Breaking Down the DOJ’s Weak Objections to the American/US Airways Merger

I didn’t get into specifics in my post about the US Department of Justice (DOJ) filing suit to block the American/US Airways merger yesterday, but today it’s time to dig in.

In the 56-page complaint filed by DOJ, there is an attempt to show that this merger will violate antitrust law. Let’s go through each point one at a time. You can follow along starting on page 14.

Many Relevant Markets Are Highly Concentrated and the Planned Merger Would Significantly Increase that Concentration
DOJ uses the Herfindahl-Hirschman Index (HHI), a measure of market concentration. There are over 1,000 markets where the HHI exceeds 2,500 points (considered highly concentrated) and the merger increases it by 200 points (considered a significant change in concentration). DOJ says that this makes the merger illegal, but in reality, DOJ guidelines say that it’s only “used in conjunction with other evidence of competitive effects.”

HHI takes the market share of each competing airline, squares it, and then adds them together. So if there’s only one airline in the market, it’s 100*100 = 10,000. That’s a monopoly market. If there are four airlines each with 25 percent of the market, that’s 25*25 = 625*4 = 2,500. You get the idea.

So there are 1,000 different markets that are deemed non-competitive using those guidelines. That’s a big scary number. But look at the list of markets in Appendix A. I can’t go through them all, but most of these are pretty small markets. Norfolk – San Juan, Des Moines to Palm Springs, Little Rock to Rochester, etc.

Let’s dig into that last little market. In 2012, there were about 4 people a day going each way between Little Rock and Rochester. Here’s the market share for full year 2012 based on DOT data (via masFlight):

2012 Little Rock Rochester Market Share

As you can see, Delta is the big boy in the market today. After the merger, let’s assume that everything freezes completely, as you have to do when you use HHI. In theory, that means Delta and American become almost equal. Nobody has more than 50 percent of the market, and there are still three competitors fighting for those 4 people every day. Is this a less competitive market after the merger? Well, yeah. The HHI will increase from 2,701 to 3,500 as one airline disappears. But is it non-competitive? No way.

More importantly, let’s take a trip back in time to 2007. In early 2008, Delta and Northwest announced they were going to merge. So what did this market look like in full year 2007?

2007 Little Rock Rochester Market Share

Well, well. Look at that. When DOJ was reviewing the Delta/Northwest merger, this market had an HHI of 3,347, a good 600+ points higher than today. And when Delta merged with Northwest, it increased it to 4,485, a much bigger increase than what we see with American/US Airways. But back then, DOJ didn’t see this as being important. Now, all of a sudden, it matters?

We should also look at what happened after Delta and Northwest merged. Well, United/Continental came into the market and US Airways grew its share. Oh, and the average fare went down. Now can I say this happened in every market? No, but I can tell you that all these previous mergers had plenty of markets that had high HHIs and DOJ never saw that as an issue previously. Nothing should have happened to change that belief.

This Merger Would Increase the Likelihood of Coordinated Behavior Among the Remaining Network Airlines Causing Higher Fares, Higher Fees, and More Limited Service
This is a four-part complaint, so I’ll just go through them below. But the overall complaint is that it’s easier for fewer competitors to coordinate pricing. There are examples given about how airlines have signaled each other previously, but there is no evidence given that it will somehow become easier after a merger than it is today.

1) The Merger Would Likely Result in the Elimination of US Airways’ Advantage Fares
Go figure. DOJ apparently sees US Airways as a low fare savior. In some markets, US Airways currently files prices below the other airlines for last minute walk-up fares. If the merger goes through, DOJ says those will go away. The justification they use here is laughable. I’m guessing they found an intern to literally just take screenshots from the ITA Software flight search matrix to show a lower fare on a certain day. As anyone who understands this industry knows, fares change all the time. You can’t just take a snapshot of a single day and use that as evidence.

One of the couple markets they highlight is Miami – Cincinnati. Let’s use 2012 DOT data to get real results. Wanna guess who actually has the highest fares in that market?

Cincinnati-Miami Average Fare

You got it. US Airways, apparently the DOJ’s champion of low fares thanks to a screenshot on one day, had the highest average fare in the market in 2012. How can that be? Well, it’s likely because while US Airways does have some lower walk-up fares, they aren’t going to be available on every flight, every day. In addition, I assume US Airways is holding back on the cheap lower fare seats that can be booked in advance. The result is lower fares for business travelers, higher fares for people booking in advance, and overall, a higher fare in the market. Does that mean that DOJ values lower fares for business travelers more than lower fares for those buying further in advance? Or does it mean that DOJ just hastily put this together without actually looking at data?

