The AA/US merger endgame — a deal that is not needed and a bad deal for consumers

by Charlie Leocha on August 1, 2013

AA-US_merger
The Department of Justice (DOJ) is in its final deliberations about the antitrust implications of the merger between US Airways and American Airlines to form The New American Airlines. The US Airways’ stockholders have approved the merger, it appears that American Airlines’ stockholders and bondholders will as well, and the Department of Justice is the big question mark. DOJ is the single entity that can scuttle this misguided (from a consumer’s point of view) merger.

Objections raised months ago by the Consumer Travel Alliance and advocates, still resonate with truth. For consumers this is a raw deal — they get no tangible benefits and lose enormous amounts of competition. For no consumer benefits, the government is trading away competition and harming the public.

Antitrust deliberations should be based on the public good and consumer protections. By that measure, this merger should not be seriously considered. Consumers get nothing but less competition and the merging airlines become more powerful. It is a bad deal for consumers and our economy.

1. No reason to merge — neither airline is in danger of failing
Virtually every merger in the past has been entered into with one of the airlines on the ropes. Congress and administration officials approached these mergers with the intention of maintaining service for the public rather than throwing the system into chaos. In this case, there is no such rationale. Both airlines are strong, profitable competitors. US Airways reported the highest annual and quarterly profits in its history. American Airlines also reported one of the best corporate quarterly profits only weeks ago. These airlines are making hundreds of millions of dollars every quarter. There is no need to merge other than to give their executives bigger toys to play with in the financial Wall Street game.

2. No consumer benefits — no new destinations when United flights, already available to US Air flyers, are taken away and AA routes added; and no cost savings.
In the beginning, the airlines claimed new routes and more than a billion dollars of savings based on merging operations. However, after months of hearings we now know that the net increase in destinations for the merger’s consumers is less than zero — in fact, US Airways consumers will lose destinations when they are removed from the Star Alliance and joined with the oneworld alliance that has far fewer airlines and destinations. Plus, the monetary savings forecast by the airlines have already been debunked by Wall Street analysts who question whether the billion claimed can be attained. At the same time, these analysts know that the merged airline will have significant pricing power — what cannot be gained by savings will be extracted by raising prices and fees. Thus, their stock prices are on the rise.

3. No labor peace — Yes, the AA unions are not against the merger, but there is unrest with pilots, flight attendants and machinists. Customer service suffers.
This story, unfortunately, will unfold after the merger. Some of the disagreements are already festering beneath the facade of union joy at the demise of the AA management team. TWA flight attendants are threatening a lawsuit and Congress is dismayed at their treatment. American Eagle pilots have rejected the merger-induced labor negotiations as inadequate. Machinists are in a pitched battle between unions about which union will represent the group in the new corporation. Worse, with this merger, unions will gain more power in their negotiations as the industry consolidates.

4. Lost of competition — CTA study shows 761 overlapping one-stop routes where competition will be lost. GAO’s study is even more damning — 1,665 overlapping routes affected with competition loss.
The only solid fact about this merger is that destination-to-destination competition will be lost. That is obvious when dramatic studies conducted by the GAO and Consumer Travel Alliance (CTA) were released. The loss of competition, according to GAO, will be around 30 percent more than lost competition from any other merger in history. The CTA study showed 40 percent of AA flights and 30 percent of USAir flights facing overlap when it comes to competition. On this issue alone, the merger should be rejected.

5. Medium-sized non-hub airports are in danger of lost service
Because of the dramatic overlap in service between AA and USAir on these 1,665 routes, non-hub airports will lose frequency of service. If AA has three flights a day between Seattle and Austin connecting via Dallas, and US Airways has three flights a day between the same two points connecting in Phoenix, a merged company will more than likely reduce their combined presence by one or two flights a day. That is what mergers do — they try to find “efficiencies” that will reduce costs. Plus, support personnel at each airport where these airlines have significant overlapping connecting routes will be faced with consolidation, which means job losses for one of the companies providing outsourced services. This will not be good for consumers with less service options, nor for suppliers with one fewer airline in the market.

6. Consumers lose the leading low-cost carrier among the legacy carriers when USAir is folded into AA.
Until the US Airways effort to merge with AA, they have consistently been the low-cost leader among the legacy carriers in the airline industry. Their airfares were always among the lowest, especially on international flights where they faced stiff competition because they were not allowed entry into the club of airlines enjoying antitrust immunity with the benefits of colluding on flight schedules and pricing with their partners. This merger will make US Airways (The New American Airlines) a full member of the oneworld alliance complete with antitrust immunity. It will be goodbye to lower prices for consumers and hello to more profits for the combined airlines at the public’s expense.

US Airways and American Airlines have been fairly transparent in their rationale for merging — competitive benefits for their merged airline based on size and better control over costs and pricing. Consumers, on the other hand, can see no benefits from this corporate marriage — they get less competition, higher prices and fewer choices.

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  • Chasmosaur

    I know DOJ wasn’t involved in it, but I lost all faith in Federal oversight when it comes to mergers with the idiocy that was the Satellite-XM Radio merger. You know – two companies granted with licenses, with the specific condition they could each never own the other’s license?

    So I’m quite sure DOJ will look at all the logic and consider it a pretty pile of paper. I’ll be happy to be proved wrong.

  • sirwired

    1 – No, AA has not been “making hundreds of millions every quarter”; this past quarter was their first operating profit in a long time.

    2 – We are currently in favorable economic conditions for airlines. The industry is notoriously cyclical, and there’s approx. a 0% chance AA could weather the next storm. As it is, I have no idea where they think they are going to find the money to pay for their new modernization program. AA liquidating would be a lot more injurious to consumers than the merger.

