American/US Airways Merger-Bashing Relies on Inaccurate Assumptions and Bad Information

Over the last couple weeks, there has been a lot of talk about how the American-US Airways merger is a bad idea. Much of this is just political posturing as the feds review the case, but some in the media are putting out their negative feelings by using strange assumptions and twisting data. I had ignored a lot of this until now, but seeing Chris Elliott’s terrible piece in USA Today flipped a switch in me. I read that and immediately started writing my response.

Why don’t we just go through it bit by bit, shall we? Here’s the general premise of the article:

US AA Merger Hysteria

Or in his terms…

Passengers will probably pay more and get less. Cities are likely to lose airline service. Many airline employees might end up with pink slips.

I’ve taken the following quotes out of order to match the original order of the assertions above. I don’t believe it changes the context, but you can always read the article yourself to judge.

Passengers will probably pay more and get less.

A merger “would substantially eliminate competition on important routes, creating a dominant firm that — acting unilaterally post-merger — could raise fares, degrade service and eliminate consumer choice,” the [American Antitrust Institute’s] Diana Moss recently said in a congressional hearing.

Let’s start with the “pay more” piece and then get to “get less” shortly. This particular statement by the AAI, used to support Elliott’s point actually refers to the handful of hub-to-hub routes and not to the merger in general, but of course, Elliott fails to note that. I also don’t know much about this group except that they partnered with the Business Travel Coalition (BTC) to do the study. The BTC is generally anti-airline, and is funded by groups that drive that agenda. That doesn’t say anything about this specific report, but it does raise a red flag.

Does that mean fares won’t go up at all? I wouldn’t say that. On average, it wouldn’t surprise me if fares went up somewhat depending on a variety of factors including demand, capacity, competition, etc. But that could happen even without this merger. It’s very hard to isolate fare changes and then say they are specifically due to the merger and not any external factors. But there is a big “check” in place here anyway. If the airlines let fares go up too much, then competitors will come in and thrive. That’s how it always works in this industry.

Better service? According to several customer service benchmarks, it doesn’t get much worse than this. The 2013 authoritative American Customer Service Index (ACSI) slapped American Airlines and US Airways with scores of 65 and 64 out of 100, respectively. Last year, US Airways was the second most complained-about airline, and American was number three, according to the Transportation Department.

On the “better service” side, the assumption here is that mergers automatically make things worse. That’s just a bad premise to start with. Look at the Delta/Northwest merger. So far in 2013, ACSI gives Delta a 68. The last time Northwest achieved that on its own was in 1995. So it has almost never been better than it is now. Delta last got a 68 or higher in 1999. That means two airlines came together and got better. Go figure.

United may be a different story right now in its merger, and scores will always take a dip during the process. But you can’t just flat out say that mergers make things worse in the end. In this case, you have a lot of angry employees at American who, under proper leadership, might start delivering a better experience. And as for US Airways, the scores it gets are actually the highest its seen since the late 1990s. Trends are more important than absolute numbers. With US Airways management taking over, I would be more hopeful about improvement than I would if the airlines stood alone.

The same goes for DOT numbers. The trends at American for complaints do not look good but the opposite is true for US Airways. With the US Airways team taking over, you would imagine that things would improve across the board, once the merger kinks are worked out. That should be a good thing.

Cities are likely to lose airline service

More service? A U.S. Government Accountability Office report warns that 1,665 airport-pair markets will lose one effective competitor in a merger, affecting more than 53 million passengers.

It’s time for fun with numbers! This is actually the piece that really got me going. I’ve already been digging into the GAO report, but I don’t quite have everything I need yet. But the above statement is using facts to make a point that isn’t valid.

The GAO defines an “effective competitor” as one having more than 5% of the market. When you merge big airlines, of course you lose an effective competitor in many markets. That’s how mergers work. But guess what? Of those 1,665 markets, more than 70 percent still have 3 competitive airlines in the market after the merger. Oh, and Elliott fails to mention that 210 markets actually see an increase of an effective competitor. (I assume those are things like Burbank to Corpus Christi which neither American nor US Airways can connect today.)

Are there some markets that will see real impacts? Yes, according to the study, 24 markets will go from 2 to 1 airline, but even that’s misleading. The GAO report specifically excludes nearby airports even though that’s usually included in analyses. So that service from DFW to Mesa on Spirit doesn’t count, apparently. Oh, and let’s not forget that Southwest gets the right to fly anywhere in the US from Love Field next year. There will be more competition when that opens up.

I could go on and on about the GAO report, but I’ll save that until I have more info. In short, it’s not proving what some people seem to think it’s proving.

Also, I wonder if Parker has been to the St. Louis airport recently, which lost almost half its passenger traffic after American acquired TWA in 2002, or to Cincinnati, where air traffic plunged after the Delta-Northwest merger? These former hubs are now ghost towns, despite promises made in a prenuptial delirium.

This is a poor comparison that shows Elliott’s lack of understanding about how airlines choose hubs. Some of the problem lies with the airlines themselves – they like to claim that they will keep all hubs when in reality that may not be the case. With American, I think the airline actually believed it would keep TWA’s St Louis hub even though it was a bad idea from the start. There just wasn’t enough local demand and St Louis didn’t provide any real additional connectivity that wasn’t already provided by Chicago and Dallas. It was doomed.

You don’t have that situation in the American/US Airways merger. Are Philly and New York close? Yes, but New York can never be a hub for American because it doesn’t have enough slots (and it has a ton of competition). Philly is a big market that works as a hub. If anything loses service, it’s likely to be New York which won’t miss it. Same goes for LA and Phoenix with LA playing the part of New York. And Miami is a terrible option for a domestic hub while Charlotte is a great one. I don’t see any hub in a situation like that of St Louis (or Memphis, or Cincinnati, or Pittsburgh….)

Which cities are going to lose service? If any, it should be the ones that already have a ton of it anyway like New York and LA. That shouldn’t be much of a concern to antitrust authorities.

Many airline employees might end up with pink slips.
Elliott didn’t bring this up again in the entire article, so apparently he just thought it would be a fun little dig to add at the beginning. Were these two overly-bloated airlines coming together, then yes, pink slips might be around. But US Airways is already pretty lean, and American was slashed during bankruptcy. There will be some overlap, especially in management functions, but chances are that you can get most people to quit by offering buy-outs. I wouldn’t expect any mass layoffs directly because of the merger, especially not on the front line.

In general, it seems like pundits are trotting out the usual, tired arguments about why mergers are terrible. Most of the arguments simply don’t hold water.

[Original naked protestor image via Shutterstock]

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