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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.
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?
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