US Airways Group, the parent company of US Airways, filed to merge with AMR Corporation, the parent company of American Airlines, in February of this year. If approved, the merger will create the world’s largest airline and to save two companies that have been in dire financial straits for nearly a decade. It would create an airline under American Airlines’ name and under AMR’s shareholders’ ownership (72%-28%), but operated by US Airways management.
There are various reasons supporting the logic of said merger, from an estimated $1.5 billion collective revenue and cost savings to US Airways’ creditor status in respect to American Airlines. The new airline will purchase hundreds of new planes, adding a boost to the global aeronautics market, and augmenting associated sectors, such as aeronautical mechanics, technic work, and engineering. The route network resulting from the merger will be the most expansive the world has ever seen, with multiple bases on every populated continent.
Despite these clear benefits, the United States Department of Justice filed to block the merger on August 13, 2013, citing decreased overall competition leading to higher prices for consumers and the disproportionate control the new American Airlines will exert over slot-controlled airports.
There are at least three good reasons why the DOJ should withdraw its lawsuit attempting to block the merger.
1. It’s unfair
If approved, the new American Airlines resulting from the merger will be the world’s largest airline. The DOJ and its supporters could object to the merger on these grounds. However, there is no clear precedent for blocking large mergers between primary carriers. The DOJ blocked neither the United-Continental merger in 2010 nor the Delta-Northwest merger in 2008, both of which created what are arguably the world’s largest carriers.
To add to the opacity of the DOJ’s precedence in challenging mergers, it all but blocked a proposed US Airways-United merger in 2000, only exacerbating future problems the carriers would face in the wake of the September 11, 2001 attacks. In this case, the proposed carrier would have been smaller relative to the market than United-Continental or Delta-Northwest (US Airways had yet to merge with America West).
There is no clear precedent that the DOJ has set in its decisions to block and allow airline mergers, and it has no established precedent for blocking the US Airways-American merger, seeing as it has allowed two other massive mergers in the past half-decade.
2. It’s unpopular
Our cities rely on the airline industry to support existing businesses, attract new businesses and to keep our local economies moving forward. The health and well-being of our cities and our citizens depends on this combination moving forward.
— Bipartisan mayoral letter of merger support to Attorney General Eric Holder
Seeing the clear advantages of a merger between these two carriers, both of which have complementary route networks, a bipartisan coalition of mayors, attorneys general, and labor leaders have voiced their opposition to the lawsuit. Indeed, the opposition to the lawsuit reaches across even the most divided of aisles — those of Congress.
Even the attorney general of Texas, the home state of American Airlines, who originally filed to block the merger, has stepped away from the lawsuit.
The DOJ, as a government bureaucracy and an extension of the executive branch, is largely insulated from political demands and the feelings of popular opinion, whereas the marketplace is highly responsive to the demands of consumers and shareholders. The merger would mean increased access to an ever-growing network of routes for casual travelers, business travelers, executives, politicians, and more. Each additional route that a city is connected to is another route of commerce that can boost not only the business opportunities of those living in that city, but also the potential tax base for cash-strapped municipalities.
3. It’s bad for consumers
Although the airline industry tends to have competitive pricing, and although the airline industry tend towards consolidation due to economies of scale, new carriers are always working to undercut the fares of larger carriers. In the 1990s, Southwest Airlines made a name for itself by undercutting its competition and forcing them to lower prices in response (in what is now famously called “The Southwest Effect”). JetBlue Airlines has replicated this model, leading to lower across-the-board fares in cities in which the airline operates. Ultra-low fare carriers, which market themselves as no-frills, low-cost airlines, such as Spirit Airlines, have also begun undercutting large, pricier carriers as they expand their network of bases.
Even if the US Airways-American Airlines merger does lead to higher prices for consumers, this signals an opportunity to these lower-cost carriers to enter the markets on these routes. Without an incentive to launch new routes, most carriers will not service a particular market. Higher fares signal this incentive and open the opportunity for a new Southwest, JetBlue, or Spirit effect to fall into place.
In the end, it is unlikely that the DOJ’s lawsuit will succeed, with US Airways and American likely settling to use fewer overall slots at specific airports and to reach an endgame with the DOJ. Despite the eventual success of the merger, every day the DOJ attempts to block is another day that consumers, shareholders, and the global economy miss out on the benefits.