DOJ Move to Block AA-US Merger Stuns Industry

In a move that stunned the travel industry, the U.S. Department of Justice filed a lawsuit this week to block the proposed merger of American Airlines and US Airways, saying it violated antitrust laws.

Perhaps the most surprising aspect of the lawsuit is its “air of finality,” with no suggestion that concessions would change the DOJ’s view, said aviation consultant Robert W. Mann.

Assistant Attorney General Bill Baer flatly stated that “[w]e simply cannot approve a merger that would result in U.S. consumers paying higher fares, higher fees and receiving less service.”

The lawsuit, in which the attorneys general of six states and the District of Columbia joined as plaintiffs, came eight days after the European Commission approved the merger.

It also came two days before a hearing at which American’s bankruptcy court was expected to confirm its reorganization plan, which involves the merger, and release it from bankruptcy.

The Allied Pilots Association told its members that American Airlines’ plan of reorganization includes an automatic 30-day stay, which the DOJ’s announcement has triggered. As a result, the airline will exit Chapter 11 restructuring no sooner than the fourth quarter of this year.

‘Vigorous’ defense planned
American and US Airways vowed to “mount a vigorous and strong defense” of their planned merger.

“We believe that the DOJ is wrong in its assessment of our merger,” the airlines said in a joint statement.

“Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together. Blocking this pro-competitive merger will deny customers access to a broader airline network that gives them more choices.”

DOJ objections
Mann commented that the lawsuit “reads like an indictment for doing what every other fragmented industry has done: They consolidated.”

Among the objections to the proposed merger raised by the DOJ and the attorney general are:

•    It would reduce the number of major domestic airlines from five to four and the number of “legacy” airlines from four to three. “Because of the size of the airline industry, if this merger were approved, even a small increase in the price of airline tickets, checked bags, or flight change fees would cause hundreds of millions of dollars of harm to American consumers” annually.

•    US Airways’ Advantage Fares, which offer lower prices on connecting services to compete with other carriers’ nonstop services, would likely disappear.

•    American’s original standalone plan for emerging from bankruptcy involved growth, whereas US Airways’ management, which would assume the management of the merged carrier, favor the capacity discipline practiced by other major carriers, notably Delta.

•    US Airways currently holds 55% of the slots at Washington National Airport. The merger would increase that percentage to 69%. The combined airline would have a monopoly on 63% of the nonstops departing the airport.

Mann noted that the United-Continental merger left that combined airline with 90% of the slots at Newark, although Newark, unlike National Airport, is not a slot-controlled airport. “I don’t see where this follows precedent or is rational,” he said.

Suit cites Kirby’s statements
The language of the lawsuit suggests that the plaintiffs take particular issue with statements made by US Airways president Scott Kirby.

The lawsuit says of Kirby that “[h]e boasted at a 2012 industry conference: ‘Consolidation has also … allowed the industry to do things like ancillary revenues [e.g., checked bag and ticket change fees]. That is a structural permanent change to the industry and one that’s impossible to overstate the benefit from it.’”

The lawsuit goes on to say: “In essence, industry consolidation has left fewer, more-similar airlines, making it easier for the remaining airlines to raise prices, impose new or higher baggage and other ancillary fees, and reduce capacity and service. This merger positions US Airways’ management to continue the trend – at the expense of consumers.”

Crandall: ‘dumbest thing I’ve ever seen’
Former American chief Robert Crandall said he was furious at “the stupidity of the U.S. government,” which he said was “determined to create ever-greater monopolies.”

Rather than promoting competition, the lawsuit does just the opposite by “not allowing the creation of a third competitor,” he said. “It’s the dumbest thing I’ve ever seen.”

The government made mistakes when they allowed the Delta-Northwest and United-Continental mergers, Crandall said, and “now all of sudden we’ve allowed too many mergers.”

“I don’t understand crippling these companies,” he said. “This is nuts. Absolutely nuts. If there were any justice in the world, American-US Airways would pass in a flash.”

The last time the DOJ blocked an airline merger was in 2001, when it raised objections to a United-US Airways tie-up.