This market is also a great argument for how the American team is doing something wrong. If you fly nonstop in the market, you should be able to get a higher fare than everyone else. So how is US Airways getting a higher fare with connecting service? But I digress…

2) The Merger Would Likely Lead to Increased Industry-Wide “Capacity Discipline,” Resulting in Higher Fares and Less Service
3) The Planned Merger Would Likely Block American’s Standalone Expansion Plans, Thwarting Likely Capacity Increases

Soon after going into bankruptcy, American put out a plan highlighting that it would be adding a lot of capacity in the coming years. That statement scared everyone from other airlines to Wall Street. Why? Because for years, airlines competed by putting too much capacity in the market. They would fight each other for market share and everyone would lose money. Consolidation has changed things. Now there are generally fewer, smarter management teams in place, and they realize that the key to actually posting a respectable profit is to keep your capacity in check. American’s current team is the only one who didn’t seem to realize that.

So DOJ likes the plan because it floods more capacity into the market, and that’s all that matters. Would it result in lower fares? Sure, at least until the airline loses too much money and retrenches. But DOJ takes American’s plans at face value, assuming that this is a solid strategy that will actually happen. The only way this happens is if American’s current management team somehow remains intact post-bankruptcy. That is far from a foregone conclusion since anyone will be able to file a plan of reorganization if the merger gets called off. And the money men are absolutely going to be looking for a plan that gets them a better return. I wouldn’t expect to see this kind of growth actually materialize. If it did, it wouldn’t last.

4) The Merger Would Likely Result in Higher Fees
I’m not sure how the potential for fees to be higher is grounds to block a merger, but apparently it’s worth an argument from DOJ. And it’s not a very solid argument. What evidence does DOJ give that fees will rise after this merger? Well, here’s one quote:

A December 2012 discussion between US Airways executives included the observation that after the merger, “even as the world’s largest airline we’d want to consider raising some of the baggage fees a few dollars in some of the leisure markets.”

Uh, ok. I’m guessing these kind of emails cross everyone’s desk at every airline all the time. Of course they want to consider it. It doesn’t mean they’ll do it, and it also doesn’t mean the other competitors will go along. DOJ says that since the new American would be the world’s largest airlines, the other airlines would just roll over and do what they say. Riiight.

The one actual piece of proof is that US Airways thinks that “fee harmonization” would result in $280 million in additional revenue each year. That means that when they standardize across the two airlines, some fees will go up and some will come down. In the end, they expect to be $280 million in the black on that. That’s in a company that generates $38 billion in revenue every year.

The Merger Would Eliminate Head-to-Head Competition in Hundreds of Relevant Markets and Entrench US Airways’ Dominance at Reagan National Airport
Yes, there are a handful of nonstop routes that would see a real, actual decrease in competitiveness, but the inclusion of connecting markets is a new trick up DOJ’s sleeve. The biggest weapons airlines have in controlling a market is their schedule. If you fly nonstop and nobody else does, then you can do a lot with pricing. So being concerned about those dozen or so overlapping nonstop markets is fine. But on Hunstville to Indianapolis (yes, that’s one of the markets on the list), going from 4 to 3 airlines isn’t going to give anyone meaningful extra power.

I think the bigger issue here is surrounding Washington/National. DOJ doesn’t like that the new American would have so many slots at National, and I think pretty much everyone expected some sort of concession to have to be given. But the impact is still completely overblown.

The merger would only increase US Airways’ incentives to hoard its slots. Today, US Airways provides nonstop service to 71 airports from Reagan National, and it faces no nonstop competitors on 55 of those routes.

What this fails to mention is that nobody wants to provide competition on these routes. You think anyone else is going to fly up against US Airways to Tallahassee? Or Jacksonville, North Carolina? You could put out a million slots, and you still wouldn’t find competition on most of these routes. But if taking some slots away from the combined airlines makes DOJ feel like it’s doing something, then that’s fine. Those will be used on bigger routes, some of which may already have competition today. But DOJ’s complaint has really blown up way beyond just National. They’ve marginalized that as an issue even if it may be the only legitimate one.


In the end, DOJ ties a little bow on it all by saying that nobody can compete with the big three airlines after this merger is completed:

The remaining airlines in the United States, including Southwest and JetBlue, have networks and business models that are significantly different from the legacy airlines. In particular, most do not have hub-and-spoke networks.

I find it pretty amusing that Southwest isn’t considered a legitimate competitor even though it’s the largest domestic US airline. It doesn’t serve small cities but it is definitely a big competitor that connects people through its focus cities (some might call them hubs). And there are plenty of smaller competitors providing service that is clearly appealing to someone. In fact, those smaller competitors are where the real growth lies in this industry.

