The shock of the year was delivered yesterday when the US Department of Justice (DOJ) announced that it was suing to stop the merger between American and US Airways from going ahead. While I think everyone figured that there would be some concessions required at slot-restricted Washington/National airport, nobody predicted that the DOJ would really try to block this in its entirety. The response has been nearly unanimous — this is insane. And for that, the DOJ has earned itself
a Cranky Crazy Jackass award.
The Merger is On Hold, Temporarily
Let’s start with what this means for the merger. The DOJ has decided it wants to block the merger, and to do that, it has to file a lawsuit. That is what happened yesterday. There will now be a million meetings back and forth seeing if they can hammer out some sort of agreement around concessions to get the DOJ to withdraw its lawsuit. If that happens, then it’ll be back on track. If it doesn’t, it’ll go to court, and they’ll have to fight it out. That could take months.
Why is this happening right now? Well, the bankruptcy judge was about to approve the merger at a hearing tomorrow, so DOJ had to act now if it wanted to butt in. It did. This could mean that they just wanted more time to conclude an agreement with the new American, and this is the way to do it. But the wording that’s coming out of the DOJ right now is so strong (read this transcript) that they are trying to make it clear they want this thing called off. Of course, this is Washington so you can never take anything at face value anyway. It could just be politics and negotiation. The only thing we know is that the merger isn’t closing in the next couple weeks. They’ll be lucky to get it done by the end of the year, if at all.
Sloppy Arguments
If you’d like, you can read the 56-page complaint filed by the DOJ here, but I might recommend against it. Personally, this lawsuit bothers me a lot. Why is that? Because when I see the government delve into something that I actually know about, and I see how absolutely amateurish and inaccurate the arguments are, it makes me lose faith in our government’s ability to do anything.
There are several arguments being laid out, and I’m going to post tomorrow with a point-by-point review. But the DOJ really seems to have outdone itself this time. I like the first impression from Jamie Baker (analyst with J.P. Morgan).
While we’ve not thoroughly digested all the legal merits of a proposed suit(s), our first interpretation is that DOJ has significantly altered its usual [mergers and acquisitions] analysis to introduce connecting markets and baggage fees into its calculus. As such, it is difficult for us to imagine how both parties could offer any meaningful regulatory appeasement.
It really does appear that DOJ has gone off the rails. The best way to sum up the argument is that airlines should all be punished for trying to be successful enterprises. The complaint is filled with talk about how capacity has shrunk and fares have risen. They think this merger will result in more of the same. But what they’ve failed to recognize is that the airline industry of the past was a sickly mess. You had too many cooks in the kitchen and some of them had the cooking skills of a 12-year-old. So airlines pushed in too much capacity just to gain market share, then they had to discount fares and nobody made money. It was a mess.
Apparently the DOJ likes that plan. It’s sad to think this is how the government looks at private industry. If you want to decide that the airline industry is a public utility, then go all-in and fully regulate it. (Fares will rise, but I would respect the argument.) Otherwise, this nanny-state-style semi-regulation will keep the industry from ever becoming truly healthy.
A Lawsuit That Will Do the Reverse of What It’s Designed to Do
What makes this worse is that all the other big mergers have been approved. Delta and United are now so much bigger and have so much more coverage than either American or US Airways, that they are in a different class. Neither American nor US Airways can adequately compete with those two alone. So by denying the ability for American and US Airways to become one, DOJ is actually hurting competition by ensuring that there are only two competitors at the top instead of three.
What I find really frustrating is how the DOJ seems to have decided to take some arguments at face value while refuting others, solely because it helps their complaint and not for legitimate reasons. They have no problem accepting historical statements from American and US Airways that they’ll be fine as standalone airlines. DOJ applies no rigor to see if that’s actually the case. But they refuse to accept the merger arguments being made by both airlines. That doesn’t make much sense.
I do believe US Airways can survive as a standalone airline; a niche carrier that earns less revenue and therefore has to keep its costs lower. That means labor gets paid less, so they don’t really like this plan either.
I have a more difficult time imagining American surviving on its own. It simply can’t provide the breadth and depth needed to compete with Delta and United (once it gets its act together) on a global scale. What’s more, the very plans to provide substantial capacity increases (praised by DOJ), are misguided and likely to hurt not just American but the entire industry, if seen to fruition. If American remains under current management, I do have concerns about its ability to succeed in the long run.
But is that really for DOJ to judge? If the two airlines can combine to create a better, more profitable company, then that should be their prerogative, assuming the anti-competitive effects aren’t too great. DOJ has used flawed analysis to try to prove that this is anti-competitive, and I’ll show more about that tomorrow.
Something Smells
Ultimately, DOJ doesn’t want this to happen, and it’s hard to figure out why, exactly. Something doesn’t smell right. Maybe this will give the government a little good press in the eyes of the common man after so much bad press coming down the pipe? Maybe there are some stakeholders who really don’t want this to happen and have leaned on their contacts to make that the case? Or maybe some of those parties are trying to extract a pound of flesh before the merger goes through? Regardless of the motivation, what the DOJ has done is shameful. It has put together some half-assed arguments that are not supported by fact.
I’ll get into these arguments more tomorrow, but when the government decides to cut and paste screenshots from a specific flight search on a single day as evidence that fares are lower on one airline, it’s not even trying. (And it’s way worse than that, since the truth is the complete opposite when you look at DOT fare data.)
Where does this leave us? We sit and wait. With any luck, this will actually just be DOJ rattling its cage to get more concessions and we’ll have an agreement eventually. But the way they’re talking, we might be in for a long slog on this.
More tomorrow.
135 comments on “US Department of Justice Gets a Cranky Jackass Award for Its Lawsuit to Stop the US Airways/American Merger”
Cranky – I think your thoughts are spot-on and I had similar thoughts yesterday when I read the new release as well as the actual filing. In short, I just don’t get it. The DOJ allowed two similar mergers to occur (and one could make an argument that the Southwest/AirTran was also similar in that in combined the two largest “low cost” carriers) and raised few red flags but now AA/US is an issue? As you commented, this essentially ensures that United and Delta will maintain an oligopoly as 1) AA and US don’t have the scope or network to compete with larger DL and US and 2) the very survival of AA and US could be in question.
