US Government Files Suit To Block American/US Airways Merger
I certainly can’t say I saw this one coming. The US Department of Justice has filed suit to block a merger between American Airlines and US Airways. Quoting attorney general Eric Holder:
“By challenging this merger, the Department of Justice is saying that the American people deserve better,” said Attorney General Eric Holder in a statement. “This transaction would result in consumers paying the price—in higher airfares, higher fees and fewer choices.”
That might be what the DOJ is saying, but they’re wrong. There’s almost no competition on direct routes between the two airlines. But, the DOJ seems to be painting this as a picture of the competition on connecting routes:
American and US Airways compete directly on more than 1,000 routes where one or both offer connecting service, the government said.
No pun intended, but that just doesn’t fly to me. The airlines are going to continue to control capacity whether there’s a merger or not. And, United, Delta, Southwest and others will continue service to, say, the San Francisco area from a number of different connecting cities. So, I just don’t see the material impact that a possible reduction of some connecting flights to cities will have on pricing.
Airline revenue is up but that’s mostly a function of capacity reductions by the airlines. In order for American and US Airways to survive on their own, they would need to continue to cut capacity as independent companies.
After large mergers such as Delta-Northwest and United-Continental, there was no corresponding increase in fares, either systemically or at cities where capacity was reduced. United has done a good job of raising prices significantly on direct routes they control. But, even that is tempered by reduced capacity and other airlines discounting their connecting service to compete effectively.
The EU has already approved the deal, and now a fairly pro-business DOJ has decided to throw a grenade into the mix.
I didn’t see this coming and strikes me as both bad business and bad politics. But, it looks like I’ll need another bowl of popcorn.
So what happens to AMR now? Can they survive as a stand-alone competitor?
That’s a good question. DOJ lawsuits are usually killers to deals. Things are generally past the point of reconciliation in the eyes of the DOJ when they file the lawsuit. They can absolutely survive as a stand-alone competitor. But, something tells me there’s at least one more chapter to be written here.
I so didn’t see this coming either and was shocked when I read the newspaper this morning!
I read a decent summary today that suggested AA/US are getting this in return for refusing to pay ball on what DOJ considered to be a few major issues. In particular, severance for Horton was highlighted as something that has DOJ very upset.
And yet, Horton’s severance has nothing to do with competition issues. I’m sure there’s truth in that report, but it’s disappointing to see the government react in this manner, completely inconsistent with previous mergers. And that’s coming from someone that doesn’t really favor a merger with US.