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Why the DOJ’s arguments against the American/US Airways merger are DOA – Part II

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Why the DOJ’s arguments against the American/US Airways merger are DOA – Part II

Why the DOJ’s arguments against the American/US Airways merger are DOA – Part II
August 25
19:38 2013

MIAMI — This is Part II of an analysis of the DOJ’s lawsuit to block the American-US Airways merger, a follow up to Part I which can be read here. The italicized text is quotes from the DOJ’s lawsuit and the normal text is my response. Responses are organized topically and not in the order that they appear in the actual lawsuit.

Effects of the merger


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. 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.

First off, it would be premature to assume that Advantage Fares will die out, as we discussed in Part 1. Second, there’s never any guarantee that capacity levels and growth plans will be maintained by an independent American and US Airways anyway. (Thankfully) The powers of the DOJ and the federal government do not at the moment include the ability to set airline capacity and growth plans – that would be regulation (as opposed to the 1978 deregulation; though as with any piece of government literature related to airlines, there is that strong undertone of wanting to re-regulate in this DOJ lawsuit). As for the fact that the “synergies” are “unverified” – that’s because the synergies are painfully obvious. On the cost side, there is the direct benefit of the new American’s increased scale; which will allow it to realize savings thanks to increased negotiating power with suppliers. Moreover, the combined network is structured well domestically to realize savings through more efficient connections. Take a passenger traveling from Richmond to Los Angeles on US Airways. Today, the shortest distance and time for that passenger to travel on US Airways is via Charlotte. Tomorrow, post-merger, that passenger can travel via Dallas-Fort Worth or Chicago O’Hare. The same principle applies to American bringing passengers to the Southeast via Dallas Fort Worth (they can now be flowed over Charlotte) or to the Northeast via Chicago O’Hare (they can now be flowed over Philadelphia). In addition, there are many savings that will flow from cross-fleeting – or utilizing pre-merger US Airways aircraft on pre-merger American’s route network post-merger, and vice-versa. For example, Boeing 737s tend to be more efficient on shorter flights while Airbus A320s tend to be more efficient on longer ones. Shifting pre-merger A320s onto routes like Chicago – Los Angeles and 737s onto routes like Charlotte-Tampa can have significant cost savings, as the Delta-Northwest proved. In fact, all of these cost synergies are pretty specific and well known to airline investors (not to mention the revenue synergies), and verifiable through the experience of past mergers (the DOJ loves using past mergers to talk about higher fares, but it won’t even acknowledge them when it comes to talking about the cost savings from past mergers – understandable from the context of them trying to win a court case, but unforgivable from a government agency that is supposed to be an impartial judge of antitrust issues).

Furthermore, US Airways actually explicitly laid out the scale of these synergies, both cost and network in an SEC filing from earlier this year. So it’s a bit rich for the DOJ to talk about them being unspecified.

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In more than 1,000 of the city pair markets in which American and US Airways currently compete head-to-head, the post-merger HHI would exceed 2,500 points and the merger would increase the HHI by more than 200 points. For example, on the Charlotte-Dallas city pair, the post-merger HHI will increase by 4,648 to 9,319 (out of 10,000). In these markets, US Airways and American annually serve more than 14 million passengers and collect more than $6 billion in fares. The substantial increases in concentration in these highly concentrated markets demonstrate that in these relevant markets, the merger is presumed, as a matter of law, to be anticompetitive. The relevant markets described in this paragraph are listed in Appendix A.

Those 14 million and $6 billion figures seem like a lot, until you realize that 14 million passengers is a whopping 2.5% of the annual US air travel market and that $6 billion is 3.1% of the total operating revenue of US mainline carriers. The DOJ has taken the opportunity to make a mountain out of a molehill here; most of these markets are tiny, with fewer than 10 daily passengers. Of course there are a few larger markets where there is cause for concern, but by and large this concern is pretty much irrelevant; because it affects so little of the market.

And it’s not as if the 1,000 markets that the DOJ picked are all of a sudden monopolistic because of the American-US Airways merger. How in the world are markets like Fresno-Honolulu or Boston-St. Thomas relevant to an antitrust case against the American-US Airways merger, when the combined carrier will not serve the route nonstop, but another airline (Allegiant Air and JetBlue respectively) will hold more than 70% of the O&D share on the route with a nonstop?