Hopefully this is just a lame attempt to flex some political muscle (and for our greedy friends in Washington to ensure competition and lower fares on their flights from DCA). Nonetheless, I think many of us agree that this interference just doesn’t make sense for the health of the industry. The filing made countless references to USAirways’ Advantage fares and the implication that fliers have a ‘right’ to cheap airfare. Maybe I’m in the minority but I greatly prefer frequent flights on well-maintained aircraft with pleasant, professional employees who are dedicated to my safety. If that means my ticket costs a few extra bucks, I’m OK with it. Let’s hope this is resolved quickly as I’m hoping that AA remains a strong competitor in my hometown for years to come.
Cranky I would not call you an industry expert but a person who gives his unexpert opinion about the industry. I have 20 years experience and beg you to be objective let this play out in the courts. Are you pro USAirways by any chance. Most AA employees want nothing to do with drunk Dougie or his hodge podge carrier us scareways!!!!!!
If you have 20 years experience, why do you write and sound like a 5 year old?
Please define your criteria/requirement for someone to be an industry expert?
Re: Drunk Dougie
Grow the hell up. This isn’t a union thug board, take that talk elsewhere.
Jumpseat – If you’re looking for objectivity, you’re in the wrong place. This is an opinion blog.
I think this raises an interesting point Cranky. Do you think that the unions are leaning on the Obama administration to block this merger? I suspect they may be the “stakeholders who really don?t want this to happen” you talk about.
Alex – No, not at all. The unions should be 100% behind this. Better pay for everyone and probably more jobs than if either airline stands alone. (At least on the front line.)
Hope it doesnt go through Cranky you get the ultimate Jackass award . AA employees want no part of Drunk Dougie bring on JetBlue or Alaska Hawaiian f
Sorry but you’re the one being the cranky jackass here. How can you say that AA employees want no part of this when the 3 major unions have all been onboard since the very beginning of this process.
Good analysis, Brett. What the DOJ action says to me is that DOJ hates Doug Parker. Remember the trouble they had with the slot swap?
The other thing this says to me is that DOJ is completely ignorant of the airline industry. The basis of the price increases in the past five years began with the price of oil. You are right that the airline industry was a crazy, stupid mess when it was ruled by gaining market share instead of profits. But you hit the nail on the head when you said DOJ liked the crazy, stupid mess because it meant lower fares. If they want lower fares then they should talk to the fuel speculators.
Looking forward to tomorrow’s column
Fuel prices yes, but also discipline in capacity growth as Cranky has noted in previous posts.
“If they want lower fares then they should talk to the fuel speculators.”
They did but a Republican congress and Democratic president (Clinton) overturned Glass Steagall and a Democratic congress and Republican president (Bush) put the commodities modernization act through.
The idea of letting the financial sector take over commodity prices were some of the few major pieces of bi-partisan legislation to make it through our divided government.
Brett – What do you make of the Texas and Arizona Attorneys General supporting the action? Was similar support shown for previous large mergers?
I think that would have been expected even without a DOJ lawsuit, particularly with AZ. No state wants to lose a corporate HQ. The TX support is a little more curious, but probably related to overall job reductions that are likely as a result of the merger. These seem more a case of putting on a show for the constituents who may be directly and negatively affected by the merger.
DC – Good question. The Arizona one makes sense, but the Texas one requires some ulterior motive. For Arizona, they don’t like that they’ll be losing a corporate headquarters. And depending upon who you talk to, some people think Phoenix will shrink. So Arizona likes the certainty of the status quo. The problem is now what happens if the merger goes through? Is the new American going to really feel like helping out the state of Arizona? It could backfire.
The Texas one smells like competitive politics. After all, Texas has a lot to gain in this merger. So why object? Well there’s another airline based across town that would certainly like to get its hands on more slots at National. Hmm….
Surely you can’t be serious… As comical as this lawsuit is it couldn’t be true.
I now truly understand why there’s so much complaining about the government. The only saving grace is that even if it takes months, the merger should still go through.
It is sickening that one of the highlighted routes in the DOJ argument was CLT-DFW. The idea that WN or NK wouldnt start that route the day it goes from 2 carriers to 1 and fares rise, is crazy. And the other highlighted fares for connecting markets don’t give dates for search or advance purchase. It is simply a snapshot with no context!
Lastly, hasn’t the total cost of flying remained fairly stable in real dollars in the past decade? Geeez! Even worse, with cost increases, the airlines have managed to do well. It’s sad that the government cannot distinuish between high fares and high profits. The airlines still don’t make 10% margin, and fares don’t equal yield!
I think DCA needs divestitures, but otherwise, this merger is no more anti-competitive than UA-CO and certainly WN-FL.
“Even worse, with cost increases, the airlines have managed to do well”
If they’re doing well then why merge? “Well” is good enough for me.
well for 1-2 years, maybe. Remember, when combined, since deregulation, airlines have lost billions. Worse, when they fail, the debt and obligations fall on other companies, workers, or worse, the taxpayer by picking up things like failed pensions. So no, “well”, over an extremely short time period of time is not good enough. Wiping out debt just to re-create it is not long term sustainable.
Worse, we punish an airline, AA which tried its hardest not to go into BK, and US (while no one likes Doug Parker), is trying to be profitable in an extremely challenging industry and has saved jobs when West bought US. We should allow the merger as it does not create a monopoly and it benefits most stakeholders, but ensure that B6, NK, and others are given preference for things like new slots at DCA and are able to grow and compete.
Check your heading: A Lawsuit “That” not “The”
Grover Jones – Thanks. Fixed.
You’re right about the airlines wanting to merge so they can be more profitable. An email has surfaced that said the main reason for the merger was that they could raise fares and thus make higher profits.
And that’s as it should be. Companies want to make money.
It’s just that pubic transportation is a little different than, say, making furniture or even a car. It affects us, the public.
Have you been to Cincinnati Airport lately? It’s big, centrally located, and a ghost town. In the ten plus years I’ve lived in the Lexington, KY area only one airline decided to try it out – they’re gone now. The changes and new routes can be counted on one hand in those ten years. In order to get to any major city one must connect through another.
Another fact is that, when AA and USair announced the merger, they said no it wouldn’t affect that many flights because there was little overlap. 12 flights overlap.
Turns out they were only talking about their nonstops. 12 nonstop overlap, but close to 1600 connecting flights do. I can guess what AA + USAIR will do to them.
If the stated goal of these companies is to simply make more money for their shareholders, why wouldn’t they do everything they can to accomplish that?
there’s absolutely nothing wrong with that; it’s just nice to know that the NON stakeholders in the companies have a voice in this.