But when it comes to big corporate contracts, where a lot of the money is, it’s true that the biggest airlines will have a huge advantage. Only problem with that? Today American and US Airways alone aren’t truly effective competitors with Delta and United for that business. You put them together, and you have a third real competitor.

DOJ certainly disagrees with me, but so far, it hasn’t presented any credible evidence to support its case. And the burden of proof in this lawsuit lies with DOJ.

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140 Comments on "Breaking Down the DOJ’s Weak Objections to the American/US Airways Merger"

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Jumpseat
Guest
Cranky every merger is different and under increased scrutiny by the DOJ consumer groups and shareholders. As the lawyer quoted during the PanAm/Delta liquidation/acquisition “the world has changed”. Dougie must now put his tail between his legs, have a few too many drinks and get his own disastrous hodge podge together. Stay in your lane Dougie don’t drink and drive and don’t embarrass yourself. All jokes aside I fully expect the merger will go through but with 40-50 slots requested at DCA and maybe some at LGA. Possibly a spin off of the DCA operation. Can anyone say DCAir? If… Read more »
yo
Guest

Will you grow the hell up when it comes to your infantile “have a few too many drinks” statement?

Address the subject at hand, and leave the snarky, pissed off employee remarks for other boards.

Brian
Guest

Exactly, making juvenile stupid remarks makes me just disregard any and all of your point. Once I get there, I just stop reading.

Klink172
Guest

First off, you’re an idiot.

Second, if DCA is spun off, this merger is over.

Togaman
Guest

First off, you’re an idiot.

Second, divesting DCA would end this merger. Isn’t going to happen.

yo
Guest

Southwest is behind a lot of this. They always are. Good analysis of a bad suit. US will be forced to give up DCA slots, and Southwest will get them. Nothing ever changes.

Southeasterner
Guest

Yes because Southwest has such a long history of backing from elected leaders?

Ironic that you use the Southwest argument in the case of American who openly paid off politicians to block Southwest’s access to various airports, routes, and terminals.

If Southwest is actually behind this I would say good for them. American deserves it.

yo
Guest

There is nothing clean about American under Crandall. Heck…, where was the DOJ when American called Braniff and tried to get them to fix prices at DFW with them? Southwest is all PR, but no one looks behind the curtain…

MeanMeosh
Guest
It is true that WN has faced headwinds from elected leaders in the past, but I wouldn’t say that’s true anymore. WN flexed a lot of muscle, both publicly and behind the scenes, to force the repeal of the Wright Amendment, and I would say that today, they probably hold as much pull, if not more, than AA over Texas state and local pols. However, I am somewhat skeptical that WN is the only player behind this, as I commented yesterday. I didn’t think to include this yesterday, but WN’s recent M.O., when they want to pick a fight, is… Read more »
clarencehill84
Member

Could it be the AA executives, who have over the years, been major donors to these AG’s and Red States/Governors campaigns, are the other influential if not the main rodent in the room? They have everything to lose, their airline, bonuses, just to name a few. What do you think?

1js7371
Member
I do not believe WN is behind this. No carrier controls the DOJ. However, a settlement of slot divestiture could benefit them……..No, folks, there is something MUCH larger going on here. And I will be the first to state it openly (although a couple posts hinted at it yesterday): THIS IS THE FIRST STEP IN THE RE-REGULATION OF THE AIRLINE INDUSTRY………..Since 1978, there have been three large consolidation eras within the industry. After the first two, there was a plethora of start-up carriers. Regional fare wars. NATIONWIDE fare sales. But there have been NO start-ups this time. NO fare sales,… Read more »
Jason H
Guest

Having no start-ups (what about Virgin America), no fare sales (which probably isn’t true either), rising fares, and decreasing service is just the market resizing to fit passenger demand and costs – the government had nothing to do with it.

1js7371
Member

Please reread my post. I did not say the Government created the market. I am saying the Government will RESPOND to the market.

Jason H
Guest

You say that “the Government intervention has commenced” when there is no evidence for that. (I never claimed that you said that the government created anything)
As to whether the government will respond further by re-regulation, I don’t see much evidence for that either. Making some consumer protection rules and delaying a merger doesn’t nearly amount to that or even anything close to it.

