The Justice Department’s surprise lawsuit to block the proposed $11 billion consolidation of American Airlines and US Airways appears to doom the latest airline mega-merger, at least in its current form. But for airline passengers, the prospect of two stand-alone airlines is mostly good news.
Stopping the transaction will keep airfares affordable and fees in check by maintaining the present level of competition, according to the federal government. It will also give consumers more choices in air travel. “By challenging this merger, the Department of Justice is saying that the American people deserve better,” said Attorney General Eric Holder in a prepared statement. Six states — including Arizona and Texas, where US Airways and American, respectively, are based — and the District of Columbia joined the DOJ in the antitrust lawsuit.
In a joint response, American and US Airways called the regulators “wrong” in their assessment of the merger and promised to mount a vigorous defense of their plans. “Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together,” they insisted.
Just a few weeks ago, few thought that the government would challenge the merger. The proposed coupling had already been cleared for takeoff by European Union regulators and American Airlines’ shareholders and creditors. But a separate lawsuit filed in San Francisco federal district court challenging the airline deal, a slew of news reports questioning the wisdom of the merger, and congressional testimony from passenger representatives appeared to turn the tide on what most observers believed was an inevitable deal.
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“This merger would have had the potential to clobber competition,” says Charlie Leocha, director of the Consumer Travel Alliance. “The consequences would have been dramatic.” (Disclosure: As the co-founder of the CTA and as a consumer advocate, I also asked the DOJ to take a careful look at the merger.)
The government objected to the transaction for several reasons. It says that American and US Airways compete directly on more than 1,000 routes where one or both offer connecting service — more than 30 percent more routes than the United Airlines merger with Continental Airlines affected. Those routes represent “tens of billions of dollars” in annual revenue, according to regulators. According to the Justice Department, American and US Airways “engage in head-to-head competition with nonstop service on routes worth about $2 billion in annual routewide revenue.” Removing that competition “would give the new airline the incentive and ability to raise airfares.”
A particular area of concern was Washington’s Reagan National Airport, where the new airline would control 69 percent of the takeoff and landing slots. That would translate into higher prices and fewer choices, the government claims.
Some experts think that the deal is still possible, but not as it’s currently proposed and probably not this year. Both airlines will have to come up with a Plan B — perhaps an offer to divest themselves of certain gates or landing slots — in order to secure the government’s permission. This assumes that the DOJ is in a bargaining mood, which is unlikely. “We think a full-stop injunction is the right outcome for consumers,” Assistant Attorney General William Baer said at a news conference after filing the antitrust lawsuit.
“They’re in a holding pattern, legally speaking,” says Henry Harteveldt, a travel industry analyst with Hudson Crossing.
In the near term, passengers are unlikely to notice any meaningful differences in the way they fly, since both airlines will continue operating as separate companies. Harteveldt says that US Airways may reconsider leaving the Star Alliance, a global airline alliance, which it had planned to do by the end of the year. If it does, this would affect flights with which the airline has codesharing agreements, as well as passengers’ ability to earn and redeem frequent-flier miles.
And, for at least the next few months, air travelers shouldn’t expect any dramatic fare increases, according to Seth Kaplan, editor of the trade publication Airline Weekly. “Airfares will be lower than they would otherwise be if these two airlines remain competitors,” he says. “It’s just difficult to say by how much.”
Passengers seem as confounded as the experts by the DOJ’s actions. Some criticized them as interference with a free market, while others say that regulators are finally trying to protect passengers after a string of large airline mergers that failed to benefit consumers.
“With the number of airlines dwindling, keeping any competition alive can only help consumers,” says Ron Goltsch, an engineer from West Caldwell, N.J.
The DOJ’s actions are far more interesting in the long term. Many observers see a fundamental shift in the way regulators view airline mergers and airline competition, from a laissez-faire approach that allowed airlines to charge passengers whatever the market would bear, to a more pro-consumer view. The antitrust lawsuit could be a cautionary tale for any airline that tries to initiate a merger in coming years.
But no one — not the analysts, not passengers, not even the two airlines that want to merge — knows what the future will bring. Only that the merger, which American and US Airways intended to finalize next month, won’t take off on schedule.