Besides most probably this will simply make the airlines come back to the bargaining table and re-negotiate. This will result in a better deal.
What do companies do when left to their own devices? Why, try to make as much money as they can and the end justifies the means.
But don’t forget–many of those connections will still be available. Many of those customers will be given more choice where to connect. Many of those 1600 markets are not connections that the people would end up taking anyway. Just because US or AA puts a price in the market, does not mean it has any meaningful share on the route. A 3 stop itinerary for $300 more is not competition for 99% of the flying public.
The “non-stakeholders” you refer to are given access to a larger domestic and international route network. Even if capacity discipline cuts frequencies, cities altogether are unlikely to be dropped. A strong AA/US may even expand as it has sufficient scope to offer a bigger network.
I wish the DOJ would go after the legacies for slot-hoarding rather than complaining about prices when average profit is in the single digits.
@jumpseat…your rationale is immature and foolish…If AA employees were faced with the following choices 1) A merger with US Air and a job or 2) no merger, no job, i think that is a pretty clear choice.
Brett did a great writeup of a horrible analysis on behalf of the government, who certainly deserves an award for sheer s….p…ty. There are a lot of individuals who think that airline mergers=higher prices and less competition, and while there is some historical truth to the idea that airline companies do collude to raise fares, add fees, etc. But the bottom line is that if an airline is not making a profit, it is making a loss, and as a business, they must make money to survive. on a second note, where was the DOJ when Delta/NW or United/Continental merged..hmm.. cannot have it both ways…if the case goes to court, i have little doubt that USair/AA merger will prevail over the government, especially if it is escalated to the highest court(s), simply put, approving the previous mergers sets a judicial precedence that cannot be overcome with the illogical brief presented by the DOJ and the states. It does seem fishy that Texas and Arizona are involved in the lawsuit, yet North Carolina is not….
In the end, I believe DOJ should focus instead on getting concessions at DCA/other airports that are slot-restricted or have capacity limitations, which would allow carriers like Southwest, Jetblue, Virgin America to increase their presence..Plus the scale of the merger would allow the combined carrier to better compete(as noted in the article) with United and Delta, and having that ability would not inherently lead to higher fares. If the DOJ does not settle this matter in a timely fashion, it will just lead to further diluting the relevance of the DOJ, and clearly highlight the sheer incompetence of Eric Holder, who has been one of the most inconsistent/incompetent AG in modern history. Bottom line is the government needs to step back from this, remove the lawsuit and negotiate rather than attempt to dictate.
But what they?ve failed to recognize is that the airline industry of the past was a sickly mess. You had too many cooks in the kitchen and some of them had the cooking skills of a 12-year-old. So airlines pushed in too much capacity just to gain market share, then they had to discount fares and nobody made money. It was a mess.
Surprisingly the “health” of the market is not the governments concern, but rather whether or not it is competitive. I’ve never seen an industry where the consumers argue for being charged MORE ostensibly for some abstract concern about the “health” of the industry. The industry has been healthy despite the individual players being basket cases at times, and as a consumer, I could give a rip less whether or not the individual I am purchasing from is “healthy.”
Mergers and consolidations are just as much an interference as keeping them apart. By allowing mergers that result in artificially high prices, we dis-incentivize other areas where efficiencies can be gained, not through consolidation and capacity control, but through technology investment, fleet modernization, and actually listening to the customers. Customers satisfaction has not gone up despite airlines making a profit, and that is a sign that they are not making moeny due to any real innovation or concern, but through the artificial mechanism of starving capacity, soemthing allowed by air travel being an ogliopoly.
Agreed. Cranky missed the fact that Southwest was making money while the big guys were losing billions of dollars. While the likes of United, American, and Delta put the blame on the unions (instead of failed strategies that focused on market share over financial returns), Southwest became one of the largest union employers in the US and still made money.
By combining inefficient airlines and making them too big to fail, requiring bailouts every 5-10 years through bankruptcy protection, we aren’t doing ourselves any favors. I’m starting to agree with the DOJ on this one.
However, US and AA are both individually too big to fail as they are right now (both have or are going through bankruptcy), so how would combining them to make a carrier that’s more likely to be successful going to make anything worse?
Based on PanAm, TWA and all the major airlines I don’t think we have a shred of evidence that can support the idea that combining carriers will make them more likely to be successful. If anything it has been the opposite with profitable carriers merging or being absorbed into poorly structured mergers that lead to failure.
Based on DL/NW and US/America West, I’d definitely say that there’s evidence in recent years. Both airlines are quite profitable and doing better than either of their predecessors were in the few years before the merger.
PanAm and other mergers or failures were decades ago when the air travel market was very different. As for TWA, it was essentially absorbed into AA, and nobody was any worse off (AA did fine, TWA couldn’t have survived alone).
Sean S – The health of the industry should be the government’s concern because it has a direct impact on safety. Airlines that are under-capitalized or losing money are going to have more incentive to cut corners and defer maintenance items. They are also not going to invest at all in the customer experience.
We are just now starting to see what a healthy airline can look like when it’s able to invest in its product. Delta has been pouring money into improving the experience for travelers. And look at complaints? Delta is really reducing them dramatically. June 2013 was within reach of Southwest’s always-low level. It always gets worse during the merger, and United is still trying to get past that. But in the long run, it’ll be better.
Southeasterner – As for Southwest, it made money early in its life because it saw an opportunity where airlines were overcharging. It came in with lower fares and made a profit. But since the mid-2000s, Southwest has lagged. It got lucky with its fuel hedges so that kept profits inflated while others floundered. But once it had to start paying normal oil prices, it has done nothing but lag in profitability. Give it time and if Southwest doesn’t make changes, it’s going to be squeeze even further. In the meantime, Spirit has found a niche serving markets with higher fares. It’s the circle of life. If fares get too high, someone else exploits the opportunity to lower them.
Exactly. Southwest has lagged but when did they go through bankruptcy protection? When did they post billions of dollars of losses?
If they are charging at the marginal cost there is hardly a better example of what our expectations (as well as the DOJ) should be for airline results.
Of course mergers are going to take place in industries that have hit their peak and are starting on a downward business cycle, but the aviation sector in the U.S. is hardly a declining sector.
Liquidate AMR and let US Airways, Jet Blue, Alaska, Southwest and others efficiently fill the void.
