Adios AA/US Airways merger — DOJ got it right

by Charlie Leocha on August 14, 2013

A view of two US Airways Express planes next to an American Airlines plane at the Ronald Reagan Washington National Airport
Thank you to the Department of Justice (DOJ) for standing on the side of consumers and not getting swept up in the Romance of the Deal mentality as America’s media did. Any reader of this website knows that the Consumer Travel Alliance and I have been at the forefront of the anti-merger activists since Valentine’s Day, when AA and US Air announced their love affair.

Today we received the best news we could have hoped for — DOJ rejected the merger. They didn’t offer any remedies, they didn’t hold out any hope for the airlines involved. They simply said, “No.” And, they said it emphatically.

Both management teams claimed that they plan on fighting the findings of the DOJ as well as those of seven different State Attorneys General, but their efforts really have no hope of survival. This merger is dead. The wooden stake has been driven into the heart of the New American Airlines monster that threatened airline competition.

The competition threat was so great that when the General Accountability Office report noted 1,665 overlapping connecting routes that were going to lose competition, there was a collective groan from the merger proponents. The Aviation Subcommittee hearing where I testified last June was a relatively somber occasion. Mr. Parker, the once-to-be-CEO of the once-to-be-largest-airline-in-the world could sense that his task of convincing DOJ that his merger was a good idea and good for consumers was slipping away.

In discussions after the hearings with airline folk, I noted that Mr. Parker was not in top form and that he was not prepared for the Consumer Travel Alliance claim that competition from overlapping connecting routes wreak havoc with competition. He kept repeating the merger mantra, “Only 12 overlapping non-stop routes.” It was as if he didn’t realize that the game had changed.

After the GAO report backed up the earlier findings of the Consumer Travel Alliance with an even more damning report that included overlapping connecting routes with more than one connection, his only response was to again mutter, “Only 12 overlapping non-stop routes.” That wasn’t the answer that DOJ was anticipating, but it made their job clear.

The simple act of forcing the merged carrier to divest Washington-Reagan Airport slots would not solve the endemic problem of competition loss across the country, touching 38 out of the 50 states. There were no remedies for the loss of competition between Seattle and Austin or Bradly and Albuquerque or Fresno to Dulles.

For a hub-and-spoke carrier that depends on connecting traffic to make their system work, to repeat 12 non-stop connecting flights over and over again was not an effective strategy to counter the 1,665 overlapping connecting routes noted by GAO.

Plus, airlines across the board did themselves no favors in courting favor with Congress and DOJ when they decided to move in virtual concert with an increase in their change fees and cancellation fees. Worse, after making the changes and being challenged by me at a media meeting in Phoenix, the wannabee American Airlines executives never came up with a rationale for increasing the change fee.

Even when asked directly during the Aviation Subcommittee hearings, Mr. Parker has no answer months after he was questioned in Phoenix. The brute force that the airlines demonstrated when they raised the not-so-insignificant $150 fee to $200 with no justification did not sit well with congressional leaders or, I can guarantee, with DOJ investigators.

It was not hard for consumers to claim that the writing was on the wall. If the airlines, while petitioning for permission to merge, were so callous that they would raise significant fees with no justification, what would they do when lawyers, legislators and regulators were not focused on their activities? It was a bad miscalculation on their part.

Today, by virtue of the DOJ and the State’s Attorneys General actions, consumers are far better off than if this merger had been approved. US Airways and American Airlines will have to regroup, but they are both in good financial shape and masters of their own destiny. I expect them to be strong and able competitors in the battle with the other airlines, both large and small, for airline consumers.

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  • Leia

    Your glee over something that will have a devastating impact on thousands of employees is reprehensible. We sacrificed our livelihoods for this merger… we stand to lose so much.
    But hey, at least the consumer wins with a $20 dollar savings on airfare.

  • Rick

    As a stand alone carrier, LONG TERM, American faces a dim prospect of not just competing, but surviving… Yes, it posted it’s best 2nd quarter since 2007(far, far from it’s best quarter as claimed) but it did so under the protection of Chapter 11 where it was able to simply shed all of it’s sect obligations. It did so on the backs of it’s employees who have seen no real wage increases in over a decade. It did so at the expense of it’s retiree’s who will face an uncertain future with no medical benefits and nor the pensions they so strongly counted on. It did so by freezing it’s current employees pensions(only after the PBG stepped in and thwarted their efforts to terminate said pensions).

