The Proposed Merger of US Airways and American Airlines: The Rush to Closed Airline Systems

Posted by D. Daniel Sokol

Diana L. Moss, American Antitrust Institute and Kevin Mitchell describe The Proposed Merger of US Airways and American Airlines: The Rush to Closed Airline Systems.

ABSTRACT: Should US Airways make a bid for American Airlines, currently in bankruptcy proceedings, the deal could present a conundrum for antitrust authorities. The transaction would create the largest domestic airline, reducing the number of legacy mega-carriers to three – Delta Air Lines (Delta), United Continental, and US Airways-American Airlines (US Airways-American). This consolidation would occur against an industry backdrop marked by a dwindling fringe of low-cost carriers (LCCs) and growing questions as to whether legacy look-alike Southwest Airlines-AirTran Airways (Southwest) exerts any significant competitive discipline in the industry. The merger could therefore hasten a troubling metamorphosis of the domestic airline industry from one in which hub airports were designed to accommodate multiple, competing airlines to a few large, closed systems that are virtually impermeable to competition and create a hostile environment in which LCCs and regional airlines have difficulty thriving and expanding.

This White Paper, produced jointly by the American Antitrust Institute (AAI) and Business Travel Coalition (BTC), asks: What competitive issues should be the focus of antitrust investigators in reviewing the proposed merger of US Airways and American?

The paper takes the position that a U.S. Department of Justice (DOJ) investigation into the proposed merger of US Airways and American should be informed by mounting evidence on the effects of previous airline mergers, namely Delta-Northwest and United- Continental. The White Paper presents a brief analysis of these combinations and highlights a number of preliminary observations that deserve a more in-depth look. These range from the effects of previous mergers on creating costly post-merger integration problems, substantially reducing rivalry on important routes, producing above-average fare increases, and driving traffic to major hubs and away from smaller communities.

The White Paper continues on to evaluate key competitive issues raised by the proposed merger of US Airways and American that deserve some attention in an antitrust investigation. One is the expected outcome – similar to previous legacy mergers – that the proposed combination could eliminate competition on a number of important overlap routes, creating very high levels of concentration and potential harm to consumers. The risk that the proposed merger could adversely affect small communities through reduced levels of, or lower quality, air service is also worth a close look. Another observation is that the merger is unlikely to be one of complementary networks (as might be argued) and could instead create regional strongholds and solidify US Airways-American’s control over key airports. Any arguments that the merger is necessary to create another “equal-size” competitor to the existing Big 3 systems are also not compelling. The analysis concludes by examining the potential effect of the merger on buyer market power and disclosure of information regarding ancillary service fees.

The joint AAI/BTC White Paper offers a number of concluding observations and recommendations. Among them is that our analysis of the US Airways-American merger– coupled with potential warning signs from previous legacy mergers – indicates that there may be enough smoke surrounding the proposed combination to indicate a potential fire. The merging parties therefore bear a heavy burden is demonstrating that their merger would not be harmful to competition and consumers.