Note: This approval of the American Airlines and US Airways merger is the bankruptcy court approval, not the antitrust merger approval that will be rendered by the Department of Justice in the next few months.
As a bankruptcy solution, the merger of American Airlines (AA) with US Airways (USAir) is a wonderful one. Creditors are made whole, stockholders do not lose all of the value of their stocks (though it has been dramatically reduced), lawyers make millions and the business of aviation can continue.
However, there is the messy business about how this merger will affect consumers. That’s where the DOJ will come into play as well as Congressional hearings.
In the annals of airline mergers, this merger between AA and USAir is unique in that neither airline is in danger of going out of business. Plus, the airlines are not touting the merger as a big consumer benefit, but rather as an industry benefit in terms of stakeholders and other airlines, which will have less competition with which to deal.
Though the airline executives before Congress and in the press claim that there will be “more flights to more destinations, domestic and international, supported by a stronger oneworld alliance that builds on our global larger network,” it is only accomplished by dismantling the current alliance between USAir and United Airlines and the Star Alliance.
The destinations that the merged AA/USAir gain are taken away from the former USAir/United alliance. The stronger oneworld alliance with AA, British Airways and Iberia only comes at the cost of a weaker Star Alliance where United, Lufthansa, Swiss and other airlines are torn from code-shares with USAir.
The merger gives on one hand and takes away with the other. Consumers end up with no net benefit. But, they have plenty of negatives that will issue from the proposed merger. Here are 10 consumer negatives as submitted to the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights.
Bankruptcy proceedings deal with creditors and stakeholders. Antitrust studies deal with the effects of this merger on consumers. This is why the DOJ deliberations are so important. Where they see possible future problems, such as control of too many take-off and landing slots or reduced competition, the department can prescribe remedies. From the consumers’ point of view, these DOJ studies are the real focus.
1. Reduced competition across airlines will harm consumers. The total number of national, domestic carriers will be reduced from five to four — a 20 percent reduction. Consumers will be faced with less choice, less service, fewer non-stop flights and higher airfares.
Several years ago, there were seven airlines in the fare-setting universe. If the American Airlines/US merger is approved, we will only have four domestic airlines participating and, effectively, only three international airline alliances (protected by anti-trust immunity). Airline passengers will lose 20 percent of their competition dynamic with this merger.
2. American Airlines/US Airways claims of only 12 overlapping non-stop routes are misleading in terms of competition. The real competition between US Airways and American Airlines takes place via one-stop connections. Flights between Phoenix and Jackson, Mississippi, all have a connecting city. American Airlines connects in Dallas and US Airways connects in Charlotte. Both have almost identical airfares. The same goes with connecting flights between Phoenix and Orlando. US Airways has a non-stop, but the real competition comes between the airlines’ one-stop connections. American Airlines connects in Dallas and Miami to Orlando and US Airways connects in Charlotte, Chicago or Denver.
There are more than 100 other city pairs where US Airways and American Airlines compete aggressively today. That is the competition that will be wrung out of the system, not only competition from non-stops. When one considers that Southwest Airlines serves less than 100 destinations, the dramatic size of the loss of competition becomes clearer.
3. Popular, mid-sized airports like Orlando and Las Vegas that are at the end of “spokes” in US Airways and American Airlines hub and spoke systems will suffer. Airports where American Airlines and US Airways must compete, such as Orlando and Las Vegas, will no longer be part of the necessary competition. Flights to those cities will suffer. When no longer forced to compete for leisure and business travelers attending conventions and sales meetings, both airlines will be able to eliminate individual “spoke” flights to these airports.
4. Consumers will lose one of the most competitive national carriers. US Airways has prided itself on low labor costs that have allowed it to compete successfully with larger rivals even while its service was via hubs that did not have high numbers of originating traffic. Those labor costs will evaporate when the merger is complete and prices will be forced to rise.
5. Airlines already operate in an oligopolistic state; this will make it easier. Their silent coordinated efforts to restrain domestic capacity, pricing and competition have allowed airlines to pass costs to consumers. Limiting competition through capacity controls has allowed the airlines to pass on fuel increases and control pricing.
Internationally, only three joint ventures and airline alliances already control more than 80 percent of international traffic. Many of these alliances enjoy antitrust immunity and many flights are operated as joint ventures where there is no competition between alliance members and operations are coordinated.
6. Consumer harm in addition to increased airfares are the norm with recent mergers. Post-merger system integration problems plagued the Delta/Northwest and the Continental/United mergers. While the airline management rakes in merger bonuses, consumers are the ones who bear the brunt of post-merger integration service problems. With prior mergers, these issues have created major problems for passengers. DOJ should analyze the performance of previous mergers, their post-merger problems and the erosion of consumer choice and competition.
7. Fortress hubs will be strengthened. Hubs where one major airline controls the market will increase. Plus, American Airlines or US controls airport take-off and landing slots as well as terminal ticket counter and gate facilities to a point that could limit other airlines’ ability to expand.
8. Some hub cities will suffer as a result of mergers. Past mergers have seen once-vibrant hubs disappear. St. Louis is a ghost town compared to when it was a hub for TWA. Reno, Nevada, was abandoned by American Airlines. Cincinnati has shut down several of its terminals because of cutbacks from Delta. Cleveland was forced to negotiate a separate agreement with Continental/United to keep its hub operating temporarily.
With an American Airlines/US merger, this is what mergers are all about, squeezing synergies from the operating systems. What hubs will suffer and when are the questions.
9. The airline industry will enter the too-big-to-fail world. With the airline industry consolidated to four domestic airlines and three international airlines, the specter of massive airlines that affect too much of our nation’s economy will come into focus. This new, too-big-to-fail reality will also provide the unions negotiating with these big airlines more power.
10. A multiplication of labor issues and higher labor costs. For half a decade US Airways has operated with its labor force of pilots and flight attendants divided into the America West group and the US Airways side. Over the past few years, American Airlines has faced some of the most contentious labor strife of any airline. Putting these three competitive groups — former American West, former US Airways and American Airlines — of workers together will be a challenge, to say the least.
Plus, Mr. Parker has already announced that new contracts with a unified workforce would increase US Airways’ costs. This will erode much of the airline’s current cost advantage that has allowed the carrier to grow and profit. These additional costs can only be paid for with an increase in airfares and/or fees.
All of these 10 problems work against consumers and may possibly harm the aviation marketplace. The Consumer Travel Alliance urges the DOJ to examine this proposed merger carefully to insure that adverse effects on airline consumers are minimized.
Charlie Leocha is the President of Travelers United. He has been working in Washington, DC, for the past 14 years with Congress, the Department of Transportation, and industry stakeholders on travel issues. He was the first consumer representative to the Advisory Committee for Aviation Consumer Protections appointed by the Secretary of Transportation from 2012 through 2018.