The airlines are not too big to fail just yet and we need to make sure they don?t get to that point. I also did not support Delta/NWA, United/Continental or any merger that is led by a failed entity. Air Tran and Southwest didn?t hide under US bankruptcy protection so it made perfect sense for two profitable entities with efficient operational histories to merge.
Southeasterner – Southwest is on a completely different timetable from the legacy carriers. Let’s back up. Back in the 1980s and early 1990s, the old lumbering carcasses were guys like Pan Am, Eastern, and TWA. Airlines like American and United were innovative and came up with ways to shoot the old guard out of the sky. Over time, they grew into the old guard with bloated costs while new guys like Southwest stepped in. Had these airlines been allowed to fail instead of reorganize in bankruptcy, then other airlines would have risen to take their place. It was the same kind of thing. But those new airlines would look a lot like the old guard looks today with lower costs fresh out of the bankruptcy spa. And guess who the old guard is? Southwest with its high labor costs and declining margins. Southwest hasn’t filed for bankruptcy yet, but just give it a few years.
I still agree with everyone that says the bankruptcy laws are too lenient. But if not American or United, some other airline would have come along to do the same thing.
Airlines that are under-capitalized or losing money are going to have more incentive to cut corners and defer maintenance items. They are also not going to invest at all in the customer experience.
You really show your ignorance here Brett. How exactly is an airline supposed to defer maintenance in a highly regulated environment where maintenance checks are required at specific, regulated frame hours? If you mean maintenance of their coffee machines, yeah, probably, but of the actual guts of an airplane? Absurd.
Companies that bleed money will go out of business, and their routes taken over through competition, not through artificial capacity constraints. The reality is that the major three have little to no interest in competing with each other in any substantive way that results in the price boat being rocked. This is collusion in spirit, if not in fact.
Sean S – So are you suggesting that the safety regulators are achieving 100% perfection? I can show you several books and plenty of examples showing how that’s not the case. There are plenty of examples of airlines in the past that have cut corners. Just look up ValuJet’s history. You can also look beyond direct safety issues at the Minimum Equipment List. Airlines in trouble defer more and more stuff because they can’t afford to fix it. Look at US Airways before America West took over.
Or look at the pre-merger United airplanes that were neglected, most notably the 747s. Are they flying in an unsafe manner? Probably not. But they are taking a ton of maintenance delays and cancellations instead.
I strongly suspect there is something else going on here that we aren’t seeing. The fact that Texas’ AG Greg Abbott, who wouldn’t in a million years be on Eric Holder’s Christmas card list, is in on the action raises my suspicions even further. I haven’t heard anything through the local grapevine, but I’m suspecting that someone influential (more likely several influential people) in the DFW business community either got wind of something and/or didn’t get the answers they wanted to hear from Doug Parker, and so leaned on the powers that be to throw sand in the gears of the whole thing until they could get a more favorable answer. It will be interesting to see how all of this plays out, that’s for sure.
MeanMeosh – My money is on Southwest. They want more DC slots and leaned on Texas to get them. Would make sense, right?
That’s a strong possibility. It’s no secret that WN has been in better graces with the state and local politicians than AA, so this could well be just a case of Gary Kelly calling in the posse to hinder and delay until he can get a bigger bone thrown his way. But I get the sense that there’s more to it than that. The Metroplex power brokers have been unusually quiet about the merger. It could just be WN pulling favors, but I just have this feeling that US couldn’t get all of the bigwigs on board for whatever reason.
The great irony is, if WN is behind this, they would have arguably been the biggest benefactor if service levels did decline out of DFW, regardless of whether they can extract some slots at DCA or not, since they’ll soon be able to compete nonstop out of DAL. Classic case of cutting off your nose to spite your face, if that is indeed what’s going on here.
> “There will now be a million meetings…”
I was under the impression there had already been meetings before the suit was filed. Is that not the case?
I can’t see AA wanting to fight this. They need to exit bankruptcy proceedings ASAP and move on, not sit in court forever.
I think they will definitely fight this. A major part of their reorganization plan, which has to be approved by the bankruptcy judge, is to merge with US Airways. The DOJ action is going to delay their exit from bankruptcy now, and they will sure as hell fight against that.
Nun – Yeah, there were definitely discussions. But I wouldn’t expect those to stop now. It will be interesting to see what the judge says tomorrow. I don’t see how he could approve a reorganization plan without it actually being able to happen in reality. But there is no official standalone plan in front of the court anyway. So there will need to be time no matter what. In the meantime, I have to assume US/AA will continue to push hard on getting this done. But at some point, time will run out, I’d think.
The way the DOJ is sounding it looks like they don’t expect to settle anytime soon. If an agreement is not reached soon and they go to court, then I’m afraid this deal is off. As you say CF, American cannot sit in bankruptcy forever. These types of lawsuits can take years–especially with appeals, etc. If it goes to court, this will certainly go well into next year. The DOJ in effect forces the merger to be off–at least under bankruptcy.
One thing that is happening here is clearly a Democratic vs. Republican administration. The Obama administration has been quite aggressive on antitrust as of late–e.g., Apple (Ibooks), ATT & T-mobile. One reason United wanted to merge in 2008 was to do so before Administrations changed as they saw the Bush Administration much more friendly to these types of mergers.
United may have wanted to merge in 2008 under the Bush administration, and had discussions with both CO and US. But it didn’t happen then. UA+CO and WN+FL both happened under the Obama administration.
Well put, Brett. I guess the DOJ wants to keep the airline industry in continual bankruptcy.
Sounds like some people in DC got screwed one time by AA or US so don’t want to make life easy for them.
Since AA/US don’t have large hubs in the same city, and except for the DCA issue there shouldn’t be a problem with a merger. If there were no issues on service/fares with UA/CO or NW/DL then there wouldn’t be with AA/US.
The cynic in me sees this as a bid for more campaign contributions for the 2016 election cycle.
“So airlines pushed in too much capacity just to gain market share, then they had to discount fares and nobody made money.”
Umm except of course Southwest who is the second largest domestic airline in terms of seat-miles.
I think the concern may be that by propping up Us Airways/American, Delta, and United you are encouraging inefficiencies and preventing more efficient airlines (the likes of SWA) from entering the market.
