Government suddenly slams door on airline merger

Posted Saturday, Aug. 17, 2013  comments  Print Reprints
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If there is to be a courtroom battle pitting the Justice Department against American Airlines and US Airways over their plans to merge and form the world’s largest air carrier, it will be a hard-fought one.

Both sides’ lawyers say they’re in no mood to settle the case. One airline attorney said he hopes it will go to trial by the end of the year.

But all of this became deadly serious the moment the Justice Department filed suit Tuesday in the United States District Court for the District of Columbia. That’s because the suit paints a picture of an entire airline industry behaving badly.

The suit says the combination would be anti-competitive and would result in higher costs for consumers. The airlines say their proposed big post-merger route network is the only thing that would put competitive pressure on the industry’s two giants, Delta and United.

Delta became a behemoth when it merged with Northwest in 2008. United grew even larger when it combined with Continental in 2010. Yet another big merger, between Southwest and AirTran, happened in 2011.

The trend appeared to be settled: Bigger would be better, and fewer airline competitors would mean those that remained would be able to avoid the cutthroat behavior of the industry’s recent years and finally become profitable. And that would be a good thing.

When Fort Worth-based American declared bankruptcy in November 2011 and Phoenix-based US Airways came seeking marriage, there seemed to be nothing standing in the way.

Until Tuesday, when the Justice Department shut the merger door.

There’s been some grousing that the other guys got to merge, so American and US Airways should, too. But “fair is fair” is not a good legal argument. The Justice Department is looking at how the previous mergers have affected travelers, and it says things haven’t been going so well.

The department will have to prove that in court. Tuesday’s complaint gave a few details, but whether they add up to systemic problems that should prevent the merger is yet to be seen.

Here’s what the government lawyers say is wrong:

Airline route networks are built from “city pairs,” a flight from Point A to Point B. Carriers string those pairs together, make some of them nonstop and some not, add amenities, promise on-time service and build customer loyalty.

One of US Airways’ competitive moves has been to offer cheaper fares on one-stop flights, a program it calls “Advantage Fares.” A one-stop flight from Miami to Cincinnati, for example, costs $471.

American’s nonstop on that same route costs $740, the Justice Department’s complaint says.

That makes sense. A customer’s one-stop inconvenience pays off with a savings of $269.

But here’s where the behaving badly comes in, the Justice Department says. US Airways must tread carefully, not for worry that the Miami-Cincinnati apple cart will be upset, but because its competitors might retaliate in another market where US Airways is weaker.

And that’s what happens, according to the Justice Department. Using an airline industry-owned network that tracks ticket prices, the carriers “monitor and analyze each other’s fares and fare changes and implement strategies designed to coordinate pricing,” the complaint says.

Recent years have been a hard pull for American, Fort Worth’s hometown airline. New labor contracts, a successful trip through bankruptcy and the planned merger made things look better.

The Justice Department’s move is not a welcome one, but it’s one that has to be faced.

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