1js7371
Member
My friend, the evidence IS the lawsuit. Based on Justice’s reasoning, both the NW/DL and the UA/CO should have been fought too. Neither of them could pass the litmus test that AA/US is microscoped. The verbiage of the DOJ complaint clearly indicates that the Government wants two independent relatively weak carriers versus one strong combined company. Deregulation knocked down all the fences, but now the Government is erecting new ones. As far as “delaying” the merger, if Justice had wanted to, it would have privately indicated that some slot divestiture would have to be executed prior to it’s approval of… Read more »
David SF eastbay
Member
Why doesn’t the DOJ shut down Neiman Marcus since they sell bath towels for $100.00 and Walmart sells them for $5.00. The thinking is almost the same, but surprise the $100 towel will last a life time, but the $5 may not last a year. If one or two airlines raise a fare, a low cost airline will still be lower. A new lower cost airline can always start up to counter other airlines with high fares. You would think the DOJ stats would look at nonstop markets only between AA/US cities and not look at connecting markets since there… Read more »
DN
Guest
Finally, someone *gets* it! Great post. And I point it out all the time, and glad to see it written here: WN is not some little underdog carrier. They fly the most domestic O&D passengers in America. Number one. A couple things I’d add on your correct DCA analysis… Using T-100 data, the biggest carrier in Washington, D.C. is… wait for it… WN. Yes, that’s largely BWI, but it’s not that far. The other thing I’d add is that DoJ is complaining that US has a “monopoly” on smaller DCA markets. You’re dead-on 100% right that WN and B6 aren’t… Read more »
Bill from DC
Guest

great point on how they are talking out of both sides of their mouth on US!

trackback

[…] and notes from around the interweb: Cranky Flier walks through a few of the markets where the Department of Justice claims that an American – US Airways merger would constitute […]

longtimeobserver
Member

HHI deltas become meaningless once an industry has been allowed to consolidate. By definition, the last HHI deltas become the most severe. Don’t like it? Shoudn’t have allowed consolidation. Now, it’s too late and merely DOJ picking winners and telling losers “go home”.

jboekhoud
Member

Great analysis. Maybe the US/AA legal team should hire you as a consultant!

JB
Guest
I agree that the DoJ suit seems under developed (maybe they felt rushed to meet the Aug 15th deadline) but the premise that airline consolidation will lead to an oligarchy is sound. Look at the phenomenon of change and baggage fees. One airline raises fees – they all follow suit. If you combined the fees into the ticket costs it looks like they are raising their prices together? The barriers to entry for new airlines are so high it seems like anti-trust pressure is the only mechanism to maintain competition. In retrospect if the DoJ had telegraphed this a bit… Read more »
ron.keith
Member

WN does not have change fees and doesn’t charge for the first two bags. I guess you are counting them when you say “they all follow suit”.

David M
Guest

The fee argument doesn’t really work. You say that in the past, one airline would raise a fee and everyone else would follow suit. The DoJ’s argument seems to boil down to one airline will raise a fee and everyone else will follow suit. So, the merger doesn’t change anything.

scott.wintner
Member
Good analysis, CF. I don’t see how it quite proves that the DOJ’s suit is nearly as insane as you suggested it was in yesterday’s post, although you provide some very good counter arguments to their points. Of course, there are two sides to every story, but I don’t quite see how that makes DOJ necessarily wrong for arguing its side. If they lose, they lose… that’s the legal system at work… hardly cause for us to conclude the system is broken. In terms of “the inclusion of connecting markets is a new trick up DOJ?s sleeve”… I think analysis… Read more »
Nick Barnard
Member

I was kicking around the “past inaction” thought in my head for a while.. The question is are there previous cases where the DOJ successfully argued that non-stop flights were more important than connecting flights? (US/UA perhaps?) It’d be golden to take the DOJ’s previous successful arguments and toss it back in their face.

scott.wintner
Member

In fact, quite the opposite. In the proposed US/UA combination, the DOJ was cited as stating:

“The Washington and Baltimore markets would see reduced competition, and competition also would suffer on the East Coast because United and US Airways are the only two airlines in many markets offering connecting service between cities up and down the coast.”

(DOJ never actually drafted a complaint in the US/UA merger because the threat of a lawsuit was enough for US/UA to drop the whole thing. This quote was taken from a statement they released, as quoted then by ABC News.)

Nick Barnard
Member

Well UA and US aren’t getting together, so the IAD/DCA combination doesn’t quite hold the market monopoly stated.

DL is much stronger out of JFK/LGA and WN is a force to be reckoned with in the market on the east coast..

I think my question what was the last case that the DOJ had to legally defend their logic for blocking an airline merger? (Or perhaps in lieu of that another transportation provider..)

scott.wintner
Member

Also, in testimony before the House T&I Committee in 2000, then-Deputy Assistant AG for Antitrust John Nannes explained “…in considering the antitrust implications of a particular transaction, the [DOJ Anti-Trust] Division looks at the effect in all city pair markets served by both of the carriers involved in terms of (1) nonstop service and (2) nonstop and connecting service.”

scott.wintner
Member
Setting the issue of this particular merger aside for a moment, the DOJ complaint seemed to be as much a scathing analysis of anti-competitive practices in the airline industry as it exists today as it was an argument against further consolidation. While those larger points may or may not be considered by the courts to be relevant to this particular merger, I do think DOJ has raised some very legitimate, scary observations (which many of us have been raising for years) about how airlines coordinate activities to control the market (and, to extrapolate, make introducing a new carrier to the… Read more »
channa
Guest

I had sex on an American Airlines plane many years ago. It was a lot of fun.

jboekhoud
Member

Thanks for that valuable contribution. There has been far too little discussion of the impact this merger would have on members of the Mile High Club.