It is a BS lawsuit. They let the last few ones in, but not this one? Of course, SW will whine and end up getting more precious DCA slots out of this, because people still believe all the PR that Southwest is the best, blah blah blah…
You could not be more wrong Brett, in this case. I like your tweets and your opinions usually, but too say that allowing another mega merger is good and that this will be good for customers is so screwed up. You are listening to opinions of analysts that have stock in the game make these opinions, ands instead you should use your own logic in your head. Allowing US Air and AA to merge creates one LESS airline, its that simple. All the gates between the two, all the slots between the two will be combined to one. There will be massive job redundancies that will be eliminated, and of course since there will be only one airline instead of two competing for some of the very same routes there will be less price competition. I dare you to refute this..You can’t. So instead of listening to some ahole stock analysts that want a merger for their own gain, use common sense, otherwise you risk being exposed for an idiot. (Which at this moment I don’t think you are, yet).
But, without the merger AA would probably go out of business.
And you end up with one LESS airline (and lots of people out of work)
If the merger goes through, and airfares go up, the ultra LCC’s will take advantage and create more competition, or someone will start up a new carrier. That is how the free market works.
If that were true, you’d be correct. However, there’s no evidence AA couldn’t survive alone. In fact, it was AA’s preference all along to remain a stand-alone carrier and grow on its own without consolidation. The whole merger was pushed by US. DOJ cites AA sources as confirming as much. While those AA sources may be deluding themselves, that’s not DOJ’s problem.
It’s nearly impossible for a new-entrant carrier to compete in the market today — largely due to the “CMI” factor that the DOJ cites in their lawsuit.
In simple economic terms, the principles you state here are sound… but in the real marketplace, those principles don’t hold-up due to complicating factors.
In another odd moment a-typical of CF, the pull quote from JPM analyst Jamie Baker was completely out of left field… it has nothing to do with what CF was writing about where that quote appears. Baker’s comment, simply, was that the nature of DOJ’s complaint will make it hard — if not impossible — for US/AA to offer-up concessions that appease DOJ’s concerns. Baker does not pass judgement on DOJ’s action, which is what CF was doing in the context he cites Baker. Very odd.
Rob – The simple fact is that a merger will be good for some consumers and bad for others. Some cities will see more service while others will see less. Some fares may go up, others may go down. US Airways fliers will begin to see more American-like amenities. American fliers may see higher fees. There is no merger where everyone is happy. Now, a lot of people like to focus on fares and use that as the only judgment for a merger being good or bad. That’s just a small piece of the equation.
The reality is that you have two big guys who can compete with each other today. Then you have US Airways and American which really can’t. If you combine the two, you have a third competitor which brings great utility to a lot of people around the US. It’s a good thing.
Scott @ DTW – Maybe I didn’t connect the dots well enough on the Jamie Baker quote. The law hasn’t changed on anti-trust reviews, so the fact that DOJ has decided to use a completely different analysis this time around is crazy. You may not think that Jamie was giving an opinion, but it shines through pretty clearly in my opinion.
I don’t get the sense from this particular quote that Jamie is condemning DOJ’s action in-and-if-itself, so we do disagree there. He could have directly stated that DOJ wrongly applied a different standard to US/AA than it had in past merger cases — he did not. Even if he had, I don’t necessarily agree.
When NW/DL merged, there were eight major airlines (I’m including WN and FL, as at least WN cannot be considered anything BUT a major carrier in the US today). When CO/UA merged, there were seven major airlines. When WN/FL merged, there were six major airlines. Now, US/AA want to merge… taking the industry down to five major carriers. So, the situation was different each time… and the shift from eight to seven or seven to six isn’t the same as six to five. It may be unfair, but timing is everything.
If I’m an executive or shareholder in DL or UA, I’m really happy right now because they duopoly they have is safe.
Merger is good for everyone in the industry. That is why DL and UA stocks got hammered on the news. So I don’t think the shareholders were happy.
Let me say the Delta / NW merger should have alos been stopped and so should the Continental UA merger. So yes AA will be smaller, along with USAIR, so what! each of these companies will be able to make money, even smaller than Delta and UA..They each control larger market segments, and that can continue regardless of if some AHOLE institutional investor gets his stock bump from a merger. People this is all just Wallstreet BS, nothing more. Competition is always better than less competition, except on Walstreet, where collusion and manipulation are always better than honest business and competition. You can make all these granular arguments about this or that the DOJ stated but in the end more competition is ALWAYS better, period..
Agreed. Using the DOJ argument, which I don’t 100% disagree with, all the mergers should’ve been stopped as there is ALWAYS overlap and it technically reduces competition.
Think about it, if all mergers post-deregulation never happened I don’t think the airline landscape would be all that different. Poorly run airlines would fail – go CHAPTER 7 – and the healthy airlines would pick up their assets.
Not all that long ago AA was the “biggest” airline and the only legacy not in bankruptcy. Without the INSANE bankruptcy laws we have in the USA American Airlines would be the top dog as NW, DL, UA, CO, et. al. wouldn’t exist.
I’m all for a free market in airlines but lets not kid ourselves that we have anything resembling one when airlines have been using bankruptcy law to gain an edge over competitors over the past 30+ years. Sure, mergers are ok in a true free market, but what we have here is gov’t picking the winners & losers with an illusion of uncle sam being out to protect the little guy. Might as well go back to regulated airlines IMO.
A – I don’t disagree with you at all on bankruptcy law but the outcome wouldn’t be much different. You’d still end up with healthier airlines taking over failed airline assets. In the end, you’d still end up with fewer, bigger, stronger players. It might not be the same ones we have today, but I don’t think the outcome would be much different.
If this merger doesn’t go through, I tend to think that might be what happens in the long run here. Without a management change, I remain very skeptical about American’s ability to succeed. So maybe several years down the line, other airlines pick up the scraps.
“The best way to sum up the argument is that airlines should all be punished for trying to be successful enterprises.”
Holy crap. Thank you. That has been screaming in my head since yesterday!!
Cranky is way off base on this one
The Anti-trust law is complex, but as a student of the law and the industry this is needed. The is not a speed bump. AA and Us air will make it on their own. Any mergers will ow be small carriers. The drop to a big 3 from a big 5 is major in any industry.
Terry – You’re a student of anti-trust law? Excellent. Can you explain what this violates?
That is such a faulty argument, it just stinks of stupidity, I disagree completly Mike… Success is not simply merging two already large companies just so that they don’t have to compete against each other, so that you can artificially raise prices and restrict resources.. America defines success on Wallstreet standards these days, as you have chosen to do. Wallstreet is hardly an honest,trustworthy entity these days. There are NO shortcuts to success, there are only schemes and manipulation that always ends up screwing someone, in this case higher airfares FOR SURE. If one of these airlines really wants to be successful, they should introduce something new, that is awesome that everyone wants and sell the hell out of it. That is what we used to call innovation, something completely lost on Wallstreet and the CEO’s today. Instead its all about quick bucks and short sightedness, and of course smearing everyone that gets in your way, in this case the DOJ for doing its JOB!
