US Justice Department Suing to Block American-US Airways Merger

by on August 13, 2013 · 34 comments

in Airline Industry, American, US Airways

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In a surprising move today that shocked industry analysts and sent US Airways’ stock value plummeting more than 10% and American’s by as much as 30%, the US Department of Justice announced that it is suing to block the merger of US Airways with American, which had been proceeding smoothly up until this point.

The merger was officially announced back in February, and the $11 billion deal was approved by a federal judge in March as part of American’s plan to reemerge from bankruptcy. The merger was also approved by US Airways shareholders and American’s creditors over the summer.

With the DOJ bringing suit, this merger might be further off than originally thought.

With the DOJ bringing suit, this merger might be further off than originally thought.

One of the reasons analysts, shareholders and the public expected the merger to proceed was that the airlines only overlap on 12 routes, and that 130 cities served by American but not US Airways and 62 cities served by US Airways but not American would be available to flyers of both once the merger goes through.

However, today’s hiccup centers on landing slots at Reagan National Airport (DCA) in Washington, DC, where the new airline would control nearly 70% of the traffic with its current landing slots intact. However, the DOJ suit claims that the merger will result in less competition and higher prices overall, hurting the consumer, and noting that the merger would result in less competition on as many as 1,700 other routes.

The suit says, “The merger, which would result in the creation of the world’s largest airline, would substantially lessen competition for commercial air travel in local markets throughout the United States and result in passengers paying higher airfares and receiving less service.” Though this issue is a bit murky since as this CNN Money article points out, a PricewaterhouseCoopers study found airfares have only risen 2% per year on average since 2004, and there have been several major mergers since then including those of Delta and Northwest, and the United-Continental merger.

However, according to this live blog of the DOJ announcement from Marketwatch, Assistant Attorney General in the antitrust division Bill Baer, said, “We learn from our investigation about what happened to competition from prior acquisitions and as we look at the market today it is not as functioning as competitively as it ought to be. If this deal goes through it is going to be much worse.”

Baer’s other justification is that US Airways is functioning profitably already and would survive just fine without the merger, while American is on the right track to come through bankruptcy and emerge profitably on its own as well, so the merger isn’t a necessity, though that’s up for debate.

My feeling is that this is probably just a brief snafu in the merger and will probably be resolved when the landing slot issue, whether it’s just at DCA or at more airports – just as the European Commission approved the merger last week when the airlines gave up a slot at London Heathrow. Still, this throws the whole process into question, and is a good reminder that nothing is certain in the airline industry, so we all need to keep up on the news and plan our frequent flyer strategies accordingly.

As an American Executive Platinum, I’m watching this process carefully. I grew up flying US Airways and it’s the first airline I ever had elite status on, but over the years, their product has become more and more low-budget with a less well-maintained fleet and a route network that doesn’t suit many of my needs. So although I think this merger will go through eventually, a small part of me hopes it might not since I think that American is a much better-run airline (or at least on the way to becoming so) with a new fleet rolling out and exciting new developments happening all the time and that once the merger happens that ticket prices (and probably fees as well) are likely to go up across the board.

What do you think?

Do you want American Airlines and US Airways to merge?

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For more information, check out these posts:

Official American US Airways Merger Announcement and What It Means For Consumers

How To Prepare for a US Airways American Airlines Merger

Maximizing a Potential US Airways American Airlines Merger

The Potential Winners and Losers of an American Airlines US Airways Merger

American Chooses Citi As Post-Merger Credit Card Partner

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

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  • Goat Rodeo

    guessing now that applying for the US Airways card was a waste of time….

  • Matt

    Wish this would’ve come out last week. I just took advantage of the US Airways 100% bonus when purchasing miles in hopes that the merger would be completed sooner rather than later. Oops.

  • LorriTC

    I read an article awhile back about members of Congress being upset about changes at Reagan because they thought that the routes they fly to and from D.C to their homes would be affected. They don’t want the hassles of having a layover, and with American/USAIr merging they would lose a lot of their non stop routes. I have no doubt this is all about them being inconvenienced…they have no problem with the rest of us being inconvenienced, but when it comes to their personal travels they want it as easy as possible for themselves….typical…..

  • stansso

    The Reagan concerns always seem overhyped to me since the greater region is served by three airports, and fares tend to be lower at the other two.

