Justice Department Criticized for Green Lighting American US Airways Merger

The Department of Justice is coming under criticism for accepting settlement terms that facilitate the merger of US Airways and American, will reduce the number of hub-and-spoke based national systems from four to three, while creating the world’s largest airline, New American.

In an editorial titled “An Unwise Airline Merger,” the New York Times said the agreement “simply ignores the central concern the Justice Department expressed in its lawsuit: the four big airlines — United, Delta, Southwest and the merged American — will have an even greater incentive to raise fares and fees because consumers will have fewer choices.”

And Bert Foer of the American Antitrust Institute said the Justice Department should have taken the airlines to trial.

“After issuing a tough complaint that described in detail how the proposed merger would likely reduce competition and harm air travelers, the government — on the brink of trial —  backed away from many of its claims, while at the same time obtaining structural remedies whose benefits will only be known in the future,” Foer said.

The settlement allows the merger to proceed to consummation, subject to divestitures of slots at only two airports — New York’s LaGuardia and Washington D.C.’s Reagan National —  and a total of ten divestitures of gates at several other large airports. Other hub airports affected by the merger are ignored, as are airports in smaller communities.

The Justice Department’s complaint argued that the proposed merger of US Airways-American would be presumptively illegal in over 1,000 route-based markets.

“But the remedy simply ignores the vast majority of these routes, and the loss of US Airways’ discounted fares for one-stop routes that helped maintain competition,” Foer said. “Under the settlement, smaller cities and towns and travelers who currently have the opportunity to use lower-priced, indirect routes may no longer have this well-named Advantage Fare, although new competition from low-cost carriers might filter into an unpredictable number of these routes.”

The Department of Justice’s press release explains that while the settlement fails to deal with all of the allegations in its complaint, it will allow Jet Blue and Southwest (and other smaller “low cost carriers”) to expand by obtaining divested slots and gates.

“For some airports and some routes, this will likely be very important, but for the national air system the American public is being asked to buy into the argument that one of a small and dwindling fringe of low-cost carriers (JetBlue) and a large legacy-like airline that no longer acts consistently as a low-cost carrier (Southwest) will provide sufficient new competition so that the disappearance of an independent legacy carrier will barely be noticed,” Foer said.

The Department of Justice which had not stopped the morphing of a competitively structured airline industry into a tight oligopoly through prior mergers, argues that its remedy:

“promises to impede the industry’s evolution toward a tighter oligopoly by requiring the divestiture of critical facilities to carriers that will likely use them to fly more people to more places at more competitive fares. In this way, the proposed remedy will deliver benefits to consumers that could not be obtained by enjoining the merger.”

“With its strong complaint the government might well have blocked the merger,” Foer said. “Instead, it has traded off one independent national hub-and-spoke carrier for the possibility that two point-to-point carriers will be enabled to grow into the equivalent of a replacement competitor. It is a bold assertion that places faith in future competitors above a status quo that had allowed the skies to become too friendly. We would have preferred to see the case go to trial on its merits.”

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