I rarely disagree strongly — if at all — with CF, but this post lacks CF’s usual sound logic and reason.
“The best way to sum up the argument is that airlines should all be punished for trying to be successful enterprises.” So, Congress was punishing American enterprises for being successful when it passed the Sherman Act in 1890? Of course airlines will do whatever they can to grow profits and return value to shareholders — which is why it’s so critical that our government function as a counterbalance.
It was one thing when the airline industry was teetering on existence. Then, you could reasonably argue that airlines needed to merge, reduce capacity and raise prices to the point where they could survive. I was the first to defend such moves, despite how unpopular they were among travelers who had become used to getting something for nothing while the airline industry was in a race to the bottom. But, that hasn’t been the case for a long time now… and that argument is now tired and irrelevant.
Now, you could argue the timing — why now, and why not protest the past several big mergers? But, CF didn’t. And, by suggesting “Neither American nor US Airways can adequately compete with [Delta and United] alone”, CF provides no evidence (while the DOJ, for its part, cites statements from both AA and US execs, be they true or not, self-proclaiming that they could effectively exist as stand-alone carriers in today’s marketplace… albeit perhaps not as profitably as combined).
I’m not defending the merger or DOJ, but this post was a sloppy rant at best. I look forward to tomorrow’s point-by-point analysis, because after reading the entire complaint, I caught nothing patently false in it.
I think breaking up true monopolies like Standard Oil and US Steel is a bit different than this case.
If the merger goes through, there will be 4 large players in the domestic market (AA, UA, DL, WN) to go along with some smaller players (Alaska, Jet Blue, . . .). If a marketplace (here, the domestic airline industry) has 4 competitors + others, I fail to see how it is anti-competitive. If the DOJ is upset about airlines colluding now, how does that change by not allowing the merger to go through?
Scott @ DTW – I have plenty of facts and figures for you tomorrow. This was meant to be more of a rant because trying to squeeze everything into one post was going to make it way too long. But I think comparing this to a true monopoly is silly, as Joe notes. There are still multiple strong competitors, and none of them are making outsize profits.
Joe – A very good point on the collusion piece. There are a bunch of examples about how airlines have tried to signal in the past but little evidence that this merger will change anything about that.
I’m sorry — we just disagree here. Even Virgin America is making money now. I’m not suggesting the airlines have necessarily become TOO big, but they don’t have a strong case for why they need to become so much bigger.
If you think this AA/US merger is going to be the last, you’re kidding yourself. Delta, having moved from first to third, is now in a position where acquiring another carrier is going to be very appealing in terms of its ability to further consolidate competition in order to drive profits up even further. Yet, Delta is already reporting double-digit profit growth. Where do we draw the line?
CF & Joe — I think the Sherman Act comparison is totally apt. It’s extremely difficult, if not virtually impossible, for new entrants in the airline industry to form at all — let alone compete with the majors. That’s because the incumbent major carriers are strong enough that, collectively, they have the ability (be it political clout, market share/pricing power, capital, etc.) to force-out such new competition (which they routinely do through behavior similar to what’s detailed in DOJ’s complaint). That’s exactly the kind of behavior that Rockefeller and Carnegie were engaged in that prompted the antitrust movement.
How many firms there are in one industry is really irrelevant — it’s how much power those firms have to protect their own interest at the expense of a free market.
Scott – you state that Virgin America is making money and then go on to say that getting new entrants into the market place is too difficult. It would seem by saying that Virgin America is profitable, they have been successful recently. Free market does not mean it can’t be difficult to enter the market place. The domestic airline industry is a rather mature market place.
Standard Oil and US Steel used their power as a monopoly to reap huge profits at the expense of the consumer and their employees. If a US airline is successful, they have profit margins in the single digits. Are they fleecing consumers with those profits? Note that Apple and Microsoft typically have profit margins > 20%.
A free market is one that driven solely by supply and demand. Airlines constraining supply to bring it into line with demand is exactly what a free market is supposed to do and what a merger will accomplish. Now, if you want to go back to regulated airline industry, that’s a whole different discussion.
Joe, airlines are currently constraining sup[ply to artificially raise fares in many markets. You appear to be knowledgeable enough to recognize this. Good for consumers? I don’t think so. Great for the merging mega airlines? You better believe it! ONLY meaningful competition can slow or lower this pricing tactics.
IF monopolies do win the day in the day, then YES, regulation should be brought back to protect consumers.
Scott @ DTW – Which airlines have been forced out recently due to anti-competitive behavior from the big guys? I haven’t seen any (at least none that are legitimate contenders for success) in years. Sure throughout history there have been plenty – think of Legend in Dallas or maybe Vanguard, etc. But ultimately if you have a good plan and are well-capitalized, you can find your niche.
You use Virgin America, though that wouldn’t be my first choice to show success. What about Spirit? Allegiant? JetBlue? Even Frontier makes money these days. There haven’t been a lot of recent attempts at new entry, but the smaller carriers are the ones that are thriving the most these days.
Mike, “currently constraining supply to artificially raise fares?” They’re doing this to eek out meager profit margins. What do you want them to do? Lower fares so they can lose money and go out of business? I don’t think that’s good for consumers. Look, I want cheapo fares as much as anybody else, but if you get those rock bottom fares, you get an unhealthy and unstable industry. In the long run, a heavily fragmented and inefficient airline industry is not good for consumers, even Consumer Mike.
It is refreshing to finally see there are others, such as Rob and Scott, who also follow Cranky, have not bought into the mega merger mania in different industries over the last few years. Banking, Oil, Wall Street, Broadcasting AND Airlines. I think that, in this case, Cranky should have awarded himself the “AWARD”. As CF has stated, his blog is for voicing opinions on different airline issues. So, here is mine:
At times I feel that for some reason Cranky sounds like a cheer leader for Parker, CEO of US AIR. If anyone really needs this merger it is Parker. Why does Cranky say it is “insane” to challenge the proposed mega merger? Although he does work in the airline industry and should have the knowledge he says he has, he says that he “looses faith in government” when a decision he doesn’t like is made? I believe government should work for the benefit of the People. I have NEVER agreed with the latest anti-competition mega merger action initiated by Parker, who started to undermine AA management at the outset. In spite of Cranky quoting a Wall Street voice from one of the original monopolies (JP MORGAN) and using phrases such as “…punished for being successful enterprises.” in his blog – I might add that this phrase is something out of the past when the monopolies of the last century were defending themselves in court – makes me believe that Cranky puts corporate greed over consumer protection. True or not, his blog has left a distict flavor of his thinking and bias in these matters. Personally, I do not read his blog as anything but opinionated in this matter, rather than informative. It appears that he is trying to sell us on the “benefits” of monopolies”. John Rockerfeller (of Standard Oil fame) would have been proud of him.
