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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