A few quick takes on today’s shock announcement by the US Department of Justice that it has filed a lawsuit to block the proposed merger of American Airlines and US Airways.
Let’s start by saying it is preposterous.
First point:Reading the DOJ announcement and comments made by Attorney General Eric Holder and assistant Attorney General, Antitrust Division, Bill Baer, I note the reference to the “more than $70 billion [spent] on airfare for travel throughout the United States” by US consumers and that “the merger is likely to result in higher ancillary fees, such as fees charged for checked bags and flight changes. In recent years, the airlines have introduced fees for those services, which were previously included in the price of a ticket. These fees have become huge profit centers for the airlines.”
There is no mention, however, of the high and ever-increasing taxes, fees and security charges that the US government loads on airlines and which it works to keep hidden from the consumer.
Huge profits centers? IATA expects the world’s airlines to make a total net profit of $10.6 billion this year, which equates to a threadbare profit margin of 1.6%. North American airlines collectively are expected to account for of that $3.6 billion profit, but again, the margin is razor thin. Without ancillary revenues, this would quickly reverse into losses and the US consumer would have fewer airlines and less choice. American Airlines would hardly have gone into Chapter 11 bankruptcy protection if it were fatly profitable.
Second point: DOJ makes much of the merged airline dominating Washington Reagan National Airport controlling 69% of the take-off and landing slots at DCA and having a monopoly on 63% of the nonstop routes out of National.
“By allowing one airline to control that many slots, the merger will prevent other airlines, including low-fare carriers like JetBlue and Southwest from competing at Reagan National,” DOJ says.
So why not propose or mandate slot giveups as a remedy? The European Commission did this as part of its approval of the AA-US Airways merger, citing the need for tradeoffs Heathrow. This should be a negotiating position, not a block.
Third point:The EC has approved the merger. Despite the huge global network of the merged carrier, the EC said it did not raise competition concerns.
Fourth point:Baer’s remark that “If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers” is particularly troubling. What soundly-managed, successful business does harm to its customers or would make that a strategy? Only a company that has a very short-term goal to be out of business.
Fifth point:And this, to me, is the most perplexing point and one which makes the lawsuit seem more political than soundly-based; why, if this merger is so bad for the consumer, did DOJ give the go-ahead for the Delta/Northwest, United/Continental, and Southwest/Air Tran mergers?
Baer says that a US Airways executive described the merger as “the last major piece needed to fully rationalize the industry.”
Baer then gave his translation of this phrase, saying that “in the airline business the word ‘rationalize’ is a code word for less competition, higher costs for consumers and fewer choices."
I was at a US Airways briefing when the rationalized industry phrase was used; that may or may not be the same sentence that Baer was referring to, but I believe he has taken it out of context and twisted it for DOJ’s purpose. It is a simple fact that the US airline industry has, indeed, rationalized in recent years – through mergers sanctioned by DOJ.
So the real issue here is where was DOJ’s insight into that codeword when it approved the other mergers? And how can it get this far along the road and then say the only two remaining stand-alone airlines that could provide real competition against the other merged mega-carriers is bad for the consumer? DOJ’s lawsuit contradicts its own policy.
Sixth point:This is a preposterous move by DOJ.