I am very happy to see the government FINALLY doing the job of protecting consumers. That is NOT to say that the mega mergerr will, in the end, not happen. BUT, it would happen differently. Natually, I would be VERY pleased if it NEVER happened. The states of PA, TX and AZ, for different reasons, also reject the merger – and rightly so. It will cost jobs, deny service to smaller cities, limit or eliminate competition, raise fares, etc. As consumers, we should ALL be pleased that the government has finally woken up, no matter what the reason. Better late than never.
It appears that Cranky has taken humbrage with the examples of fare hikes used in the government debate. I can assure you, that those of us who have traveled over the last year have seen a NOTICEABLE increase in fares, especially in markets which have lost true competition.
Cranky has promised us additional comments regarding his “Kiss of Death” opinion of the Mega Merger objection by the DOJ. One can only hope that his future comments will be less biased, more evenly informative and less soothing to characters like CEO Parker. In his “..delve into something he really knows about” claim he should have been the first one to know that it never is over UNTIL the fat lady sings. This is why I think Cranky should have awarded himself the JACK ASS title this month.
This is my opinion.
The core American ideal of success is not corporatism, it is free market.
Kudos to the DOJ for not succombing to the Wall Street screw-the-citizen (so we can make money) mentality.
They definitely got DL/NW wrong UA/CO (remember those execs who went in front of Congress telling everyone how they would not reduce services to their various hubs? Nope, it was just a lie), but show that they can learn from their past mistakes.
And what’s this whining about the analysis actually reflecting the way people fly? I.e., by sometimes connecting and often paying bag fees? If they did not include this in prior analyses, then they were shockingly pro-airline biased incomplete ones.
Looks like somebody at DOJ is bucking for a promotion. I bet it’s that pederast Hanrahan.
Anybody who thought that this was pro-consumer have their head examined.
From the DOJ complaint:
US Airways also plans to institute its fees ($40 on average) for the redemption of frequent flyer tickets on American?s existing frequent fliers, who currently are not charged for mileage redemption.
“US Airways? own documents estimate that ?fee harmonization? would generate an additional $280 million in revenue annually?directly harming consumers by the same amount.” The complaint explains that by “fee harmonization” they meant increasing fees charged to consumers.
>> But what they?ve failed to recognize is that the airline industry of the past was a sickly mess. You had too many cooks in the kitchen and some of them had the cooking skills of a 12-year-old. So airlines pushed in too much capacity just to gain market share, then they had to discount fares and nobody made money. It was a mess.
Nobody compels you or me to buy airline stocks or bonds.
Guaranteeing investor’s returns in a particular sector is certainly not the government’s business. Maintaining free markets everywhere is.
The DOJ is specifically charged to ensure a competitive, free marketplace. They are doing their job in this case and the finally did it right. They should never have allowed the last two mergers either.
But can AA survive on its own with it plan of large capacity increases, a plan that has routinely failed in the past? If AA goes down and US is marginalized because they are unable to compete with UA and DL, has a competitive marketplace been achieved?
AA looked to be doing well under Ch11 before Parker became involved – if not for the merger they would be well on the way to exiting bankruptcy protection, if not already.
It will be interesting Horton’s take on this.
When I heard about the DOJ filing suit I laughed. Being now quite cynical lately about this government in general and this administration in particular, I immediately concluded that this is ‘thus politics’ at work. This is extortion, plain and simple. Someone, somewhere is looking for ‘something’ . The administration has simply no clue how this works and is being a bully. (thought they had a campaign on against that) What they don’t have the mental capacity to grasp here is that if this merger doesn’t go through, quite possibly, AA can go out of business totally. Then, please someone tell me, what impact would that have on competition? Holder, et al, need to back away and let this happen. (BTW I am neither a fan of AA or AW)
You could not be more wrong about this. You are totally uninformed about how the DOJ works and what they are charged by Congress to do. You make it sound like the White House is pulling strings here when one of the main jobs of the DOJ is to make sure the marketplace remains competitive. Having 5 carriers is MORE competitive than 3. I dare you to dispute this. Hence the intervention by the DOJ. Wall Street would have you think this merger is just the free market operating, but this is nothing more than some rich investors trying to further monopolize the industry, to squeeze resources and raise prices. Thats not competition, that is what we call Collusion. The Delta / NW merger and the UAL / Continental merger should also have been stopped, as it is we have too few competing airlines in the US. This I fault the DOJ for..
Rob – Having 100 carriers is more competitive than 5. So we should break them all up and give each airline one route, right? How have you decided what the right number of airlines is?
How have YOU decided that the right number is one fewer than the number we have today? I hope to find that answer in tomorrow’s post.
Scott @ DTW – You aren’t going to find that answer in tomorrow’s post. If the DOJ wants to sue to stop a merger because there are not enough airlines, it has to prove that to be true. The responsibility lies with DOJ and I have seen no proof.
Yes, we must have the government bring back Western Pacific, MarkAir, Midway, National(2), Pan Am 2, Pan Am 3, Braniff 2, Braniff 3, Independence, SilverJet, Legend, Air One, McClain, Western 2, HootersAir, JetTrain…etc. Oh, and while we are at it, the Feds should donate startup money to California Pacific, TheCoast, AirGumbo, Northern, Crystalair and Family Airlines.
Because there is not enough competition, doncha’ know….
Rob: If it sounds like I think the White House is pulling strings then my message did get through, 5×5. The DOJ in consort with the White House has been acting more like a criminal activity created and bred in the Chicago ghetto then the professional guardian of the US Constitution. Shame on them both
sorry, that should have read “thug politics”
I was losing sleep last night worrying that poor Cranky might not be able to find a topic for today’s post.
Ahh, I’m feeling better, now! Shouldn’t have worried.