    AA/USAir will not be able to compete long term with Delta and United(who were allowed to merge by the DOJ) as stand alone carriers. All it will take is the next downturn in the airline sector. It will happen, whether it be via an economical or terrorist event, rest assured, the next downturn is out there.

    Airfares, on average, have risen 28% since 1995. In the mid 80′s, as a college student, I could fly r/t between DFW and ORD for $179.

    Today, it costs $216.

    I am pretty sure airfares have NOT kept up with inflation. How about oil and gas? Should we go there?

    Yes, the DOJ stepped in and objected to the merger. It also objected to the employees earning a decent, living wage, and it objected to allowing the consumer to set the price.

    What the DOJ did do, should it ultimately prevail, is set in motion the beginning of the end of a once proud airline. The employees will NOT make any more sacrifices so that the consumer can still pay 1980′s airfares. The employees’s fought long and hard for change. That change came in the form a new and much stronger airline.

    The DOJ and the 6 states piggybacking on the suit failed to take into account one little aspect of the merger. The employees.. All 150,000+ who will not take this lying down and will fight it to the end. Not because they are in love with management. On the contrary, to get rid of the current management team that brought this once strong and proud airline one step closer to extinction. And thanks to Florida, Texas, and Arizona. Home to the 2 airlines HDQ and AA’s most profitable hub.

    Very smart move.

  • neal1

    Leia and Rick, Ironic isn’t it. Travel agencies who sell the majority of your product have and keep sacrificing our livelihoods as well. Your products cuts than eliminates our pay. Each merger finds a way of squeezing us more each time with more cuts. It’s about time the DOJ steps in and puts a hold on the money grubbers. Especially the over paid management with their golden parachutes. This merger would have killed the industry. It would have less capacity, which leads to less sales, and less opportunities for travelers and companies to be able to afford of doing business. Can you believe it costs over $600 for advance purchase from Vegas to DC and visa versa. Think how this will affect the casinos as well. Airlines affect the economy, the hotel business for conventions and down the line. With less seats, all this wouldn’t happen. They airline industry will survive as they have always, but it may be with different names, who can run efficiently like Southwest.

  • Alex

    As a reluctant US Airways customer, I was actually looking forward to this merger. The only direction this airline can go is up from the ‘low-cost carrier service at legacy airline prices’ embarrassment that it is now.

  • Bill

    2 things – 1. your pronouncement that the merger is dead is very misleading. just like most things, this is a road bump – i think it is way too early to say this is over, especially since AA and US are prepared to fight this. and 2. i think you are off base saying how this merger will result in higher fares. yes, maybe fares will be higher, but it is not because of the merger – it is because of economics. when you fill your car with gas, you are no longer paying under a dollar like you did in the 90s – gas is $3-4 a gallon. jet fuel has also increased, but for some reason people think air fares should remain the same. wages have risen in the past 20 years – don’t airline employees deserve a raise in their wages as well? fuel and labor are the two big costs associated with airlines. the problem is that airfares did not keep up with the increases over the last 20 years – airlines were continuing to offer rock bottom prices banking on a few high paying customers to keep them afloat. if anything, the merger of AA and US will bring about an airline that is financially solid – good for all the people who work for the airline and the passengers who fly it. AA is only turning a profit because of its Ch 11 concessions – on the backs of its employees. there will still be the low cost carriers in the US to keep fares down – and if prices have become too high with the big 3, informed and intelligent people will support the low cost carriers and they will flourish. this is the US – we are a capitalistic society. why not let capitalism win out in this case? that sure is the view of many people when it comes to medical care – they want the govt out of it. health care should be a basic human right – air travel is a comodity.

  • mtp

    best article yet!

  • Joel Wechsler

    Given the past history of the DOJ I think it’s a bit too early to declare the merger dead in spite of the connecting flight problem and Doug Parker’s public admission that fares would go up if the merger was approved. A few concessions about slots at Reagan and DFW and perhaps some other things and lo and behold the merger may suddenly not be deemed so anti-competitive. I hope I’m wrong about this, because of Parker’s sad history with The USAir/America West merger but I’m not holding my breath.

