Wow. A DOJ anti-trust suit was’t expected.
There has long been the belief that there would need to be some divestiture of takeoff and landing slots at Washington’s National airport for the deal to go through — US Airways is already the dominant carrier there, and had to divest some slots when they did their swap of LaGuardia slots with Delta. So it wasn’t expected they could just combine their National airport position with American’s.
But the DOJ position is apparently based on the overall competitive environment. US Airways and American currently overlap on very few non-stop routes, so it isn’t about specific city pairs that will see reduced competition.
The European Union has already signed off on the deal, seeking only to deal with the Philadelphia – London route.
A DOJ suit clearly puts the deal, and especially the timing of its close (and of US Airways’ exit from Star Alliance and entry into oneworld) in flux.
The suit itself may be a bargaining position, it could still be possible to satisfy the Department of Justice such that it could withdraw its objections. In other words, this could be a tactic for the administration to extract more concessions from the deal.
But the way the suit is being described — related to overall market conditions rather than specific routes — would seem to make this less likely.
The Justice Department sued to block the transaction because it would remove the incentive for US Airways to offer lower prices and lead to higher airfares for consumers, said a person familiar with the matter who asked not to be identified because the matter is private.
Delta and Northwest got their merger. United and Continental got theirs. It was expected that if those went through, including through the current Department of Justice, that the American merger would as well. Though at the same time, the airline revenue environment is stronger than it has been in recent years (although neither Continental nor United could have been seen as failing carriers when they merged in a much weaker environment).
Actually litigating this hardly seems prudent, as it would put off any deal for years and incur significant costs and distractions. That’s why DOJ opposition is so often a deal killer, regardless of the merits of their case under anti-trust law. These things are usually settled in advance through negotiation and lobbying, and once formal suit is filed that seems a big deal.
Did you see this coming? Will the DOJ scuttle the merger? Or will American and US Airways find a way to mollify government concerns?
Update: I should add a brief word about what this means for frequent flyers — if the government were to kill the merger, and I don’t think it’s by any means done just yet.
In the short run it puts off integration of the programs so US Airways folks keep what they like and American folks keep what they like.
In the long term though my sense is that the changes which were going to come and get attributed to the merger are largely/likely changes that would have and will happen anyway. Simple stories like “merger bad/standalone good” probably aren’t really true, and both programs will evolve often in directions that members aren’t all that fond of.
Right now there are sweet spots in the US Airways program that I’d expect to go away, and the American program overall (especially the elite program) is probably “overindexed” to use a term coined by Hilton’s Jeff Diskin to talk about being ‘too rewarding’ (where customers do not adequately reward them in return with sufficient incremental business for that generosity).
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@Stuart Falk…get the US Airways credit card again. Then, if you have to, do it again 🙂
@Nick
Nonsense. Network structure has a far greater influence on reliability than, say, the age of individual components of the fleet, in the same way that the reliability of the internet is enhanced far more by its distributed structure than by the computing power of the average node.
Even in a fictitious world where planes never aged, shocks would inevitably happen; this can’t be controlled. What can be controlled are the consequences of those shocks, through decentralization and redundancy to limit/absorb them. Unfortunately carriers are able to offload optimization risk on pax, mostly because pax can’t perceive this risk vividly like they can the price of the ticket.
This definitely is pro-consumer, the fact that all the airline stocks dropped due to this news is everybody was anticipating a merger, less competition and higher profits. That said the environment that the DOJ has already created following each bigger merger from DL to UA, I don’t see how AA/US can compete especially with international destinations where they already lag significantly behind the other two carriers.
The state of TX and FL are among the states ( 6 I believe) trying to block this deal. Does not sound so good anymore….
I could see the block coming. American and US Airways just didn’t look like a merger made in hell. Great for stocks, and for puts now.
AA should have just merged with Alaska airlines and be done with it. No one wants US Airways in One World, and if Texas (AA) and Pennsylvania (US) are part of the DOJ suit….see ya!
I could see the block coming. American and US Airways just didn’t look like a merger made in hell. Great for stocks, and for puts now.
AA should have just merged with Alaska airlines and be done with it. No one wants US Airways in One World, and if Texas (AA) and Pennsylvania (US) are part of the DOJ suit….see ya!
In the end I predict the merger will go through
simply because they let the other carriers go before them
That was so wrong but its what was done
Those monopolies are already in place
US Airways can cry me too in court.
You let the others go through we want our piece of the monopoly pie too sob sob
Here are our shark lawyers to get our piece
At best this is away for the GOV to get concessions out of the new combined carrier. As another poster shared Id take a marriage with Alaska who has an excellent business culture over the US Hairways cronies running the show
ICK
BTW is it too late to get a refund on those US Scareway miles I just purchased? 🙁
Oh well I still think they will become AA miles in the end 🙂
Why do you say Advantage over indexed? In what way? For example other programs offer free’upgrades to low level elites. They make it way easier to get to Europe considering how very stingy AA has become nit to mention the crazy YQ on BA partner flights. The only thing I can imagine is generosity from city but that’s not really an aa issue.
Gary,
In the DOJ lawsuit doc, it looks like with the merger executives from both airlines are determined to put $$ ahead of consumers according to internal email exchanges.eg elimination of US Airways’ Advantage Fares program, no need for matching discounts, etc.
http://www.latimes.com/business/money/la-fi-mo-justice-department-us-airways-internal-messages-20130813,0,4594941.story
The merger as it stands is dead. Justice doesn’t file these suits as a negotiating tactic. Without a detailed explanation, the HHI numbers for hundreds of submarkets post-merger are off the charts (meaning way too high a concentration)–See the appendix to the suit.
In addition they use the airline’s own statements indicating that 2.5 million people who used US Air’s Advantage Fares (lower fares for connecting flights, fares unavailable on other carriers) would likely lose access to these fares as there would be no reason to offer them.
The mere fact that previous mergers were allowed actually makes it LESS likely this one would be approved. There is no “you let them merge so you have to let us merge ” rule.
DCA , in my mind, is just a side issue that could be cured but the other issues cannot be cured –at least I can’t think of a cure.
It is a myth that fewer airlines means less competition and higher prices. Industries have optimal economies of scale, ranging from natural monopolies (which can be a very good thing for the consumer) to commodities. In this case, a small handful of powerful airlines is necessary for profits and stability. When the government intervenes, you’ll see many weak airlines that dip into bankruptcy, cut corners, and otherwise provide poor options for consumers.
The reason for the Justice decision isn’t all that Difficult to understand. US Air and AA didn’t give enough to Obama’s reelection campaign.
@Lamp “It is a myth that fewer airlines means less competition and higher prices.”
So, when AA implemented check baggage fees in 2008, that was good for the consumer? And, when UA and US immediately followed suit, that resulted in LOWER prices?
Try reading the brief submitted by DOJ and attempt to comprehend some of the anti-trust behaviour of US, especially by its CEO – Doug Parker.
@D Wonderment wrote, “In the end I predict the merger will go through simply because they let the other carriers go before them.”
Obviously, you have a thing or two to learn about economics. Just because it happened before, it doesn’t mean it should happen again.
@You are So Silly – there’s not a legal requirement that the government treat like cases equally, at least that’s generally enforced, but to be sure anti-trust is much more law than economics, no matter what veneer is put on it.
Many thanks Mark, glad you identified it useful. 🙂