A merger with American would allow US Airways to hit the “sweet spot.” For consumers, however, it would be anything but sweet. US Airways believes that merging with American “finishes industry evolution” by accomplishing US Airways’ goal of “reduc[ing] capacity more efficiently.” When first considering a combination with American, US Airways projected that the merged firm could reduce capacity by as much as 10 percent. Similarly, American expects that the merger will lead to capacity reductions that would negatively impact “communities,” “people,” “customers,” and “suppliers.” Higher fares would be right around the corner.

 This passage comes on the heels of a wide ranging discussion about the capacity reductions taken after each previous merger. I’m somewhat sympathetic to these arguments, but philosophically, there is one key point to consider. In 2012, the combined carrier would have lost money. This means that some of the combined carrier’s capacity is unprofitable; and no business should be forced to produce output that is unprofitable. Again this goes to back to one facet of this lawsuit that makes me the most uneasy; the DOJ is hinting that it should have control over the output decision of private firms. And that 10% number is an overestimate, the real figure will probably be in the range of 5-7%. Remember, for all of the Doug Parker quotes about capacity control littered throughout this lawsuit, US Airways was the only legacy carrier to record consolidated ASM growth above 1% in the second quarter of 2013.

 American and US Airways engage in head-to-head competition with nonstop service on 17 domestic routes representing about $2 billion in annual industry-wide revenues. American and US Airways also compete directly on more than a thousand routes where one or both offer connecting service, representing billions of dollars in annual revenues. The merger’s elimination of this head-to-head competition would create strong incentives for the merged airline to reduce capacity and raise fares where they previously competed. 

$2 billion is 1.02% of the US airline industry. And as I showed in another analysis of the GAO’s testimony on the US Airways/American merger, most of these routes will still have plenty of nonstop competition.

 Standalone American’s growth plans


In November 2011, American filed for bankruptcy reorganization and is currently under the supervision of the Bankruptcy Court for the Southern District of New York. American adopted and implemented a standalone business plan designed “to restore American to industry leadership, profitability and growth.” While in bankruptcy, American management “pursued and successfully implemented” key provisions of this plan, including revenue and network enhancements, as well as “restructuring efforts [that] have encompassed labor cost savings, managerial efficiencies, fleet reconfiguration, and other economies . . . .” That work has paid off. American reported that its revenue growth has “outpaced” the industry since entering bankruptcy and in its most recent quarterly results reported a company record-high $5.6 billion in revenues, with $357 million in profits. Under experienced and sophisticated senior management, American’s restructuring process has positioned it to produce “industry leading profitability.” As recently as January 8, 2013, American’s management presented plans to emerge from bankruptcy that would increase the destinations American serves in the United States and the frequency of its flights, and position American to compete independently as a profitable airline with aggressive plans for growth.

One thing to keep in mind about American’s second quarter results is that the profits are artificially inflated due to the fact that American is in bankruptcy and thus has lower costs than it would otherwise, because it doesn’t have to pay interest on much of its debt that is currently being restructured. It’s also important to point out that American’s revenue growth outpaced the industry in the years since its bankruptcy precisely because its revenue had fallen behind that of the industry trend for several years prior. So the revenue growth since they entered Chapter 11 in December of 2011 can largely be thought of as so-called “catch-up growth” – a return to the trend.

There is no reason to accept the likely anticompetitive consequences of this merger. Both airlines are confident they can and will compete effectively as standalone companies. A revitalized American is fully capable of emerging from bankruptcy proceedings on its own with a competitive cost structure, profitable existing business, and plans for growth. US Airways today is competing vigorously and earning record profits. Executives of both airlines have repeatedly stated that they do not need this merger to succeed.

While it’s true that American did initially come out of bankruptcy with a plan to grow domestically and internationally, it’s important to note that that plan was primarily to grow with new international routes and additional frequencies, not as much with additional capacity. Furthermore, the order for new planes was made six months before American entered Chapter 11 bankruptcy protection – to improve fuel efficiency and costs for the fleet. American CEO Tom Horton told us that the carrier was still trying to negotiate labor contracts that would keep American out of bankruptcy even after the order was placed. The order was not made to support the plan. The plan came later.