  • neal1

    I think the sad part it will pass. Some money will be passed along, concessions will be made on gates, which I think the lagacy carriers should not be given any. Give more gates to the small guys and Southwest. This will keep competition very strong. Plus Southwest should be given free reign in DFW as part of the deal. I think AA should give up 40% of their gates in DFW to promote competition, as well as in Miami. AA and US handle a large chunk of the Caribbean traffic and this will increase fares that the locals wouldn’t be able to afford. Also, US Air to give up 1/2 their shuttle flights to another carrier. Delta had to give up when they took NWA and now Delta doesn’t fly the DCA Boston shuttle anymore. I think there that they agree to not increase baggage fees and certain others for a period of 8 years. Just for starters.

  • Joel Wechsler

    It is not as easy as you thnik for airlines like AS, B6, NK , VX, WN or F9 to set up the kind of hub and spoke operation make up for the diminshed competition resulting from the proposed merger. Some of those carrier lack the planes and/or the gates while others are financially weak themselves and are in position to embark on that type of expansion even if they wanted to.
    As to fare increases, Doug Parker, who would be the CEO of the merged airline, has publicly stated that the merger would result in higher fares and he was not suggesting that it was because iof economics.

  • BobChi

    I can only hope your hope that both carriers survive is justified. If the result is that one goes under, the loss to consumers will be much greater than any temporary victory you’re celebrating here. The stock market certainly punished both carriers heavily in the initial reaction. I just hope you’re right.

  • dcta

    I’m absolutely not convinced that the merger is dead – I suspect it’s only postponed.

    Apparently the biggest issue for the DOJ is the number of slots the merged airline would control at DCA and LGA and there are many remedies for that.

  • MeanMeosh

    Southwest wants nothing to do with DFW; they can (and have had the ability since 1973) to fly out of DFW if they want to, they have just chosen not to because it doesn’t fit their business model. And in any event, WN has the right to begin nonstop service anywhere in the country out of DAL starting next year. They can compete with US, AA, or USAA on any route they want to once that happens.

  • MeanMeosh

    Or Doug Parker and Scott Kirby could turn the combined USAA into the world’s largest low-cost carrier at legacy prices, which is why a lot of AA partisans weren’t high on the merger to begin with, despite AA’s history of incompetence over the past 15 years.

  • StephenD

    The “New American” remains the same “Old American”. This is the airline that stranded my mother (with cancer at the time) in Dallas at the airport. We filed numerous complaints. Out of the goodness of their hearts, they offered her a $50 travel voucher. Good riddance. What goes around, comes around. There is not a worse product in the air.

  • StephenD

    Sure .. this is a “bump in the road” like that recent sinkhole in Clermont, FL is a “pothole in the road”.

  • StephenD

    Touche’! Amazing how the airlines (and employees) have forgotten how quickly they have turned their backs on the people and institutions that were (at one time) their livelihood. I am surprised at their surprise of our lack of sympathy for their current situation.

  • StephenD

    Woo! Hoo! Ding, dong … the witch is dead. The loss of the “New American” is no loss at all. I live in Dallas and (sadly) must fly from this poor excuse of an airport where American calls home. I love it that our own Attorney General is part of the lawsuit.

  • StephenD

    I forgot … with the $20 savings in airfare and $50 credit voucher offered years ago. I guess I owe you $70. A small price to pay for AA to go away. “Reprehensible”? AA … you wear that well. No symphathy here.

  • Chris

    I wish one day all you ney sayers either get laid off, take a 30% pay cut, loose your pension or loose your healthcare for retirement… Oh and try living on the same wages for the last 12 years. I wish one or all of the above would happen to you consumer traveler advocates because I know the airline employees are sick and tired of subsidising your airfare for last twelve or so years with the concessions they had to give up to save their airline. If you don’t like USAIR or American try driving from NY to Florida for $250 roundtrip or try driving from DC to vegas for $600 rountrip.

