Feds Board Wrong Plane in Blocking US Airways–American Deal

Despite what the feds say, the American–US Airways merger couldn't possibly make things worse

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Win McNamee / Getty Images

A US Airways jet taxis at Reagan National Airport outside Washington, D.C., earlier this year

It may be a sign of just how truly messed up our air-travel system is that the Department of Justice is filing suit to keep US Airways alive. But that’s the logic in the feds’ lawsuit, joined by several states and announced Tuesday, to stop US Airways from merging with the bankrupt American Airlines.

The DOJ says the merger will make the reconfigured airline, which would retain the American Airlines name and be the largest in the world, too powerful in markets like Washington, D.C.’s Reagan National Airport — where it would have 69% of the traffic —  and result in higher ticket prices and less competition. It’s the second time since 2001 that authorities have blocked a US Airways merger (last time United was the other party).

“The merger of these two important competitors will just make things worse — exacerbating current airline-industry trends toward reduced service, increasing fares and increasing passenger fees,” Bill Baer, who heads the department’s Antitrust Division, said in a statement.

Make things worse? How could that possibly be, you must be wondering.

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Of course, reducing service and increasing fares has been the whole point of the airline mergers of the past five years: Continental and United, Delta and Northwest and US Airways and America West got together because the airlines had managed in 10 years to lose more money than the industry ever made in its entire history. Consolidation among the major carriers was needed, especially with the low-cost carriers (LCCs) such as Jet Blue and Southwest eating more market share every year.

As a result, the industry overall has shed billions of route miles. That’s why jets are running more than 80% full. Still, high fuel prices have made profits hard to come by. Most analysts praised this marriage as the last big piece of the industry’s rationalization of competitors and capacity.

But the feds balked over what economists call “extracting rent.” It’s what you do from a fortress hub, and the DOJ is concerned that the new airline would be too strong in too many places. In addition to Washington, D.C., and US Airways’ big Phoenix hub, American was going to pick up hubs in Philadelphia and Charlotte, N.C., while also gaining slots at JFK in New York City. Those Atlantic gateways are important for European traffic.

Yet of all the badly run carriers that road warriors have had to endure over the decades (People Express couldn’t die fast enough) the prospect of seeing US Airways disappear into a merger evoked a sweet sense of revenge. Many of us remember those overpriced, overcrowded Pittsburgh to St. Louis or Indianapolis flights for $1,500 round-trip, or those awful commuter flights on Shorts 360 flying boxes.

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That’s the US Airways of memory — and it is a bit unfair. In recent years, US Airways became a Wall Street pet because it has been run as a low-cost carrier by CEO Doug Parker (its stock symbol is even LCC), who merged America West with US Airways, moved the operation to Phoenix and began to earn a profit. American Airlines, meanwhile, remained at war with its big competitors and its own employees, losing money and losing customers because people don’t want to fly on an airline where everyone is mad at one another. Weighed down by industry-high operating costs, it went bankrupt in November 2011, long after other big carriers such as Continental and United filed for Chapter 11.

So there was a certain logic in place when Parker proposed to the bankruptcy court that the two merge and that he be the one to run the combined company. The bondholders were behind him, and he even made peace with American’s labor unions — something American couldn’t do itself. American had strong hubs but weak operations and was losing money fighting fare wars where it wasn’t strong. US Airways had strong operations and weaker hubs, and there is not a huge overlap among the two carriers’ routes.

The bankruptcy court agreed. The feds did not.