American’s standalone plan would have bucked current industry trends toward capacity reductions and less competition. US Airways called American’s growth plan “industry destabilizing” and worried that American’s plan would cause other carriers to react “with their own enhanced growth plans . . . .” The result would be to increase competitive pressures throughout the industry. After the merger, US Airways’ current executives—who would manage the merged firm—would be able to abandon American’s efforts to expand and instead continue the industry’s march toward higher prices and less service. As its CEO candidly stated earlier this year, US Airways views this merger as “the last major piece needed to fully rationalize the industry.”

It’s somewhat ironic that the DOJ is now stating that the comments of US Airways executives are more relevant to the merged company here, but failed to do so in case of the Advantage Fares above. That being said, the DOJ is veering into dangerous territory here; since when is it the DOJ’s job to decide how much output companies produce? The DOJ doesn’t get the right to determine how many IPhones Apple produces or how many cars Ford produces. Yet by including this as a specific objection, it is in effect trying to control (albeit indirectly) the amount of capacity or output a company will produce in the future. The DOJ is here to judge this merger on an antitrust basis only – not to effectively make decisions about how much output 2 companies should or shouldn’t produce.

American does not need this merger to thrive, let alone survive. Before the announcement of this merger, a key component of American’s standalone plan for exiting bankruptcy revolved around substantial expansion, including increases in both domestic and international flights. Thus, in 2011, American placed the largest order for new aircraft in the industry’s history.

While it’s true that American did initially come out of bankruptcy with a plan to grow domestically and internationally, it’s important to note that that plan was primarily to grow with new international routes and additional frequencies, not as much with additional capacity. Furthermore, the order for new planes was made six months before American entered Chapter 11 bankruptcy protection – to improve fuel efficiency and costs for the fleet. American CEO Tom Horton told us that the carrier was still trying to negotiate labor contracts that would keep American out of bankruptcy even after the order was placed. The order was not made to support the plan. The plan came later.

 US Airways executives feared that American’s standalone growth plan would disrupt the industry’s capacity discipline “momentum.” In a 2012 internal presentation, US Airways executives recognized that while “[i]ndustry mergers and capacity discipline expand margins,” American’s standalone “growth plan has potential to disrupt the new dynamic” and would “Reverse Industry Capacity Trends.” Moreover, US Airways believed that if American implemented its growth plans, other airlines would “react to AMRs plans with their own enhanced growth plans destabilizing industry.” US Airways believed that American’s standalone capacity growth would “negatively impact” industry revenues and threaten industry pricing.

US Airways thought that a merger with American was a “lower risk alternative” than letting American’s standalone plan come to fruition because US Airways management could maintain capacity discipline. American’s executives have observed that “the combined network would likely need to be rationalized,” especially given the merged carrier’s numerous hubs, and that it is “unlikely that [a combined US Airways/American] would pursue growth . . . .”

Let’s discuss American’s growth plans for a second here and their fate post-merger. The following is the original region-wise capacity growth plan post-bankruptcy from an American presentation.

 * Capacity growth figures are displayed as ASM growth between 2012-2017

Domestic: 1.2%

Europe: 3.1%

Latin America: 6.0%

Asia: 14.4%

We’ll tackle domestic first. The major growth plans the DOJ grows about at the beginning of this documents amount to a whopping 0.3% annual growth in domestic capacity from the new American. The increased frequency American talks about will primarily be achieved through increased usage of regional jets and the smaller A319, not increased capacity. For the sake of the DOJ, we can assume that this paltry growth will go away post merger. Since Europe is a point of significant overlap (New York JFK versus Philadelphia), we’ll even concede that those growth plans would taper. That still leaves major growth to Latin America and to Asia; two regions where US Airways is currently weak. Even post-merger, the growth to Latin America and Asia will still probably happen. And the network will likely grow in size; post merger American will probably serve more destinations than the combined pre-merger airlines.

And while the DOJ claims that American would survive and thrive given a merger, that’s far from a certainty. There are fundamental weaknesses in American’s network that make it hard for American to compete with United and Delta for the high yield corporate contracts and business travelers that are so important to an airline’s survival. There are really three major weaknesses in American’s network today; the East Coast, Europe beyond London, and Asia. A merger with US Airways addresses two of the three, and provides additional scale to facilitate growth in the third. And the first two cannot be addressed by organic growth. On the east coast, American has no true connecting hub to serve the Northeast; Chicago O’Hare is too far west, and New York JFK and La Guardia are slot restricted operations that cannot handle a banked hub operation. US Airways has two strong connecting hubs, Washington-Reagan and Philadelphia, in the Northeast that are 2 and 4 times the size of American’s focus cities at La Guardia and JFK by frequencies. In the Southeast, Miami is too far south and Dallas Fort Worth too far west to serve as a true domestic connecting hub to the Southeast, while Charlotte for US Airways is one of

only two viable legacy hubbing points for the Southeast (the other being Atlanta).