  • Confucius Jackson

    As somebody whose majority of business flying involves either Chicago, Washington, or both, merging DCA/CLT into the American route map is a big benefit for me. Like you, I suspect this is mostly about slots at DCA. DOJ isn’t going to be able to make US give up their flights to state capitals as Congressmen will complain. I suspect that US/AA will be asked to give up some of their outside-the-perimeter flights as well as cut down on flights to the NYC area – maybe even give up the US Shuttle slots at both DCA/LGA to somebody else.

  • Jake from MSP

    “…As Congressmen will complain…” Ha… Have you been watching the news since Jan. 2009? When was the last time the DOJ cared about what some US Reps say?

  • Jake from MSP

    90K J tickets to Asia are never a waste of time

  • Andrew

    As do we… Don’t we all want it as easy as possible… Those nutcases for wanting it easy.

  • Andrew

    BWI and IAD are so much further then DCA is to “Washington”
    DCA is so convenient. IAD and BWI are not and you can encounter tons of traffic. If I were going to hang out in D.C. for a few days the fare would have to be considerably less $$ for me to consider those other airports and of course would still need to be on the carrier of my choice.

  • stansso

    Sure, most people will pay a premium for DCA because it’s closer and cheaper on the ground transportation side (for most travelers). However, that premium is already factored into fares.

    If DCA fares get out of whack too much compared to BWI and IAD, the market will balance itself out.

    Don’t forget that IAD with have DC Metro access in 2018 — so some of the concerns for not selecting IAD with be reduced (i.e. higher ground transportation options, traffic, etc.).

    I wouldn’t be surprised if DOJ kills the US-AA merger, just like they did the US-UA merger in 2001 (their main concerns then were DCA).

  • Brian L.

    If you honestly believe that Metro to IAD will be finished on time, I’ve got some oceanfront property in Arizona to sell you.

  • stansso

    It will get built at some point.

    DOJ specifically mentioned Metro access as a reason for customer preference for DCA.

  • Oldsmoboi

    “PricewaterhouseCoopers study found airfares have only risen 2% per year on average since 2004″

    That’s because baggage fees, change fees, and all the other ancillary nickle-dime charges are all much higher.

  • Rachel

    BWI is easily accessible though, since MARC and Amtrak both have stops there.

  • Rachel

    I’m surprised you’re not more impressed by US Airways’ international business product (Envoy). I’ve flown it several times now, and the seat is great. It’s a 1x2x1 configuration, lie-flat seat. I just flew to Europe last week from PHL and bought a round-trip Envoy ticket for $2700. I thought that was a pretty good deal for a nice product.

  • LorriTC

    Yes…my point was that Congress only wants it easy because it affect their plans…they don’t care that we have to be inconvenienced ever…they don’t care until it is a problem for them. So I think it should be easier for all of us or none of us. If we have to change planes and deal with the hassles of connections then they should as well….maybe if they had to deal with a few hassles they would understand why we get annoyed with connections, delays, cancelled flights etc.

  • traderprofit

    Read the 56 page filing. I have traded mergers/acquisitions for years,so I am very familiar with antitrust law including case law, and I am going out on a limb here, but I will pay 10-1 odds to anyone who wants to bet this gets approved. There are basically no good fixes to Justices’ claims.
    This merger will NOT HAPPEN.
    There, now I am on record.

  • Sam

    What does this do for the US Air moving to OneWorld timeline? Do you think it will still happen this year?

  • LiberaceLikesObama

    Congress is in Washington. Government is in Washington.
    US/AA you’d better give us a mega deal to transport our workers or else !!

  • LiberaceLikesObama

    Ahhh but bloggers are telling everyone that these miles (US) will convert to AA !! ( I’d rather keep that 90k to ASIA :-) )

  • LiberaceLikesObama

    US Air is more generous than America in certain routes. You cant beat the US – N. Asia with a stop in Europe. Basically they give you 10k miles ( business) to fly to N. Asia !

  • John K

    Okay Mr trader…what are your thoughts on AAMRQ then? Tank 45.44%….you think will recover or will lose ground even more?

  • traderprofit

    Not a clue on what AAMRQ will do as I have not been reading the bankruptcy filings . I believe it was always supposed to be equity holders getting very little and that the stock seemed grossly overpriced. A friend of mind did a back-of-the-cuff calculation a few months ago and we both thought it was overpriced, Frankly I never paid much attention to the thing until today.

    Historically, airline mergers have been the one area the DOJ has looked at closely. I am watching Fox business and CNBC and they seem to be of the opinion that because the government allowed 3 other mergers, they should allow this one because it is no worse. Unfortunately, that’s not how merger analysis works. Each completed merger changes the landscape such that the next may be more difficult to complete until you reach a point where had these parties gone before the others….they would have been allowed to merge. I know that doesn’t sound fair but it’s just the way the marketplace is at the time the merger come up that’s the important thing. The concentration at DCA is not the biggest deal here.