If US/AA could show that a combined airline would improve the chances of getting laid in-flight, I suspect Congress would approve the merger overnight without any DCA slot divestitures!

WN
Guest

Also southwest flies ROC to LIT via BWI.

Mike
Guest

I’d like to see evidence that these DOJ guys actually graduated high school.

looks like they are making up their stats.

trackback

[…] In the meantime, I highly suggest a MUST READ. Brett Snyder, aka Cranky Flier, PBB analyst and Contributing Editor has posted an analysis of the DOJ complaint today on his blog. Read it.  […]

DesertGhost
Guest
A very succinct analysis, Brett. I couldn’t agree more. Looking at the markets DOJ chose, virtually all have some competition. Since I live in Phoenix, I quickly looked at Tucson to Charlotte (whose rating is 5647). Both are fairly large cities (for those who are unaware, the Tucson metro area has over a million inhabitants). Southwest, Delta, United, American and US Airways offer one-stop flights via various hubs (Phoenix, Dallas/Fort Worth, Chicago O’Hare, Chicago Midway [via AirTran from Chicago to Charlotte] and Atlanta). The end result of the merger would reduce the number of competitors on this route from five… Read more »
DesertGhost
Guest

I wanted to add, parenthetically, that I, too, am surprised by Southwest’s lack of presence in the DOJ filing. It IS the country’s largest domestic carrier, after all.

mstengel
Member

Again, excellent job. The DoJ is way off base and does not have a clue about the competitive dynamics of the airline industry. The government needs to stop treating the airlines like a public utility to be micro-managed and instead let them operate as healthy, reliable, and profitable businesses. Simple supply and demand: if fares get too high, a new entrant will come in to lower prices in the appropriate markets (who heard of JetBlue, Spirit, Allegiant, or Virgin America 10 years ago?).

-1 for taxpayer value.

yo
Guest

Add the Essential Air Service to the taxpayer ripoffs, because we need to have service at Mid America Airport! (or numerous Hooterville’s that just happen to be in the district of a pork pulling congressman)

Nick Barnard
Member

Although does US Airways or American (or their subsidiaries) have any EAS service directly? AFAIK most of that contracting is done directly through the operating airline, not the marketing airline..

scott.wintner
Member
“…if fares get too high, a new entrant will come in to lower prices in the appropriate markets (who heard of JetBlue, Spirit, Allegiant, or Virgin America 10 years ago?).” Mike — therein lies the rub. The barriers to entry for new carriers, who could effectively compete in the marketplace against what would be the “big three”, is so difficult that the airline market really isn’t “free”. If it were, I’d agree with you. Of those carriers you listed, only JetBlue and VA compete head-to-head for traffic from those three major carriers (and VA has hardly been a success story… Read more »
David M
Guest

Spirit actually does target high fare city pairs with existing service. Airchive recently posted an interesting article about them, pondering whether the “Spirit Effect” has replaced the “Southwest Effect”. http://airchive.com/blog/2013/07/20/has-the-spirit-effect-replaced-the-southwest-effect/

Allegiant really does focus on unserved niche markets.

Bravozulu
Guest
I’m new to this site, but love the comments. Many good points from both sides and the lingering “smoking gun” element adds suspense! I think everyone is in agreement that this was a huge surprise. The DOJ is going to court with a lot of weak ammo in my opinion. The biggest flaw to they’re argument is they’re making AA/US weaker by blocking the merger. If the DOJ thought consolidation was bad they should never allowed DL/NW and UAL/CAL to merge. In a court where a judge is going to decide what’s fair it makes the DOJ look like idiots.… Read more »
Bravozulu
Guest
Has anyone given much thought on the positives to small cities that might benefit from an AA/US merger. I’ll give you an example of what could happen. Let’s take a look at (EVV) Evansville IN. The city has a population of roughly 120k. Currently, EVV is served by two carriers-DL and AA. DL serves the city from DTW and ATL. AA serves the city from ORD and DFW. As of right now, DL is the only carrier to offer passengers connections through a Southeastern hub. US used to serve the market through CLT, but couldn’t make money on the route.… Read more »
Nick Barnard
Member

Oooh, excellent point. There probably is an argument to serve some of the passengers who connect over ORD right now through CLT or PHL. They’d also probably get more reliable service in the winter than through ORD or DTW.