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The merger probably increases competition in the sense that it creates a true competitor to United and Delta for certain travelers. And it increases parity between the alliances on international routes, especially to Europe.

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Effects of Consolidation


 

Increasing consolidation among large airlines has hurt passengers. 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. An August 2012 presentation from US Airways observes that consolidation has resulted in “Fewer and Larger Competitors.” The structural change to “fewer and larger competitors” has allowed “[t]he industry” to “reap the benefits.” Those benefits to the industry are touted by US Airways in the same presentation as including “capacity reductions” and new “ancillary revenues” like bag fees.

At the same time, passengers have benefited from consolidation as well; especially the business travelers that the DOJ is so eager to protect at Reagan, but unwilling to consider as a beneficiary of consolidation anywhere else in the lawsuit document. The easiest benefit to quantify is the survival of several US airlines – no matter how much harm higher fares causes to consumers, it pales in comparison to the harm that would have been caused if one or two of the major airlines (even before this latest wave of consolidation post-2007) had gone under. The second way that consolidation has benefited passengers is through increased network connectivity. While the DOJ lawsuit speaks of lost service on a number of city pairs (contextually speaking of hub drawdowns at Cincinnati and Memphis post Delta-Northwest, service reductions in Cleveland and Denver post United-Continental, the elimination of Milwaukee as a hub post Frontier-Midwest, and the capacity reduction in Atlanta after Air Tran – Southwest), network connectivity at US airlines has actually increased during this wave of consolidation. US carriers today get you to a lot more places, especially internationally, than they did 5 years ago. And that’s a direct result of the added scale consolidation allows for. To cite just one powerful example, following the Delta-Northwest merger, the new Delta was able to funnel more Asian connecting traffic over pre-merger Northwest’s hub in Detroit – leading to the launch of 5 new Asian routes; from Detroit to Beijing, Seoul, Shanghai, Hong Kong, and Tokyo Haneda (while some of these routes were resumptions of routes served by Northwest in the 1990s, and 2 of these have since gone away, the point remains that consolidation helped build Detroit into a true Asian gateway). And this isn’t even the biggest benefit of consolidation – that has been the very survival of the US airline industry. Take a look at the following chart – which serves as a companion to the New Order: New Holy Grail – Industry Consolidation chart in the DOJ lawsuit.

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*Results include all US mainline airlines. Frontier results are missing after 2006, and Spirit results are missing before 2007.

For all of the DOJ’s bluster about how the airline industry has used consolidation to gouge customers over the past few years on its way to profitability, it’s important to note that consolidation occurred as a direct result of the massive losses suffered by the US airline industry throughout its existence. Since 2000 alone, the industry has lost a cumulative $55.38 billion dollars, and suffered operating losses totaling $19.16 billion. That second number is important; as basic economics and market theory tells us that if a company is unable to make a profit on its operations (i.e. cover its variable costs) over a period of time, then firms in that industry will shut down until such point that the industry breaks even on an operating basis. Until 2008, the industry was rapidly hurtling towards that point. Over the period since 2008, which the DOJ seems to focus on at some sort of turning point, it has only just begun to make up the massive losses sustained in years prior – earning $15.76 billion in operating profits and $5.36 billion in net profits from 2008-12. That’s it; over 5 years, the airline industry has earned an average operating profit of $3.15 billion and an average net profit of $1.07 billion. Those numbers are for an industry with more than $195 billion in annual revenues. For the most recent full year, the entire US airline industry as a whole made $11 million in profits – just $11 million on $195 billion in revenues. True the large carriers are financially better off, but not to an enormous degree. The 5 largest US carriers (4 remaining legacies plus Southwest Airlines) made a grand total of $3.39 billion in net profits between 2009-12 on cumulative revenue of $464.21 billion. Why is the DOJ treating airline profits like some sort of scourge? Moreover, that net margin of 0.7% would not persist in any other industry without many airlines going under. Luckily, the US airline industry has come back from the brink. Consolidation saved the US airline industry; and it would be fallacy to ignore that.

