Reasons Why U.S. Government Wants to Block American-US Airways Merger

Like someone screaming their last-minute objections at a wedding ceremony, the new American Airlines, considered to be a done deal and just a couple of months away from takeoff, just experienced a very serious complication.

In a blockbuster move, the U.S. government finally found some guts, and along with six attorneys general and the District of Columbia, filed a civil suit to prevent the $11 billion U.S. Airways-American Airlines merger.

While officials from both airlines viewed final Department of Justice approval as almost a fait accompli, and were merely weighing how many slots they might have to give up, the DOJ said enough is enough and sued in U.S. District Court in Washington to stop the marriage, arguing it would stifle competition between the two airlines, and lead to higher fares.

“Airline travel is vital to millions of American consumers who fly regularly for either business or pleasure,” said Attorney General Eric Holder. “By challenging this merger, the Department of Justice is saying that the American people deserve better. This transaction would result in consumers paying the price – in higher airfares, higher fees and fewer choices. Today’s action proves our determination to fight for the best interests of consumers by ensuring robust competition in the marketplace.”

“The department sued to block this merger because it would eliminate competition between US Airways and American and put consumers at risk of higher prices and reduced service,” said Bill Baer, assistant attorney general in charge of the Department of Justice’s Antitrust Division. “If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers. Both airlines have stated they can succeed on a standalone basis and consumers deserve the benefit of that continuing competitive dynamic.”

In addition to arguments about stifling competition and leading to higher airfares, here are some of the reasons the DOJ sued to block the merger:

• The complaint also emphasizes that both airlines have stated they don’t need the merger to succeed and could operate independently and profitably. The DOJ wants to test that proposition.

• The DOJ didn’t buy the two airlines’ arguments ad nauseum that there was little overlap between their route networks, noting that they compete “on more than a thousand routes where one or both offer connecting service, representing tens of billions of dollars in annual revenues. They engage in head-to-head competition with nonstop service on routes worth about $2 billion in annual route-wide revenues.”

• The complaints says that eliminating this competition would give the new American Airlines a free hand to raise fares.

• If the merger went though, the suit argues, four airlines — the new American, United, Delta and Southwest — would control more than 80% of the domestic commerical airline market.

• The suit also alleges that the new American would have monopoly control over 63% of the nonstop routes at Reagan National Airport, meaning passengers “would likely see higher prices and fewer choices.”

• In addition to likely hikes in ancillary fees for things such as checked bags, the suit alleges the merger would make it easier for United, Delta and the new American to coordinate pricing.

• “Although low-cost carriers such as Southwest and JetBlue offer consumers many benefits, they fly to fewer locations and are unlikely to be able to constrain the coordinated behavior among those carriers,” the DOJ stated.

• United, Delta, American and US Airways have been vocal in endorsing further consolidation in the airline industry so they could get pricing “right.” On this theme, the suit quotes recent statements from US Airways CEO Doug Parker and President Scott Kirby.

President Scott Kirby said, “Three successful fare increases – [we are] able to pass along to customers because of consolidation.

At an industry conference in 2012, Kirby said, “Consolidation has also…allowed the industry to do things like ancillary revenues…. That is a structural permanent change to the industry and one that’s impossible to overstate the benefit from it.”

As US Airways CEO Parker stated in February 2013, combining US Airways and American would be “ the last major piece needed to fully rationalize the industry.”

A US Airways document said that capacity reductions have “enabled” fare increases.

The moves puts a wrench in AMR Corp.’s exit from bankruptcy, and tie-up with US Airways, which was to lead the operations of the merged airline.

It would also upend global airline alliances as US Airways was to exit the Star Alliance, the merged airline would have been in Oneworld.

Until now, the main objections that the DOJ made to the merger was filings by the U.S. Trustee hoping to derail American Airlines CEO Tom Horton’s proposed $20 million severance. Horton was to serve as chairman for a time, and then depart the new American.

But, the DOJ was getting nowhere with the bankruptcy court, which twice overruled the U.S. Trustee’s objections to Horton’s severance.

Joining the DOJ in the suit were the attorneys general of Texas (where American is headquartered), Arizona (where US Airways is headquartered) Florida, the District of Columbia, Pennsylvania, Tennessee and Virginia.

It remains to be seen whether the DOJ will succeeds in halting the merger, and there is no charting how this will play out.

The DOJ’s stance is an abrupt departure from its approvals over the years of the US Airways-AmericaWest merger, Delta-Northwest, Southwest-AirTran, and United-Continental.