DesertGhost
Guest

Bravozulu -An excellent point. And the additional route options may, in fact, add competition to the marketplace, not reduce it.

Bill
Guest
I’m a lawyer. Just a small point on the way lawsuits work: it is not necessary for the USDOJ (or any plaintiff in ANY case) to spell out each and every piece of evidence that that party intends to rely on in proving the case at the outset. This complaint is very detailed and does includes references to specific e-mails and statements, as well as includes specific examples like the ITA Matrix screenshots. Those are included by example and/or may be thrown in to give the complaint some color, but that doesn’t mean they HAD to be included, nor does… Read more »
DesertGhost
Guest

Playing devil’s advocate, Bill, is there any hard evidence to show the merged American won’t continue the practice of offering Advantage Fares? You seem to have missed the larger point that airfares constantly change. If Advantage Fares boost US Airways’ bottom line, the new carrier would be foolish not to learn from its history.

scott.wintner
Member

DesertGhost — Read the DOJ complaint. “Because US Airways? hubs generate less revenue from passengers flying nonstop, US Airways must gain more revenue from connecting passengers. It gets that revenue by
offering connecting service that is up to 40% cheaper than other airlines? nonstop service.” (P. 18), backed-up by analysis that goes on for several pages, including quotes from both US and AA execs (pp. 21-22). Even without those quotes, which may well be taken out of context, DOJ’s argument (right or wrong) is logical.

DesertGhost
Guest

Scott – I’ve read the DOJ complaint. And your point is? With all due respect, your point has absolutely nothing to do with Advantage Fares. I believe the legal term for what you wrote is “non-sequitur.”

DesertGhost
Guest

To clarify the above, there’s nothing to indicate that the merged American won’t continue Advantage Fares when they make sense. That was my original point, and that’s the precise non-sequitur.

scott.wintner
Member

DesertGhost — I’m not sure where the confusion is. The quote I posted (and referenced page numbers) is precisely from the DOJ’s discussion of Advantage Fares and why they would not continue post-merger.

Nick Barnard
Member

Well, US’s current hubs aren’t going to magically generate more revenue when they’re part of a merged US/AA.

I can see US conceivably continuing to offer Advantage Fares, and perhaps even offering them in situations where pmAA has a direct flight and pmUS only offered connecting flights. That’d be something of a market innovation and provide some price flexibility. (Now the question is if the IT infrastructure will allow it…)

scott.wintner
Member
Nick — you’re assuming that US’s hubs would continue to function as they do today in a combined airline network. More likely, I suspect, is that the pmUS hubs that aren’t generating revenue today will be downsized (if not eliminated entirely over time) because they’ll no longer be necessary. That is, if the “new AA” has hubs that both generate O&D revenue AND provide connecting opportunities… the hubs that do only one of those become are much less attractive. Moreover, the only reason the whole Advantage Fare approach works is because US’s costs over their hubs such as CLT are… Read more »
Nick Barnard
Member

Scott, true the hubs will function differently, but there also isn’t enough capacity at pmAA’s hubs to simply shift all the people who were connecting on pmUS to there.

The other question is pmUS’s costs may not go up as quickly as you’d argue since I’d expect more of the marginal traffic is handled by US’s Express carriers, which won’t be getting the labor rate bump.

scott.wintner
Member
Hum… I don’t know, Nick. As recently as yesterday’s conference call, US lawyers bragged about how the merger would enable the new airline to invest heavily in upgrading the traveler experience (like Delta has done). That will cost money. I’ve seen no evidence to suggest that the “new AA” will be looking to retain the low-yield markets that have been US’s salvation over the past several years. Again, the only reason that’s worked for US is because they’ve focused (to their credit) on low-costs. It doesn’t sound to me like the new AA is focused on a low-cost product that… Read more »
DesertGhost
Guest

Scott, to put it simply, there’s no evidence that the merged AA won’t continue offering Advantage fares. That’s all I was getting at. No one knows what the future will bring.

scott.wintner
Member
DesertGhost – I don’t know how you can say that having read the DOJ complaint. Whether it proves to ultimately be right or wrong, the DOJ makes a very detailed argument as to why it believes that the so-called “Advantage Fares” will cease to exist after said merger. No one can predict the future with absolute certainty — but that doesn’t mean there isn’t evidence to suggest future outcomes. Certainly, there is at least some evidence from the perspective of DOJ, which they enumerated in their complaint. To suggest that there is “no evidence” or “nothing to indicate that the… Read more »
Bill
Guest
Hi DesertGhost. I didn’t miss the point — I’m a psycho frequent flyer myself and I do know they change constantly. Frankly, I never heard of “Advantage Fares” and Googled it and couldn’t really find it on the US web site either. However, I do know firsthand that when two carriers like DL and UA compete, sometimes, they do charge the same exact price even when one route is nonstop and the other is an inferior connecting service. In a world with truly competitive prices, that would be a rarity. The fact that it happens is troubling. It is entirely… Read more »
DesertGhost
Guest

Bill, it’s also reasonable to believe the New American will continue to offer Advantage Fares if it’s to it’s “advantage.”