Now let’s talk about those “rising fares.” The following table shows the average airfare paid by US consumers over the period from 2000-2012. As the table shows, air fares have risen about 21% since 2009, however on an inflation adjusted basis, air fares are up a more modest 11.3% than 2009 (with jet fuel, the single largest cost-line item for airlines, about more than 150% since 2009). Moreover, inflation adjusted air fares are up just 1.3% from 2008, and are actually down around 20% on an inflation adjusted basis versus 1995. Of course the introduction of ancillary revenue in recent affects the math of total out of pocket travel cost somewhat, but even still, the cost of air travel has not inflated anywhere near as much as several other goods (like college tuition for example).

Year

Average Ticket Price – $

Inflation Adjusted Ticket Price -$

1995

292

444

2000

339

456

2008

346

373

2009

310

335

2010

336

357

2011

364

375

2012

375

378

Now take a look at the amenities arguments. Perhaps the number of amenities offered for free has decreased with the development of an unbundled business model, but the quality of those amenities has increased. The meals and snack-boxes on a United flight today, available at a nominal $6-9 charge, are miles better than the free meals Continental phased out five years ago. And the profits driven by consolidation have allowed airlines to invest directly in improving the passenger experience. One need look no further than recent comments from Lufthansa (once considered the gold standard for airline service) CEO Christopher Franz bemoaning the fact that US carriers have led the world in introducing flatbed business class seats; US carrier business class hard products are now the gold standard. Six years ago; that would have seemed impossible, and it is only the profits driven by consolidation that has allowed US carriers to invest the millions of dollars required for not only the upgrade in hard products, but also other facets of the passenger experience, including lounges, meals, and more. US airlines have invested billions in new terminals and product updates in the last five years after not investing in much of anything for the ten years before. Why? The profitability engendered by consolidation. So it’s flat out wrong for the DOJ to claim that amenities have suffered as a result of mergers.

Legacy airlines have taken advantage of increasing consolidation to exercise “capacity discipline.” “Capacity discipline” has meant restraining growth or reducing established service. The planned merger would be a further step in that industry-wide effort. In theory, reducing unused capacity can be an efficient decision that allows a firm to reduce its costs, ultimately leading to lower consumer prices. In the airline industry, however, recent experience has shown that capacity discipline has resulted in fewer flights and higher fares.

Each significant legacy airline merger in recent years has been followed by substantial reductions in service and capacity. These capacity reductions have not consisted simply of cancellation of empty planes or empty seats; rather, when airlines have cut capacity after a merger, the number of passengers they carry on the affected routes has also decreased.

The DOJ is really mixing correlation with causation here. So isolating for legacy carriers during the period of consolidation (2008-13), capacity is down about 10%. However, by and large, that isn’t due to consolidation. Capacity fell nearly 15% from 2008 to 2009 as air travel demand collapsed in the wake of the global financial crisis. Since 2009, capacity amongst legacy carriers has slowly recovered to pre-recession levels, and only from 2011 to 2012 have passenger traffic and available seat miles actually stabilized. Moreover, this merger will not change the overall trend in capacity control; US legacies have all committed to control capacity in the domestic market, even standalone American and US Airways.

US Airways has recognized that it benefitted from this industry consolidation and the resulting capacity discipline. US Airways has long taken the position that the capacity cuts achieved through capacity discipline “enabled” fare increases and that “pricing power” results from “reduced industry capacity.” US Airways’ CEO explained to investors in 2006 that there is an “inextricable link” between removing seats and raising fares.

Also known as…. The law of supply and demand.

In 2005, America West—managed then by many of the same executives who currently manage US Airways—merged with US Airways. America West had hubs in Phoenix and Las Vegas while the former US Airways had hubs in Pittsburgh, Charlotte, and Philadelphia. Following the merger, the combined firm reduced capacity, including significant cuts in Pittsburgh and Las Vegas. In 2010, the Chief Financial Officer for US Airways explained: We believe in the hub system. I just think there’s too many hubs. If you look across the country, you can probably pick a few that are smaller hubs and maybe duplicative to other hubs that airlines have that they could probably get out of. In our example, we merged with US Airways [and] . . . what we have done over time, which is unfortunate for the cities, but we couldn’t hold a hub in Pittsburgh and we couldn’t hold a hub in Las Vegas. So over time we have consolidated and condensed our operation back, which is really important, condensed it back to our major hubs. A post-merger US Airways analysis confirmed that it succeeded in obtaining a “3% to 4% capacity reduction.”

