamic with this merger.
4. Consumers will lose one of the most competitive national carriers. US Airways has prided itself on low labor costs that have allowed it to compete successfully with larger rivals. Those labor costs reportedly will evaporate when the merger is complete.
5. As airlines already operate in an oligopolistic state, this will make it easier. Their silent, coordinated efforts to restrain domestic capacity, pricing and competition have allowed airlines to pass costs to consumers. Limiting competition through capacity controls has allowed the airlines to pass on fuel increases and control pricing.
Internationally, only three joint ventures and airline alliances already control more than 80 percent of international traffic. Many of these alliances enjoy antitrust immunity and many flights are operated as joint ventures where there is no competition between alliance members and operations are coordinated.
6. Consumer harm, in addition to increased airfares, are the norm with recent mergers. Post-merger system integration problems plagued the Delta/Northwest and the Continental/United mergers. While the airline management rakes in merger bonuses, consumers are the ones who bear the brunt of post-merger integration service problems. With prior mergers, these issues have created major problems for passengers. DOJ should analyze the performance of previous mergers, their post-merger problems and the erosion of consumer choice and competition.
7. Fortress hubs will be strengthened. Hubs where one major airline controls the market will increase. Plus, AA or US control airport take-off and landing slots, as well as terminal ticket counter and gate facilities, to a point that could limit other airlines’ ability to expand.
8. Some hub cities will suffer as a result of mergers. Past mergers have seen once-vibrant hubs disappear. St. Louis is a ghost town compared to when it was a hub for TWA. Reno, Nevada, was abandoned by AA. Cincinnati has shut down several of its terminals because of cutbacks from Delta. Cleveland was forced to negotiate a separate agreement with Continental/United to keep its hub operating temporarily.
With an AA/US merger, Charlotte can be expected to lose much of its international service — Latin American service will shift to Miami and European service to JFK or, perhaps, Philadelphia. Phoenix as a hub may disappear, as Los Angeles and Dallas would absorb much of its traffic. This shift away from once-important hubs harms smaller communities, citizen-funded airports, adds to unemployment woes and drains government funding.
9. The airline industry will enter the too-big-to-fail world. With the airline industry consolidated to four domestic airlines and three international airlines, the specter of massive airlines that affect too much of our nation’s economy will come into focus. This new too-big-to-fail reality will also provide the unions negotiating with these big airlines more power.
10. A multiplication of labor issues and higher labor costs. For half a decade US Airways has operated with its labor force of pilots and flight attendants divided into the America West group and the US Airways side. Over the past few years, American Airlines has faced some of the most contentious labor strife of any airline. Putting these three contentious groups of workers together will be a challenge, to say the least.
Rumors that US Airways workers would be brought to similar salary structures as American Airlines will almost immediately erode much of US Airways’ current cost advantage that has allowed the carrier to grow and profit.