    3 – TWA employees have been threatening a lawsuit for a long time, the merger has nothing to do with it. And why is it “worse” that union’s power will increase? Given how much they’ve gotten the shaft in the past from airline management, I don’t see why this is a bad thing. Furthermore, I don’t see what labor issues have to do with the merger approval; I don’t think it’s on the list of approval criteria.

    4 – That very same study also stated that most of those routes with “lost” competition will still have plenty of competition left. Routes going down to zero or one remaining competitor make up less than 4% of the route network. The study also stated that pricing power was generally not a motivation behind airline mergers since any aggressive moves in pricing in non-hubs can be quickly countered by competition; starting new domestic routes is not hard.

    5 – If flights are full, they’ll stay. If they aren’t, then yes, some will be dropped. Why is dropping flights running below capacity an anti-trust issue?

    6 – Doesn’t the Star Alliance (of which USAir) is a member already have anti-trust immunity? Yeah, they’ll be switching to OneWorld instead; what’s the difference?

  • sam

    From a purely selfish point I’m for the merger. My 1K status with UA means (almost) nothing when travelling with US Air (e.g. having to pay to travel on a flight just one hr earlier). On the other hand a merger with AA will recognize my Platinum status

  • TonyA_says

    I wonder, how many large airlines do other countries have? One or two, maybe? Is everything falling apart over there because of lack of competition? Are we simply seeing a natural phenomenon called consolidation? A merger of two lousy carriers – should we be alarmed? For as long as I can fly my jetBlue or Southwest, who needs AA or US?

  • Charles Leocha

    1. But they are making a profit and a handsome one at that. They can stand on their own with no problem.

    2. Whether AA liquidating would be more injurious to consumers is conjecture. It might hurt for a few months, but new service will fill the need. We know that less competition means higher prices.

    3. It is an example of labor problems to come. There is no labor peace here, only AA labor wanting to get out from under their old management.

    4. the same study did not say “plenty of competition.” It said some competition. Changing from three competitors to two still has competition, but it is not the same. There were 1,600+ routes that would lose competition and 200+ that would gain. It is exactly those non-hubs to which I am referring.

    5. It is a question of loss of service. When the two airlines are competing with each other they want to keep frequency. When they do not compete they can cut service. Cut service means less choice because of less competition.

    6. No. USAir does not have antitrust immunity within Star Alliance.

  • Charles Leocha

    This “natural phenomenon called consolidation” is why there are antitrust laws. Our markets are far larger than any other country and most countries have competition from outside. We do not allow foreign airlines to have schedule within the USA. We should be alarmed because of lost of competition. Your JetBlue and Southwest also are tempered by that same competition.

  • TonyA_says

    Then the real problem is our cabotage law(s).
    Also in other developed countries they have a great rail system. Our’s pathetic.
    The best way to solve this problem is to encourage competition. While I am not for the merger, forcing companies not to merge is not encouragement of competition. Removing the laws of your buddies in Washington or removing the people in Washington is probably better.

  • TonyA_says

    And Charlie, what happened to those “anti-trust” laws when Delta merged with Northwest and United with Continental. How about the banks? Google? Need more examples?

  • Charles Leocha

    Previous antitrust hearings were under financial duress. Congress and DOJ were faced with airlines that were losing hundreds of millions of dollars and wanted to do something to keep the economy going and avoid massive layoffs. This merger is nothing like that — both airlines are healthy now. Banks and Google are another story. You can line up your examples in the airline industry and there are rationales for each merger. This one is an outlier.

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  • Chris

    Charles Leocha, I am a US Airways employee, I can tell you from first hand experience that we as workers, want this merger because it means more stability and compensation for us as well. My union, the IAM, is only waiting for our current negotiations for our current contract (as the number 4 carrier) to close and have a new contract to endorse the merger.
    I can also tell you that flights get cut all the time, if it isn’t making money the airline will not operate the flight. Capacity will not be cut if the demand is there for it, in that Austin-Seattle scenario, apparently there is enough demand for both airlines to operate the route already, that will not change just because the two airlines become one.
    Lastly, preventing this merger only allows United and Delta to dictate the prices, if you allow American and US to merge, you create a third competitor at that level. Continental was bigger than US Airways as was United, Continental was Skyteam Alliance, they are now Star Alliance. American Airlines is the only American carrier in the Oneworld Alliance, with this merger each of the major airline alliances (Star, Skyteam, Oneworld) will have one of the big three American carriers as part of them. Before this “merger mania” Delta, Northwest and Continental were all Skyteam while United and US Airways were Star.

  • Chris

    Charles, your version of what you perceive to be “protecting consumers” is at odds with the facts and the reality. Your first five points are completely without merit and substantiation. Point 3 regarding labor issues is just plain false. All the labor unions of both airlines have already signed on the dotted line. To think that American has and can implement a Plan B is wishful thinking paid for by special interests which are not in the interest of the consumer. I cannot understand how a supposed consumer advocate can oppose this merger. It makes absolutely zero sense. I question your credentials as a consumer advocate because you are certainly advocating for something that in every way shape and form will harm the consumer in the short and long terms.

  • Chris

    Charles, please explain to me how this proposed merger will result in less competition. I’m really interested to know.

  • Chris

    Explain to me how American is a healthy company. They made a bit of a paper profit. The first in 20 years. They are bankrupt and their plan forward is the merger. USAir is healthy but it cannot compete with the larger carriers or grow to the level needed to so by itself. If the merger fails how does American move forward. No businessman in this country can tell you how that happens. And when Delta and UAL tire of swatting around USAir it will be squeezed into a smaller and less competitive carrier. It boggles the mind how you have arrived at your conclusions. Absolutley irresponsible and unifmormed.

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