Tuesday, January 8, 2013

Analysis: US Airways merger would harm competition

A white paper from the American Antitrust Institute and the Business Travel Coalition suggests that a tie-up of American Airlines and US Airways could face Department of Justice antitrust issues and would likely be a major blow to competition.

You can read the PDF of the 28-page report here. The report paints a picture of an airline industry that is already very consolidated, and would become even more so if the merger, which is under consideration now, goes through.

Three huge legacy carriers would be left after a merger: American-US Airways, Delta-Northwestern, and United-Continental. Southwest-AirTran, a combination of two low-cost carriers that behaves increasingly more like a hub-and-spoke, legacy carrier, is losing its competitive power to establish pricing discipline. And the remaining low-cost carriers, such as JetBlue, are tiny by comparison, and play on the fringes of the air transportation network.

And the hub airports are increasingly devoted to one legacy carrier, such as Charlotte Douglas International Airport. Here, US Airways operates about 90 percent of the daily flights, a trend of consolidation that's likely to continue.

"The merger could therefore  hasten a troubling metamorphosis of the domestic airline industry from one in which hub airports were designed to  accommodate  multiple, competing airlines to a few large, closed
systems that are virtually impermeable to competition and create a hostile environment in which LCCs and regional airlines have difficulty thriving and expanding," the report says.

Looking at the effects of past mergers, the report concludes they've reduced competition, especially on hub-to-hub routes, and driven up fares on the airlines that remain. Larger hubs see more traffic, and smaller hubs, such as TWA-American's St. Louis hub or US Airways' Las Vegas operations, experience cuts.

"Over 50 percent of the overlap routes potentially affected by the proposed merger of US Airways and American would be monopolized or nearly monopolized," the report concludes.

All of this is, of course, somewhat the point of a merger. US Airways CEO Doug Parker and his executive team have long been advocates of greater industry consolidation, as a means to reduce price wars and rationalize capacity. And airlines, which eke out razor-thin profit margins even in good years, are desperate for more pricing power after a decade that's seen almost every major carrier go through bankruptcy.

The silver lining for Charlotte in all this might be that the authors conclude a merger would likely result in more traffic at the combined airline's largest hubs - including Charlotte Douglas. How much a price consumers would pay for such increased service, however, remains an open question.


Anonymous said...

So the other airline mergers were not a blow to competition?

Anonymous said...

So what was Delta/Northwset? United/Continetal? Even Southwest and Aitrain?
The only thing suspicious is why the writer wrote this article

Anonymous said...

The Delta-Northwest (NOT Northwestern), and United-Continental mergers should never have been allowed to happen in the first place. American and US Airways have to merge in order to compete with the other two.

Tvan said...

I agree with the previous posts, regarding the UA-Continental and Delta-NW mergers. When you look abroad, you see one or two dominant carriers per country with several discount carriers and that set up seems to work just fine.

People who want to fly Mega Air instead of Gigantic Air are going to do so. Same for when someone chooses a discount carrier when that option is available. Cities like Charlotte, NYC, LA, Dallas, St Louis, etc... will always be serviced by multiple carriers. The cities that stand to lose the most are the smaller cities and towns. But to say that AA and US should not be allowed to merge because it would affect competition is absurd. If someone is going to stand on this ground, then they need to break up the new Delta and United airlines respectively.