DesertGhost
Guest

Scott@DTW – With all due respect, just because the DOJ’s complaint speculates about the future doesn’t mean that speculation must automatically come to pass. How can you say something is “patently false” when there’s no evidence to back up your assertion? Anything we predict now is simply a guess. It’s like trying to predict who’ll win the Super Bowl. One can only make an educated guess. Until the season and playoffs are finished, no one can possibly know who will win the Super Bowl. And no one can know if American or US Airways will or won’t offer Advantage Fares.

Bravozulu
Guest
I think everyone is assuming US “advantage fares” are a result of lower labor rates. The DoJ entire argument is based on the fact, that US current business model will cease to exist. Thus, bye bye “advantage fares”. What the DoJ failed to research was the landing cost associated with the “advantage fares”. I haven’t actually researched the landing cost, but everyone on both sides of the argument use CLT as the connecting city associated with “advantage fares”. In my opinion the real reason US “advantage fares” are funneled through CLT is because CLT offers the cheapest landing rates in… Read more »
scott.wintner
Member
DesertGhost – What I described as “patently false” was your statement that “no evidence exists”. Using your Super Bowl analogy, the way commentators develop their best guess as to who will win is by examining the evidence they see. You’re right, all they can do is make their best guess — based on the evidence. That’s all DOJ is trying to do here… make their best guess based on the evidence, which they spell-out in their complaint (and, as Bill notes, they may have even more yet to share). As I wrote above… no one can predict the future with… Read more »
DesertGhost
Guest

Scott@DTW, We’ll just have to agree to disagree about our semantic argument. It’s my view that something can’t be called “patently false” without hard facts to back up that assertion. Evidence simply isn’t enough. Facts are indisputable. Evidence is often subjective. One can make predictions based on evidence, but there’s no guarantee they’ll come to pass (many Super Bowl predictions turn out to be dead wrong). But one can draw solid conclusions based on facts.

DesertGhost
Guest

…and maybe I stated my point imperfectly. I probably should have used the word “facts” instead of “evidence.” There are no hard facts that point to the conclusion that US Airways (or the new American) will automatically discontinue the practice of offering Advantage fares if a merger occurs.

scott.wintner
Member

Again, DesertGhost, what I termed “patently false” was your statement that “no evidence exists”. Or, to use your new word, no “facts” exist. I did not say that the possibility of AA continuing Advantage Fares post-merger is patently false. But, to say that there’s absolutely no indication that they are to be dropped is.

ron.keith
Member

I think the Texas concern is really around jobs. Will Doug do to Dallas/Ft Worth what he did to Pitsburgh? I believe he promised to leave jobs there and then changed his mind and moved them to PHX. There are a lot of maintenance jobs in DFW that could end up in PHX if Doug decides to go that route.

scott.wintner
Member

Here’s Texas AG Abbott’s rationale, in his own words: Attorney General Greg Abbott: Why I challenged the American Airlines-US Airways merger (http://www.dallasnews.com/opinion/latest-columns/20130815-attorney-general-greg-abbott-why-i-challenged-the-american-airlines-us-airways-merger.ece)

scott.wintner
Member
I said this in my comments to yesterday’s post, but I think it bears repeating in light of today’s discussion because I think it’s missed by all of CF’s stats and charts here: the number of carriers in a market and/or the concentration of market share alone are not the only determinants of whether a market is competitive. The extreme barriers to new carriers entering the picture, combined with the incumbent carrier’s proved ability to drive competition out of markets (as detailed in the DOJ complaint and which CF has never disputed) is enough, I think, to legitimize DOJ’s argument… Read more »
Bravozulu
Guest

If that’s the argument of why this merger should be blocked why didn’t the DoJ use the same argument to block UAL/CAL or DL/NL? It seems to me everyone taking the DoJ side is ignoring the previous two mega mergers. In fact I have yet to see one person on this thread point to major differences between AA/US merger to previous mergers. This is the elephant in the room that is probably going to be the DoJ’s failure in a court of law.

scott.wintner
Member
Bravozulu — What you’re missing is that the lack of legal action does not set legal precedent. Unlike in DOT route awards, etc., where the Department must analyze applications and render a decision that becomes part of the docket, DOJ declined to take action to block UA/CO or DL/NW. Because DOJ does not have to explicitly “approve” a merger (merely decline to file suit to block it), that kind of passive “approval” does not set a legal precedent to which the Court is bound in future cases. Now, AA/US can still argue the unfairness of the situation in Court (as… Read more »
Moochie
Guest

Holder DoJ. Amateur at best. What did you expect? These are the guys trying to hand the ebook market to Amazon so they can monopolize it later. Clearly idiots at the DoJ and it starts at the top.