Again it’s the correlation versus causation issue. Duplicative hubs can stay around if they are profitable (see Newark and Washington Dulles for United, or even Philadelphia and Washington Reagan at US Airways itself), but the real core issue is that neither Las Vegas nor Pittsburgh was profitable for the merged carrier. Las Vegas was already fraught with low cost carrier competition and fares were too low to support the hub. So US Airways pulled out. But other airlines stepped in to backfill the lost capacity, most notably Allegiant Air and Southwest, whom the DOJ dismisses as a competitor to the merged carrier. Las Vegas sees similar service levels today to what it had as a US Airways hub. Pittsburgh on the other hand became unprofitable because the airport authority refused to lower costs after racking up large amounts of debt building a new terminal. The key takeaway; both of these hubs would have eventually gone away whether or not US Airways and American merged – they were unprofitable.

Ancillary Fees


 

Since 2008, the airline industry has increasingly charged consumers fees for services that were previously included in the price of a ticket. These so-called ancillary fees, including those for checked bags and flight changes, have become very profitable. In 2012 alone, airlines generated over $6 billion in fees for checked bags and flight changes. Even a small increase in these fees would cost consumers millions.

The DOJ has hit on the real driver behind the fees in its second sentence – “profitable.” The airline industry has discovered that US consumer psychology makes it profitable for airlines to pursue an un-bundled business model with ever-increasing ancillary fees. The federal government has only enabled this by taxing ancillary fees less than airline profits themselves. And ancillary fees are going to go up regardless of whether this merger goes through; that’s just where the evolution of the airline industry in the US is going. Economy Class travel in particular is rapidly moving towards the a-la-carte model where a fare only buys you a seat on a plane, and every other service or amenity is extra.

Once again, it’s probably important to point out that ancillary fees have never before been a factor in DOJ antitrust analysis – the American – US Airways merger is being judged by a different standard than previous mergers. And unlike in the case of capacity reduction or rising fares, the growth in ancillary fees has very little to do with consolidation or mergers.

Increased consolidation has likely aided the implementation of these fees. The levels of the ancillary fees charged by the legacy carriers have been largely set in lockstep. One airline acts as the “price leader,” with others following soon after. Using this process, as a US Airways strategic plan observed, the airlines can raise their fees without suffering “market share impacts.” For example, American announced that it would charge for a first checked bag on May 21, 2008. On June 12, 2008, both United and US Airways followed American’s lead. Similarly, over a period of just two weeks this spring, all four legacy airlines increased their ticket change fee for domestic travel from $150 to $200.

If all four legacy carriers are all moving in lockstep on ancillary fees anyway, then what difference is it going to make if US Airways and American are allowed to merge? This goes back to my point above; consolidation is not the driving factor behind higher ancillary fees, or even really an enabling factor.

Post-merger, the new American would likely lead new fee increases. A December 2012 discussion between US Airways executives included the observation that after the merger, “even as the world’s largest airline we’d want to consider raising some of the baggage fees a few dollars in some of the leisure markets.”

New checked baggage fees on leisure international routes, and variable fees based on the travel period (think higher fees at Christmas/Easter, and lower ones in say, mid-February) are coming; it’s the next logical step for an industry that has seen ancillary revenue growth plateau in recent years.

If the planned merger is enjoined, both American and US Airways will have to compete against two larger legacy rivals, and against each other. The four legacy airlines will not look exactly the same. As the smallest of the legacy airlines, American and US Airways will have greater incentives to grow and compete aggressively through lower ancillary fees, new services, and lower fares.

It’s not as if US Airways and American are aggressively discounting ancillary fees at the moment. Their ancillary fee revenue has risen just as fast as United and Delta, only from a smaller base. And the idea of a standalone American lowering ancillary revenue misses one key point; American is leaving money on the table by not raising its ancillary fees, and if it is forced to compete with United and Delta without the network strength engendered by US Airways, it will likely raise ancillary fees anyway so as to better compete with United/Delta from a profitability standpoint.

Conclusion


There is very little in this document (34 pages) that actually supports a lawsuit blocking the merger. There are a few antitrust concerns, mostly centered around Reagan, that have very specific remedies that are already within the DOJ’s powers to require. But the DOJ has decided to draw a line in the sand. It will be interesting to see whether this case goes to trial and whether the DOJ can win.

 

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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