    I suggest anyone who wants to understand Justice’s actions read the filing. It might take you 30 minutes. Pay particular attention to the market concentration numbers in the appendix ….

  • GDB

    I am an American flyer. I get why a merger will make the airline financially more stable and competitive with the other two legacies. But deep down I smiled this morning when I saw the news – there was still a chance that a hillbilly DUI egomaniac will not be at the helm of an airline that historically has been an air travel innovation incubator and run by the people who are ok with no hot meals in first class, no need for an app until 2013, no working website, international routes you can count on one hand, oversaw the largest airline integration disaster in history with America West, worst trained phone agents in the industry (many would still insist Lufthansa is not in Star Alliance) and sulkiest flight attendants. So maybe it’s not a bad thing it is getting blocked.

  • bobrob

    “Though this issue is a bit murky since as this CNN Money article points out, a PricewaterhouseCoopers study found airfares have only risen 2% per year on average since 2004, and there have been several major mergers since then including those of Delta and Northwest, and the United-Continental merger.”

    Actually, it’s really not very murky. Those two mergers (as well as the Southwest-AirTran merger) occurred in 2009 and later. So using a sample period that begins in 2004 to argue that industry consolidation hasn’t affected airfares is either dumb or disingenuous (and it’s CNN, so it’s hard to say which one). So what does that PricewaterhouseCoopers study say about airfares after 2009? “Since the third quarter of 2009, the average airfare has increased . . . 11.6 percent after inflation adjustment.”

  • benjur

    I think you guys are missing the point. So what do we make of the 100% miles bonus that we can buy… <1900 USD for 100K miles is not a big deal… Thought?

  • Matt

    I’ll definitely have to look into that. Appreciate the info

  • Guest43

    I disagree. As mentioned in the article, there are not many overlaps in destination and most importantly, it has the support of all sides. The DOJ is flexing its muscle to squeeze a little more out of the deal so that the government can look good and say that they were protecting the consumer. Worst case, both sides will ask the DOJ what needs to be done to make the deal more acceptable to all parties involved, there will be a seat the table for the DOJ, and a new agreement will be negotiated. The DOJ/gov’t is also probably worried about layoffs; this will also have to be negotiated. But again, if they allowed previous mergers involving all the other major airlines—Delta, Continental, United, NW—they all got to merge. If I were American Airlines I’d be screaming unfair!!

    The lawsuit is classic bargaining strategy. Ultimately, the government has leverage because it raises a good point about price increases. Unfortunately, I don’t think the DOJ really wants to spend the time and money litigating and fighting an appeal that may not go its way. There have been other mergers and price hikes are remaining around 2%. If the government’s case is about keeping costs low, how is it going to get past raw data?

    I’ll raise your 10-1 and counter with 20-1 this never sees a courtroom. The DOJ is also going to have to prove that their belief that AA will survive, which one would assume is based on AA’s recent success, and that success is not at all predicated on the merger? AA is getting a lot of new planes. It has to, but think of how much new debt is being accrued.

  • Dan Nainan

    I’m Executive Platinum on American and I don’t want them to be poisoned by USAir. USAir is horrifying. I stopped flying them years ago, because I had a problem with one of their outsourced reservations agents, and I asked for a supervisor. That “supervisor”, also another outsourced agent, pretended to be very nice and assigned me to another flight, which turned out to be nonexistent, so it turned out that they did that to me just to screw me over.

    When I complained to customer service, they said that their agents would never do such a thing. Whereupon I swore I would never fly that airline ever again. USAir is garbage. I wish I had recorded the phone call.

  • Cliveeta

    20k low season economy return to Europe is not a waste either. I am not a fan of their product but if the route works for you then their miles are useful. My estimation of them went up a notch after no charge for a last minute change of flight due to personal reasons.

  • TracyC

    I had to chuckle when I read your comment about US Airways being a lower budget and less maintained fleet. I had to fly US Air (US Scare more like it), 3 times in the past year and a half. ALL 3 of those times we had to make emergency landings for one thing or another – the last one being we blew an engine in the air. I might add I fly weekly and this has been the only airlines (knock on wood) at this point that this is happened to me. I now AVOID flying them like the plague. My concern with the merger would be that AA would continue flying those planes as part of their fleet.

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