DOJ: American and US Airways Can't Merge, Because Flying Is Already Horrible for Everyone
And it's Washington's fault, too.
Dear air travelers of America: You know those rising ticket prices you've been grousing about? The checked bag fees that drive you into a frothing rage every time you set foot in the terminal? The Department of Justice feels your pain, and it would like to offer you a mea culpa.
Now, we are talking about a stern Washington bureaucracy run by lawyers, so they're not just going to come out and apologize. But it's hard to read the government's new lawsuit seeking to block the proposed merger of American Airlines and US Airways as anything other than a tacit admission that, for the last several years, federal antitrust policy has been a failure for flyers.
Call it a case of regulator's remorse. Since 2005, Washington has given the thumbs up to four separate mergers between large airlines, cutting the number of major carriers down from nine to five. The results have clearly left Justice feeling queasy. "Increasing consolidation among large airlines has hurt passengers," yesterday's lawsuit stated flatly. "The major airlines have copied each other in raising fares, imposing new fees on travelers, reducing or eliminating service on a number of city pairs, and downgrading amenities." Allowing American and US Airways to tie the knot and become the world's largest airline would only continue that trend, the government argues, by leaving 80 percent of the domestic air travel market in the hands of just four carriers.
At points, the government's lawyers even sound, well, a bit jilted. Take this extended passage, in which Justice more or less accuses airline executives of being willing to lie through their teeth in order to get a deal done:
Notwithstanding their prior unequivocal statements about the effects of consolidation, the defendants will likely claim that the elimination of American as a standalone competitor will benefit consumers. They will argue that Advantage Fares will continue, existing capacity levels and growth plans will be maintained, and unspecified or unverified "synergies" will materialize, creating the possibility of lower fares. The American public has seen this before. [emphasis mine] Commenting on a commitment to maintain service levels made by two other airlines seeking approval for a merger in 2010, the CEO of US Airways said: "I'm hopeful they're just saying what they need . . . to get this [transaction] approved." By making claims about benefits that are at odds with their prior statements on the likely effects of this merger, that is precisely what the merging parties' executives are doing here--saying what they believe needs to be said to pass antitrust scrutiny.
As The Washington Post's Brad Plumer noted yesterday, it's possible that the DOJ has filed this case as a hardball negotiating tactic in order to press American and US Airways to make additional concessions before the merger, much as it made Continental and United give up the rights to some takeoff and landing spots before their marriage in 2010. On the other hand, this is the first time the government has filed suit to block an airline tie-up since 2001. And the government calculates that there are 1000 different pairs of cities where the merger would reduce air travel options severely enough to create antitrust concerns. Those don't seem like problems that can be solved by spinning off some airport real estate. Rather, they seem like complaints you bring to court in order to halt a deal "full-stop," as Bill Baer, head of the Justice Department's Antitrust Division put it during a press conference.
Whether you think that's necessary probably depends on how you read the recent history of the airline industry, which which has struggled mightily with profitability ever since deregulation in the 1970s. Before this latest wave of consolidation, the combination of the dotcom bust, 9-11, and rising oil prices had driven United, US Airways, Delta, and Northwest Airlines each into bankruptcy. American, of course, is still attempting to emerge from its own 2011 Chapter 11 filing. As the Post's Steven Pearlstein has explained, most within the industry believe there have simply been too many carriers running too many flights and undercutting each other on price to be sustainable. And, as this AEI chart based on trade association data shows, prices are indeed still far below where they were even in the 1990s.
But frankly, that's probably how the Justice Department likes it. Since the Reagan administration, the one guiding star for U.S. antitrust policy has been "consumer welfare," or, to put it more bluntly, keeping prices cheap. With the airline industry currently in its fourth consecutive year of profits, the government clearly feels it's handed carriers more pricing power than they need. "As we look at the market today, it's not functioning as competitively as it ought to be," Baer said yesterday.
Consider that lawyer-speak for: "We're sorry."