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14 comments
Brad22
Brad22

This was a long time coming, but the way the DOJ did it, this late on, is somewhat shameful and only hurt both companies more than necessary. In its own way this entire thing is a sham. The author is probably right, it is mostly about Washington National (DCA). US Airways would own a huge majority of the traffic here but like another commenter pointed out this was so before any merger was mentioned. 69% is the total number of slots that the combined airline would own out of DCA. However this is a somewhat flawed percentage as US Airways currently operates a huge majority of regional flights out of the airport aside from their larger mainline fleet. In fact, every single regional partner except for Air Mesa and SkyWest operates a number of flights out of DCA. So while the majority of Delta's or United's may be made in large aircraft the majority of US Airways flights are made in 75 seat aircraft or smaller. Included in this is the fact that US Airways competes with these airlines only on New York (Area) and Boston which has been a competition since the beginning of this airport's commercial existence and one which American has no part in. Almost all other routes by all other airlines are to different destinations. Compare this to a 57% use of slots at Dulles by United and the number seems less disagreeable when you consider the added airport size, number of international flights, number of airlines, and the fact that it is supposedly the 'preferred' DC airport.  Now again, I find the fact of the huge majority of traffic of DCA will be consumed by the new American to be rather problematic but that was a set up problem from the beginning because, in the end, how did US Airways become such a powerhouse at DCA? Well after the United-US Airways failed bid because of the DOJ on grounds of competition, (Which was then followed by the merger of Continental, a larger airline than US Airways) US Airways entered into negotiations with Delta about gate swapping from La Guardia (LGA) to DCA a few years ago. This met some resistance from a federal judge due to the very issue the DOJ cites now but it faced no opposition from the DOJ or any senators or states. This may (I do say may) stem from the fact that DCA is the preferred airport of government officials and following the completion of this gate swap US Airways opened direct regional service to a number of state capitols which would also be used by these officials. (Tallahassee, Burlington, Des Moines, Little Rock, Nashville, Albany, Huntsville, Birmingham) Forced gate divestitures at DCA were on the table as part of the terms of the merger and that would most likely conclude that those routes, served by small aircraft even when compared to other regional, would be the first to go. So there is a bit of background on that area. As far as competition, American is awful domestically, (hinted at by their shunning off of American Eagle) but owns most travel into South America, and has a relatively good international presence. US Airways has actually strengthened its domestic market quite a bit but is the US's worst international legacy airline. (Most flights work within the Star Alliance network and not their own) These airlines might survive separate for now, but even with the largest aircraft order in history (450+) American Airlines still does not have as large a fleet as UAL or DAL so at the end of the day there are still not really competitive. People will argue how bad the airlines are and this will just make the 'mega-bad' airline of our nightmares, with either US Airways ruining American or American ruining US Airways, but that really has nothing to do with it. You go anywhere and you will see people complaining about different airlines so there is really no objective credence to be given to it. Arguments can be made about Doug Parker but in all honesty US Airways is, for its market share, now one of the most profitable airlines and he placed it in a position to merge which he has been trying to do for years. I also hear the tarnished airline quip referring to the low grade of US Airways compared to the elite American. Consumers, as a whole, mentioning that should have considered that before they let American go bankrupt and US Airways remain profitable if it was some kind of icon because those kind of sentiments are not how businesses work. Southwest and JetBlue exist because it was not about the 'legacy' of the carriers that mattered, it was about the bottom line to the consumer. (You will of course find your fair share of customer complaints about those as well) So, as far as will it consolidate the market? Of course. Will ticket prices go up? Who knows, but yeah probably. Should the DOJ have considered that before offering no contest to creating 'the world's largest airline' twice before this? Absolutely. So basically they are lacking foresight, are serving their own special interest at DCA, or are picking these companies out specifically to be left out in the cold because they were the last to consolidate and for that I call foul. Thus concludes my rant.

If that was too long to read, (It is the internet and I know we all would rather skim) in summary: Like most things, it is, in my opinion at least, all political. It is probably all about trying to get more negotiating leverage.

GretaBrena
GretaBrena

I would like to see more airlines -- not fewer. And, I want to fly on the airlines who pay their employees well. American had paid pretty well, but no more.  

matsci
matsci

The DoJ logic is seriously flawed.  At each of the airports cited, either American or US Airways already had an outsized presence and the merger really changes this very, very little.  If the government really cared about air travel it would take the billions and billions of excise tax dollars and actually invest them in improving air travel, which would lead to far fewer delays and missed connections.  This would make the flying public much happier and would produce a better product that might actually be worth the extra $ we're already paying.

viapanam
viapanam

I would suggest the author of this article boarded the wrong plane. Your whole premise is flawed. The surviving company is not American Airlines; the surviving company in all but name is US Airways - perhaps the worst customer service carrier in the United States. The new company is run by Doug Parker, who clearly knows how to treat his passengers even worse than cattle (the rest of the industry pretty much treats us like cattle). I have rued the day that a proud airline like American would have its name tarnished by the likes of US Airways management. I hope this merger falls apart, that US Airways falls apart, and that American finds a way to keep flying. Bravo to the US DOJ.

corymattson
corymattson

It's like two drunks holding each other up.    Merging doesn't atuomatically make them bette; better management makes them better. 

littleredtop
littleredtop

Where does the DOJ get the authority to block any business related issues that are non criminal?  We have other agencies to deal with mergers etc.

gysgt213
gysgt213

These 2 are not merging for anyone's benefit but their own bottom line.  Having the labor unions on board should be of no comfort to you when you connect the dots and understand that all labor unions are in the weakest position they have ever been in.  In other words what choice to the unions have but to go along.  Of course bond holders like it they want to make money too.

goblue562
goblue562

So now, instead of having 2 bad airlines, we'll have one REALLY BAD airline.  


Just as long as Southwest doesn't go anywhere, it's fine with me.

falcon269
falcon269

I smell a payoff of "journalists." Consumers would be devastated by the proposed merger. Get real, you flacks for monopolists.

krleitch
krleitch

I would have to agree.  Merging two dogs might help them survive.  Make them divest more assets to get it done.

CRF353
CRF353

@viapanam American was "a proud airline" decades ago. The surviving company is American Airlines, based on the relative size of both airlines separately, run by Parker.