LIVE VIDEO: News 19    Watch
 

American-US Airways Merger May Require Big Concessions

7:57 AM, Aug 16, 2013   |    comments
Logo images from American Airlines and US Airways (AP file)
  • Share
  • Print
  • - A A A +

Charisse Jones, USA TODAY

The Department of Justice lawsuit that is threatening to derail plans for US Airways and American to merge has shocked industry watchers who have watched other megamergers get cleared for takeoff without a hitch.

Industry experts said Tuesday that the merger - which would create the world's largest airline - could still ultimately come to pass, but likely not without American and US Airways having to make significant concessions on routes, takeoff and landing slots at some airports and perhaps even the executives they choose to run the new, combined carrier.

"The Department of Justice is going to want to extract far more than they really have any right to expect," says Henry Harteveldt, a travel analyst with Hudson Crossing, "and that's not only going to be slots and gates at certain airports, but they may try to dictate who should not lead the company."

The Department of Justice, along with the attorneys general for six states and the District of Columbia, filed suit Tuesday to block the pending deal citing concerns that diminished competition would force fliers to pay higher airfares and fees.

The ability to possibly get the airlines to give up more than they otherwise would have may have been part of the reason for the Justice Department voicing its objections so late in the process, some said. American, which has been under bankruptcy protection since November 2011, was to have the bankruptcy court review its restructuring plan this week, and hoped to merge with US Airways by the fall.

"This is where they can apply the greatest pressure," says Anthony Sabino, a business law professor at St. John's University. "So there's a certain tactical reason that might be behind this."

Still, he says, ultimately the deal "will not be derailed. It will be delayed."

Others aren't so sure. The last time a merger was squashed occurred in 2001, when the Bush administration said it wouldn't OK a union between US Airways and United because of concerns about diminished competition. Since then, consolidation has transformed the industry, with pair after pair of airlines getting the OK to join forces. In just the last five years, Delta linked with Northwest, United with Continental and most recently low-cost carriers Southwest and AirTran decided to become one.

As it now stands, more than 70% of U.S. market share is in the hands of four airlines, and that would grow to roughly 85% if US Airways and American combine, a fact that may have also led to the proposed merger receiving more scrutiny, says William Swelbar, a research engineer at MIT's International Center for Air Transportation.

"We know from prior mergers that elimination of head-to-head competition on non-stop routes results in substantial price increases for consumers," Assistant Attorney General Bill Baer said in prepared remarks.

"I just keep coming back to the idea that the (Department of Justice) looked in the mirror and said that this deal would result in too much market share in the hands of a few," Swelbar says.

US Airways and American, like other carriers wishing to merge before them, have insisted that they will not shed hubs if they become one airline, and service will only be enhanced as they blend their networks. But the state attorneys general who joined with Justice include Texas and Pennsylvania, which are home to hubs for each carrier, and may have factored into their decision to fight consolidation.

"Any network restructuring ... you'll reduce some costs, and invariably that probably means a hub or two or three may be downsized," says Daniel Friedenzohn, assistant professor, Aeronautical Science at Embry-Riddle Aeronautical University's Daytona Beach, Fla., campus. "For some of these states that's job loss. I think American and US Airways will have to make an aggressive push to show some of the benefits of these mergers."

US Airways and American have promised to fight the lawsuit in court, a process that they say will likely take several months. Many think they'll prevail, but say it's less of a certainty given the Justice Department's surprising mood.

"US Airways and (American Airlines) will be able to mount a strong case based on prior mergers in the industry," Swelbar says. "That said, I am less convinced today that a merger will happen based on what appears to be a changed mindset toward further consolidation in the US airline industry" at Justice.

The era of megamergers in the airline industry was coming to an end with the tie-up of American and US Airways, and will also come to a close if the deal doesn't happen. But mergers on a smaller scale, involving smaller airlines, could still continue.

"If the Department of Justice squashes this merger, it doesn't mean that other mergers won't take place; it just means they won't be able to take place among the four largest airlines," Harteveldt says.

On their own, American and US Airways could survive, as officials at both carriers have previously said. But they might have a harder course to travel without the benefit of the other.

"I think their life will be harder if they don't merge because they're competing against two other airlines that have a significant competitive advantage," says Robert Mittelstaedt, dean emeritus of Arizona State University's W. P. Carey School of Business, who closely follows the airline industry.


Most Watched Videos