In February, AMR’s (AAMRQ.PK) American Airlines and US Airways (NYSE:LCC) announced a detailed, years-long integration plan. Both executives and company lawyers were expecting Thursday to be the end of American’s bankruptcy proceedings and beginning of the $11-billion merger between the two airline carriers, a merger seen as the capstone of the era of consolidation that helped the industry return to profitability.
The new airline was expected to be a stronger competitor than both United Continental (NYSE:UAL) and Delta (NYSE:DAL), but a lawsuit brought by the Department of Justice last Tuesday, based on antitrust grounds, presents quite a delay. An antitrust lawyer for US Airways told The Wall Street Journal last week that the airlines “hope to get to trial before the end of the year.”
Here’s a look at the pros and the cons of such a merger.
1) Jobs: As Tim Averett, a Captain for US Airways, wrote in an opinion piece for USA Today, the carrier “cannot continue on its current course, depending partially on pilot salaries that are far below industry standard and small scale hubs overshadowed by giants.” American Airline’s unions — The Allied Pilots Association and The Association of Professional Flight Attendants – strongly back the deal because it offers them superior contract terms.
Ensuring that unions were onboard with the merger was an essential step in US Airways’ attempt to take over American Airlines in bankruptcy court, especially given the carrier’s initial resistance.
Now that the deal is threatened, unions are concerned; if US Airways and American remain independent, they will be forced to keep ticket prices low to remain competitive and, in turn, that strategy means many of the airlines employees will earn less than their peers at Delta and United.
“The DOJ’s premise is to (seek) cheap airfares on the backs of labor,” Dennis Tajer, spokesman for the Allied Pilots Association, told Forbes. “The DOJ decision puts at risk our working families’ livelihoods, and we will not be silent.”
2. Save the Airlines: Both US Airways and American would find it difficult to compete in the current industry environment, given recently merged giants United Continental and Delta. A solo American would be number three, in terms of traffic, to United and Delta, while US Airways would be fifth after Southwest Airlines (NYSE:LUV), which also expanded through a recent merger. This trend toward consolidation that has characterized the industry for the past decade makes the Justice Department’s opposition slightly surprising.
“If this merger does not take place, US Air will continue to have the gaps and weaknesses in its network that it has now, and American will continue to have the gaps and weaknesses in its network,” Joe Sims, an antitrust lawyer for American, told USA Today. “Neither individually will be as effective a competitor to United and Delta and Southwest and all the smaller low-cost carriers.”
If the two airlines do not merge, travelers will see lower prices. But as those lower prices cut into margins and become unsustainable, the airlines will be forced to cut routes, and eventually they may go out of business, as they attempt to compete with the industry’s giants. Also, without a strong network, the airlines would likely secure fewer business accounts, further destabilizing future success.
3. New Planes: ”I think the benefit to consumers is that they’ll be flying in newer planes and we won’t see another bankruptcy,” George Hobica, president of AirfareWatchdog, an airfare alert and travel advice service, told Reuters.
Side note: The merger agreement between American and US Airways will expire in mid-December if it has not yet been granted regulatory approval, according to the deal’s fine print. This urgency could prompt the airlines to agree to a settlement with the Justice Department.
1. Unfair Competition: For much of the past ten years, the government has allowed merger after merger. Northwest Airlines merged with Delta in 2008, Southwest Airlines bought AirTran in 2010, and Continental merged with UAL Corporation, the parent company of United Airlines, to form United Continental in 2010. The argument was that the industry was suffering from too much competition — so many carriers were grasping at customers and market share that none of the so-called “legacy” carriers could be profitable. Airlines, shareholders, creditors, and employees were suffering.
Therefore, the only reasonable solution was for airlines to merge or go bankrupt. But, the Justice Department now believes that times have changed. By 2009, fares and fees had begun to increase and the number of seats, or industry capacity, had fallen. The DOJ believes the merger will make the reconfigured airline, which would retain the American Airlines name, too powerful in many key markets, including Washington D.C.
2. Industry Pricing: A key aspect of the government’s case is that US Airways’ current Advantage Fare program prices one-stop trips at 40 percent discount from the nonstop flights offered by its competitors, ignoring standard industry practices. In a truly competitive market that would not be unusual, but the other airlines have a tacit agreement not to “undercut” each other’s nonstop fares.
3. Hurting Consumers: Even worse, internal memorandums acquired by the government show US Airways executives believed the merger was the best way to prevent American from expanding its service, reported the Seattle Times. The merger will not add capacity, but cut it by 10 percent, just as all other airlines did post-merger, according to documents cited by the government. If capacity was cut, fare increases would likely follow and consumers would be hurt..
“We allege that the deal will lessen competition and passengers will pay higher fares and receive less service,” Justice Department spokeswoman Gina Talamona told USA Today.
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