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American and US Airways will jump on the fact that Southwest has a lot of clout in airline industry pricing. That doesn't mean that the merger won't reduce competition and lead to higher airfares.

Southwest Airlines Co. (LUV) flies more passengers in the U.S. than any other carrier and serves 29 of the 30 largest metropolitan areas. To federal regulators, that’s not enough to be considered an influential industry competitor.

In suing to block the merger of AMR Corp. (AAMRQ)’s American Airlines and US Airways Group Inc. (LCC), the U.S. Justice Department erred in deeming Southwest, the biggest discount carrier, too small to sway others’ actions, according to analysts such as Savanthi Syth of Raymond James Financial Inc.

“You can’t ignore one of the largest players in the market,” Syth said in a telephone interview from St. Petersburg, Florida.

American and US Airways, seeking to overturn the Justice Department’s opposition, are likely to cite Dallas-based Southwest’s ability to undercut rivals as one reason to let their deal go through. The U.S. says the merger creating the world’s largest carrier would crimp competition and boost fares.

The government’s exclusion of Southwest and JetBlue Airways Corp. (JBLU) as significant competitors “will clearly be one of the airlines’ main contentions,” said Allen Grunes, a lawyer with GeyerGorey LLP in Washington who formerly worked in the Justice Department’s antitrust division.

AMR, which is in bankruptcy, and US Airways say they can’t compete on their own against United Airlines (UAL) and Delta Air Lines Inc. (DAL), the industry leaders formed in mergers since 2008.

The Justice Department said in its antitrust suit in federal court in Washington that a combination of American, the third-largest U.S. carrier, and No. 5 US Airways would create three major carriers with little incentive to compete on pricing.

U.S. View

Gina Talamona, a Justice Department spokeswoman, responded yesterday to questions about the agency’s approach by citing the lawsuit and comments made Aug. 13 by Assistant Attorney General Bill Baer on a conference call with reporters.

The so-called legacy airlines are focused on each other, and “to a large extent Southwest and the other low-cost carriers are not competitive constraints in many, many respects,” Baer said on the call.

Southwest and JetBlue, which rank fourth and sixth in the U.S. industry by traffic, have route systems and business models “significantly different” from carriers such as Fort Worth, Texas-based American, according to the Justice Department’s lawsuit.

“In many relevant markets, these airlines do not offer any service at all and, in other markets, many passengers view them as a less-preferred alternative,” the U.S. said. “Competition from Southwest, JetBlue or other airlines would not be sufficient to prevent the anticompetitive consequences of the merger.”

Rationale Questioned

That argument spurred Helane Becker, a Cowen & Co. analyst in New York, to question the Justice Department’s rationale in concluding that Southwest wasn’t “a viable fourth competitor,” as she put it in an Aug. 20 note to clients.

“By what standard does the government cite they aren’t a serious competitor?” Becker wrote. “Southwest is one of the most competitive airlines, with competitive air fares throughout the domestic US. Indeed, the airline has limited international service, and does not charge baggage fees, while most other airlines have bag fees.”

Besides carrying the most travelers on domestic routes, Southwest is the largest airline in the U.S. using the industry benchmark of miles flown by paying passengers. On that basis, it is more than twice the size of Tempe, Arizona-based US Airways.

Domestic Leader

“It is the biggest domestic airline by a long shot,” said Rick Seaney, chief executive officer of Dallas-based travel website “I can’t imagine how you can do anything without including it.”

Seaney estimates that Southwest wields enough market power to determine the success or failure of about a quarter of broad-based fare increases attempted by U.S. carriers.

Southwest declined to comment about its role in industry pricing, said Brad Hawkins, a spokesman.

The Justice Department is viewing Southwest as it operated “10 years ago, but not today,” said Michael Boyd, president of consultant Boyd Group International Inc. in Evergreen, Colorado.

Southwest now carries more connecting passengers on longer flights, as United, Delta and American do, instead of fliers just making short nonstop trips. The average flight length rose more than 21 percent to 678 miles (1,090 kilometers) in 2012 from 2003, according to the airline. In that same period, the share of connecting passengers rose to 28 percent from 21 percent.

‘Success Story’

“Southwest is taking on some aspects of a hub carrier and effectively doing it,” said Charles Hunnicutt, senior counsel in the transportation practice group at Thompson Hine in Washington. “They’ve been a great success story. I consider them the fourth network carrier.”

Instead of its old focus on secondary airports to avoid costly delays from congestion, Southwest’s moves since 2009 include beginning service to Atlanta, home to the world’s busiest airport, and to New York, the busiest air travel market.

“You wouldn’t even know that they really are a force in this industry from that complaint,” Rich Parker, an antitrust attorney for US Airways, said on an Aug. 15 conference call. “Southwest is bigger than my client and everyone knows determines the fare structure.”

Southwest and JetBlue both objected to the dominance of a post-merger American at Washington’s Reagan National airport.

2011 Purchase

In paying $1.01 billion for AirTran Holdings Inc. in 2011, Southwest pulled off the most-recent merger in the U.S. airline industry before the planned AMR-US Airways combination. Sales totaled $17.1 billion last year, 24 percent more than for US Airways.

Regulators opposing the AMR-US Airways deal would be able to point to waning price clout at Southwest since the late 2000s, when its fuel-hedging program gave it a financial edge over rivals.

At the time, it could kill about three-quarters of all attempts to boost fares by deciding not to take part, FareCompare’s Seaney said. Airlines that trigger increases typically will rescind them if others don’t match.

The pricing shift has occurred because Southwest’s operating costs have risen even as those of Delta and United have dropped after restructuring in bankruptcy court, erasing part of the discounter’s cost advantage that helped it profit while charging lower fares.

Good Evidence

“If the Justice Department defines Southwest and JetBlue out of the market, they’ve got to have good documentary and economic evidence to support that allegation,” said Grunes, the former Justice Department lawyer. Baer, the U.S. antitrust chief, “would not allow it to be in the complaint otherwise.”

David Swierenga, a former chief economist for the U.S. airline trade group now known as Airlines for America, said Southwest’s role as a brake on fare increases remains intact, if diminished.

“Whatever market they are in, prices are measurably lower,” said Swierenga, president of consultant Aeroecon in Round Rock, Texas. “Maybe the effect isn’t as much as it was only because the legacy carriers have gotten much more efficient and more competitive with their costs. They still have a definite impact.”

The antitrust case is U.S. v. US Airways Group Inc., 13-cv-01236, U.S. District Court, District of Columbia (Washington). The bankruptcy case is In re AMR Corp., 11-bk-15463, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

–With assistance from Julie Johnsson in Chicago, Tom Black in Dallas and David McLaughlin in New York. Editors: Ed Dufner, James Callan 

To contact the reporter on this story: Mary Schlangenstein in Dallas at

To contact the editor responsible for this story: Ed Dufner at

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Tags: american airlines, jetblue airways, southwest airlines, us airways

Photo credit: Southwest passengers react to getting free, inflight access to the DISH network through a promotion that started in July. Southwest

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