  • Jon

    Thank you Chris- you’ve said what was on my mind as well.
    Consumers want to pay rock bottom prices to travel – catch the bus or train… Last time I checked a person can travel by air cross country for less than a bus or train ticket.. Heavens forbid these leisure and business travelers have to pay 2013 prices instead of circa 1980′s fares… Sad

  • StephenD

    Waa! Waa! Waa! In the last several years, who hasn’t lost their jobs or had to make concessions with the downturn in the economy? I have NO guaranteed pension. Quit crying. My job is performance based WITH “AT WILL” EMPLOYMENT. TRY THAT! My recent AA flight was disgusting. The gate agents were actually YELLING at each other and the passengers prior to boarding. You subsidizing our airfare? You make me laugh. Let us all stop flying and seeing who is subsidizing who. With your attitude, it is no reason AA and US are exactly in the position they are. I am one damn proud naysayer. We actually call it “public opinion”.

  • Leia

    Really? You’re going to castigate an entire work group over something one POS insensitive corporate a$$hole did to you? Thanks.
    I PERSONALLY would have driven your grandmother to her destination if I’d have been involved… cancer has affected me and my family in too many ways.
    But that’s cool… I’ll figure out some other way to care for my family when I’m jobless.
    You’re a jerk.

  • StephenD

    Rock bottom prices for rock bottom service and a rock bottom product. Go figure!

  • StephenD

    “Jerk”? Defensive name-calling? Careful now … your AA customer service training is starting to show. You’re making me feel like I’m on a flight right now. BTW … thousands of passengers are castigated daily simply by flying AA.

  • bayareascott

    Wow, you really have no class. You can have whatever opinion you want. It doesn’t mean you need to treat people like you are an asshole, as you have done here repeatedly. All you have done here is instigate others. You sound like the kind of person that deserves whatever bad karma you get when flying around.

  • StephenD

    Speaking of deserving bad karma … I am reminded of the of the just failed merger of AA and US. Wow … now there’s some bad karma coming back around for you … just slappin’ ‘em both in THEIR “no class” cabins. HAH!

  • bayareascott

    Pretty much just proving my point.

  • StephenD

    Thanks for the laugh. Seriously … with the increase in airfare and fees (oh … the fees, the fees, the fees) and the decrease in products and services, I speak for so many passengers … quit whining. Stop bitching. It’s karmic … you are exactly where you should be. Karma is a bitch, huh?

  • neal1

    Chris, our industry (travel agents) have had all of the above since 1995 when Delta made the first commission cut. We’ve been taking a pay cut since (18 years now), and have learned to deal with substandard health care, no pension and so forth. Why is it that your group feels more entitled than the ones who send those customers your way. We pay the overhead for staff, advertising, rent, and so forth. We have to deal with the complaints when you give poor customer service, or need a refund, or flight was delayed and cancelled. Yet you keep crying that you are suffering. Plus, when I call your stupid airline to help fix a problem, I get the runaround so much, that I want to reach through the phone and punch the idiot on the otherside. Because the ill trained dumbys don’t care unless it’s them. OHHH same scenario here, your problem on this subject, not addressing everyone in the industry.

  • bayareascott

    What are you talking about? I don’t work for either of those companies. It doesn’t take an employee to see you for the kind of person you are. But so a corporation increases airfare and fees while decreasing services, and you castigate and belittle front line employees — saying they deserve to lose their jobs — who have nothing to do with those decisions? You are a pathetic excuse for a human being.

  • StephenD

    Now I feel so bad. Crying in my lack of service and pissed off employees. That hurts so much. NOT!

  • StephenD

    Pathetic excuse for a human being? Must be flying AA in coach.

  • toodles

    But you get your 1980′s airfare..

  • StephenD

    toodles – I dont’ know what planet you live on but … “1980′s airfare”. RIDICULOUS. I have 2M+ actual flight miles over years and that is a bunch of BS. But again, it’s the airline industry so about the best I can expect is BS. Get your head out and read a little.
    See the following:

