U.S. airlines have always argued that consolidation is not only good for them, but is also good for the consumer—and now that theory will be tested in court.
Regardless of the outcome in what now becomes a very public fight with the federal government over the proposed merger of US Airways and American Airlines, the antitrust suit that the Justice Department filed last week represents a tectonic shift. No longer, the government signaled, will it analyze the impact of mergers and acquisitions (M&A) on prices and competition mainly on nonstop routes between cities. Now, the full panoply of connections will be examined, with routes through third cities getting much more emphasis.
Firing a cannonball though the two carriers' oft-cited datum of overlapping on a mere 12 routes, Justice said it found 1,044 city pairs in which a combined US-AA would be bad news for ticket buyers.
“They have finally figured out that this is a network business,” airline regulation scholar Michael Levine says of the government's lawyers. Levine, an architect of deregulation under Civil Aeronautics Board Chairman Alfred Kahn in the 1970s, adds, “Competition policy in this area should balance the public benefits of expanding networks against the cost of tightening the oligopoly, and the balance in this case from the consumer perspective comes out strongly against approving the merger.”
But US Airways and American say they will fight back vigorously. They will argue that the combination would allow them to compete against the other two big domestic network carriers—United Airlines and Delta Air Lines—to force prices lower.
And they have some influential allies in making the case that the government is ignoring the benefits of a healthy airline industry. The Air Line Pilots Association says Justice has “interfered with the steady progress that the airline industry has made to achieve an economically rational yet vigorously competitive industry. . . . By filing this lawsuit, the department has completely ignored decades of instability in the airline business that has caused many carriers to go out of business.”
The Justice action initially sent stockprices plummeting.