Axelsarkiss
Member

Excellent post. Breaks it down beautifully; I’ve read around on the situation (Bob Crandall’s write-up comes to mind) and I’ve seen little that is for the DOJ that isn’t coming from, well, the DOJ.

Jim
Guest
The bottom line is that you have to draw the line somewhere. Obviously going from 10 major airlines to 2 is going to have a big anti-competitive effect. But if you go from 10 to 9, the difference is not that much. Then you go 9 to 8, the difference is not that much. You keep allowing mergers one at a time, because the difference is negligible, but before you know it you have lost half the airlines and competition is significantly reduced. At some point, the government has to say enough is enough. You need to draw the line… Read more »
MS0177
Guest

Being that this would create an airline about the same size of the ones created from last two legacy mergers, I would think this would be the last mega-merger. WN is a much larger factor than implied in the DOJ complaint, and there are the VXs, F9s, and NKs of the world keeping the big boys honest.

123
Guest

Who is to say that US will not stop the advantage fairs at any minute, of any day, regardless of the merger….

scott.wintner
Member
That’s certainly a possibility, but for all the reasons that DOJ details in the complaint, US is probably not likely to do so as a stand-alone carrier anytime soon for the same reason they instituted the practice in the first place: given their route network, with hubs that generate less O&D revenue than other airlines’ hubs, they have to make-up for that lack of fare “quality” with “quantity”. The practice was born out of a necessity and has done very well for US… why would anyone reasonably expect US to abandon a strategy that both makes sense and seems to… Read more »
123
Guest

@Ron the reason that US closed PIT was due to unfair pricing compared to Southwest. The city was trying to charge US more than WN for the same services. US called them on it, the city didn’t change their plans. US took their ball and went elsewhere.

123
Guest

Ron, US pulled out of PIT due to unfair fee policies compared to their competitors. WN was pushing for service into PIT, PIT gave them cheaper access than US. US called them on it, PIT held their ground, wanting to create an unfair environment. US took their ball and went elsewhere.

Bonnlass
Guest

Why hasn’t anyone looked at the fight in Charlotte over the City’s control over Douglas by Jerry Orr and the cozy relationship with Doug Parker to a lid establishing a Municipal Airport Authority?

mirabella
Guest

Weil Gotshal vs. Skadden Arps. Who will win? Tracy Hope Davis vs. the UCC. Who will win? Tom Horton vs. Doug Parker. Who will win?

political_incorrectness
Guest

CF, if I were US and AA, I’d probably hire you as a consultant. These two pieces on the DOJ arguments really tear them apart.

Some breathing room in markets would open up for the likes of B6 and VX. I think the DOJ is going to utilize its leverage on more slot divestures. Although it makes me wonder if they had to divest certains slots, would some smaller markets like those at LGA for DL lose out and then not have non-stop service or one less competitor?

Ryan
Guest

Excellent and intelligent post Brett. Once again, you remind me why I love reading your blog. You don’t settle for just giving your opinion. You back it up with logical arguments and support it with facts. If only the DOJ would do the same.

Bill from DC
Guest
From the states’ perspective, I see it as a negotiating tactic. Look at two recent precedents, Minnesota and Ohio… Both MSP and CLE extracted some fairly iron-clad job and service level guarantees from their post-merger airlines. Of course, these guarantees were partially the result of guarantees previously made by the pre-merger airlines in order to get the various municipalities to fund their capital spending at these airports. I don’t recall the MSP specifics but I do recall that the state of Ohio sued at one point in this process. Wonder if the Texas, Arizona, etc. AGs simply looked at these… Read more »
tharanga
Guest

I haven’t noticed anybody mention the role of the business passenger lobby. I think one of those interest groups has been pushing the inclusion of connecting-flight markets when assessing mergers. It sounds like those guys made very sure that the DOJ knew about this line of reasoning, which is probably a good part of why the DOJ is applying metrics they didn’t look at before.

scott.wintner
Member

As has been noted throughout this discussion, it’s simply not clear that DOJ has not previously included analysis of connecting markets when evaluating proposed mergers.

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