    Why Have Prices Increased?
    Ticket prices are high today for a number of reasons. For starters, the industry has consolidated a lot over the last few years. Less competition means less need for cheaper prices. Thanks to bankruptcies and mergers now there are only 4 major airlines in the US (soon to be three when American merges with US Airways). In Canada, you have 2. In Europe, KLM and Air France are now one company, and Lufthansa has its hands in many smaller airlines. (While budget airlines keep prices cheap within Europe, once you leave the continent, those 10 Euro prices disappear!) As airlines have partnered up, merged, or gone bankrupt, there is little incentive or need to create low fares to win your business.
    Secondly, the price of airline fuel has increased tremendously. Back in 1996, airline fuel cost 55 cents per gallon. Now, it’s $2.97 per gallon. Airlines can’t absorb all of that increase, so they pass some of that on to the consumer, leading to higher fares.
    Additionally, airline taxes and security fees have also increased, adding a lot of money onto your base fare. Currently, the following fees are added to the cost of your ticket:
    •September 11th Security Fee of $2.50 (up to a maximum of $10 per round-trip).
    •Passenger facility charges of $4.50 per segment (up to a maximum of $18 per round-trip).
    •US Federal Domestic Segment Fee of $3.70 per segment.
    •US Travel Facilities Tax of $8.20 per direction (only applicable to flights to/from Alaska and Hawaii and the 48 contiguous US states or between Alaska and Hawaii);
    •US Immigration User fee of $7.
    •US Customs User fee of $5.50.
    •US APHIS User fee of $5, US International Transportation Tax of $16.30 per arrival or departure; and Foreign Government security/tourism/airport/international transportation taxes and fees of up to $290 (varies widely by destination and fluctuates with exchange rates).
    That’s a hell of a lot of fees! And it’s not just the United States. Ever fly into London? Half the price of the ticket is made up of the fees and taxes!
    Moreover, following 9/11 and the recession, demand fell and to compensate, airlines reduced both the number of routes they offered and the frequency of their flights. They did this to save money and fly fuller planes. Fuller planes mean more passenger revenue and fewer costs for the airline. It’s why if you live far from a major city you’ve seen fares go up and the number of flights go down. Planes fly close to full now and airlines are quite happy about that.
    With fewer planes, less competition, and higher capacity, airlines can charge a lot more for tickets. There’s nothing to stop them and they don’t need to lower prices. United CEO Jeff Smisek said that only now are airfares priced appropriately. When you have a CEO say something like that, it means prices are not going to go down anymore, but only up.
    According to Rick Seaney of farecompare.com, “Before 2008, things were in the favor of the passengers. After the 2009 crisis, the scale of justice tipped towards the airlines.”

  • StephenD

    The DOJ did indeed get it right. In (almost) any other industry competition drives prices down and products and services up. In the airline industry (see recent non-refundable ticket change fees), one airline raises fares/fees and the others following JUST BECAUSE THEY CAN. Airfares/fees get raised when oil and gas prices increase. Airfares/fees are never reduced when oil and gas prices drop.

    See the following from Texas Attorney General. Antitrust? Collusion? Price fixing?

    “The answer is simple: We believe that actions by the airlines and their officials violate antitrust laws. In fact, the legal violations appear so overt that it would offend my oath of office not to take action.

    The legal action is based on evidence such as internal emails, investor presentations and other comments by top executives of the airlines. Those documents reveal their thinking about how shrinking competition in the airline industry — and, hence the merger — will allow the airlines to pile even more bag fees, ticket change fees and increased fares on customers.

    This is just a small sampling of troubling things. First, the airline executives’ own words raise antitrust concerns. Second, the goal of the airlines appears to undermine free markets. The combined airlines will be able to extract higher fees and impose more onerous fares only because the free market system will be so distorted.

  • skyhighflyer

    If you wanted to ensure competition, you should have had all this figured out prior to Delta-NWA merging. Waiting until the end to put up a fight is quite juvenile. Its not fair? Small towns lose out? Let me tell you whats not fair. My job was outsourced by AA and I was furloughed after AA filed bankruptcy. In additions to hundreds of jobs lost. Fortunately, I was rehired a few months later (losing all seniority and accrued benefits) due to the pending merger. All that stopping the merger will do is most likely ensure the demise of AA and US Airways. So the saving of the few dollars it comes down to per consumer will be short lived. If the merger is blocked, I don’t see how the reorganization plan will work, which means no exit from bankruptcy. I fear AA can’t clear bankruptcy alone, the only option will be to continue to cut flights, close locations, and to continue the downsizing and shrinking of the workforce (initially AA planned layoffs of over 12,500 people). How is stopping the merger helping the small towns and connecting routes if the airline eventually has to close these stations and lay off local workers? Possibly close the doors permanently since we cant compete? That wont help your “competition” either, since then there will be two less companies (assuming US Airways goes under, as well) instead of losing one. Be careful what you wish for.

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