The US Department of Justice makes a big deal in its lawsuit seeking to block the American Airlines-US Airways merger about four carriers controlling more than 80% of the US air passenger market post-merger. This, it argues, is an anticompetitive situation that will harm consumers and must be stopped.
But just five carriers already control more than 80% of the market today. With DOJ previously approving the Delta-Northwest, United-Continental and Southwest-AirTran mergers (the last two during current attorney general Eric Holder’s tenure heading DOJ), there really are only two choices going forward: one is five airlines controlling more than 80% of the US market and the other is four airlines controlling 80%-plus.
The latter scenario would feature four airlines (the new American, Delta, United and Southwest) with market shares ranging from 18% (Southwest) to about 24% (American), based on 2012 US Department of Transportation traffic numbers. The three full-service international airlines would be bunched together (American about 24%, Delta 22% and United 19%). This is the scenario DOJ is trying to prevent.
If DOJ has its way and successfully stops the American-US Airways merger, then five airlines will control about 83% of the market. The difference? The carriers’ market shares would range from 9% (US Airways) to 22% (Delta). There would be four full-service international airlines instead of three, with Delta and United about the same size, American in the middle with approximately a 15% share, followed by US Airways at under 10%.
One of these scenarios will roughly be the reality in the US airline market in 2015. Which looks more competitive?
DOJ’s answer, as stated in its lawsuit, is that post-merger the new American, Delta and United would simply lay down arms and stop competing. “This merger will leave three very similar legacy airlines … that past experience shows increasingly prefer tacit coordination over full-throated competition,” DOJ’s lawsuit states. “By further reducing the number of legacy airlines and aligning the economic incentives of those that remain, the merger of US Airways and American would make it easier for the remaining airlines to cooperate, rather than compete, on price and service.”
This, I believe, is critical to understanding DOJ’s rationale in opposing the American-US Airways merger. If you actually believe Delta, United and the new American will essentially collude, you then have to conclude the merger would be anticompetitive. But should DOJ base its review of the merger on its prediction that in the future the three airlines won’t compete?