And of course he’s got that little princess to take care of, but “why is Daddy running around kicking and screaming again? Must be one of those nasty commenters questioning his experience again, I suppose!”
Cranky, while I respect your argument, I have to say that your first point is a bit off. The airline industry of the past was a sickly mess, but at the moment it is quite healthy. Most if not all of the major carriers are turning a profit (even Virgin America!) and the industry as a whole is doing fine. It is highly unlikely that there is going to be another round of bankruptcies any time soon.
Jim – There are several points in history where you could say the industry was healthy. I remember in the last 1990s when everyone was minting money and Delta’s CEO proclaimed that airlines would never have problems again. Demand is good right now and capacity is low enough to keep fares at profitable level. Things can change that equation anytime so that’s why I look out into the future to see if I think there’s really stability the way it is today. I don’t. Others will disagree, but that’s my opinion, especially in regards to American’s plan as a standalone airline.
Cranky, you are certainly correct that the industry could change at any time. However, “we need to merge so that we can make sure we’re profitable in case there is another downturn” really isn’t a valid argument.
Arguing that the two carriers could exist profitably independently is actually NOT a valid legal argument stop the merger.
Jim – I didn’t make that argument. I’m simply refuting the argument that everyone is healthy so a merger isn’t needed. As alex says, this shouldn’t be taken into account during an antitrust review anyway.
FINALLY! Finally the government is putting the brakes on massive anti-consumer mergers.
Some call it a “nanny state” and whine about “gov’t regulations” of a quasi-utility, but the rest of us are sick & tired of the government ignoring longstanding anti-trust principles.
I just wish the government had grown a pair before United & Continental merged and destroyed competition in so many markets!
Well said, Brett!!
Prediction: If DOJ does stop this merger-watch them go after DL and UA and try to break them up.
We can only hope.
DOJ has no authority to “break up” an airline.
Jim, really??? The last administration-the pro bussiness Bush, and his Attorney General went after Microsoft and tried to break them up. Ultimately they lost, but the government has the power and authority to sue companies and break them apart-It’s called the Sherman Antitrust Act.
I agree completely Brett. I was sure when I opened up the article it was somehow going to deny the headline — but no such luck. I worked in the industry twice (WA & TW) and loved it, but fortunately didn’t get addicted to the smell of Jet A. I really think the broader issue that shows here is just how anti business this administration really is. They simply can’t help themselves with tinkering and puttering and trying to gum up the works. Hopefully sanity will prevail.
Anti-business? Considering the record profits and record share prices this has actually been the second best administration in terms of profitability for the fortune 500 since the great depression.
A complete opposite analysis appeared at millionmilesecrets.com today. I don’t have as extensive a post graduate education as he does, just your typical business school, but I find myself completely in the Cranky camp. Oh, and I had been traveling frequently for business for three years when the FF programs began in 1981. Remember, if you wanted all the points and miles, you bought a ticket then flew. All of them stated that they reserved the right to change at any time. Weak airlines? I flew Pan Am, TWA (a lot and redeemed a lot and was saved, maybe temporarily by their acquisition by AA) Swissair and others. Want to see AA disappear and U.S. become a budget wanna be? Stop the merger.
Shindig, I too was flying on business when AA started the FF program and others followed. At the time I used TWA extensively. What happened to TWA when Ichann bought the company and gutted the assets and selling it to AA was a disaster where everyone lost – EXCEPT Ichann. AA, who received MAJOR tax breaks after promising the moon to the government and many cities to maintain service/presence, then cutting service, laying off (screwing) most of the TWA personnel and keeping the cream of TWA. Granted, there were economic down turns which forced some of these actions.
I do not agree with your prognosis of AA or US AIR and believe life will go on, perhaps a little differently, but not the end of the trail for these two companies.
Bottom line: Don’t buy into the snake-oil sales pitch for seeing only glowing benefits from this highly marketed mega merger. Don’t fool yourself into believing the consumer will not get hurt. You’re flying on a fixed income will definitely be challenged.
Three cheers for the DOJ!!! Finally a voice other than those of the airline execs being heard. Listening to them brag about how good this merger will be for consumers is akin to foxes trying to explain why access to the hen houses will be good for the hens.
Cranky, another classic post for your book!
Can we agree that DOJ had to look at the situation, maybe not file suit?
The antitrust law is pretty clear at what DOJ has to look at, “delve into,” the situation, whether or not they may know as much as you do about it. Drives you nuts, I can see. Filing suit, well, they could have ended their analysis without doing that, of course.
I believe they are required to look into antitrust concerns as to:
“whether a proposal will likely create, enhance, or entrench “market power,” or facilitate its exercise.” “Market power,” as I understand it, is the “ability to maintain prices profitably above competitive levels for a significant period of time.”
DOJ voiced concern that the:
“merger would create the largest airline in the world and result in four airlines controlling more than 80 percent of the United States commercial air travel market.”
GAO said that to be an “effective competitor,” it has to control more than five percent of the market.
Great! Beyond that, few of us can agree on anything. Facts; analyses, you name it!
As to prices, I have no idea why any price exists, how it was developed, and what might be if this or any other merger took place. Airline pricing makes no sense to me and I believe one can draw any conclusion they might want to reach. Why is my fare so high? You mean they still are offering $99 transcon fares? Sorry, that was a minute ago. And, what will they look like if this merger or any merger takes place? Give me a minute…I’ll talk with Bob Crandall!
And, why any airline serves a city-pairs as they do, or will in the future, lot’s of luck. So 4 ailines control 80 percent, is that bad, good! Suppose Delta wants to take over UA, 3 airlines controlling 90 percent, is that bad, good? Should somebody file suit to stop it, or at least to warn any airline about even thinking about it?
Well, gives us all something to talk about, for now, and ’till…!
Interesting group of plaintiffs, to say the least. Peope, who don’t agree on much of anything. From Virginia, Republican conservatitive Attorney General Ken Cuccinelli, who’s running for Governor this fall. Someone you either love or hate. Wants government out of everything, except for…well, you know about it. From Pennsylvania, Democrat Kathlene Kane, Attorney General who won’t support the Commonwealth fighting laws the Right insists she must. Attorney General from DC, who I doubt ever agreed with the Commonwealth of Virginia on much of anything. Throw in Texas and Arizona…quite a group!
Looking forward to your futher comments.
JayB – Yes, agreed. The DOJ certainly needs to look at this, but they should be finding people to do the analysis who have a good knowledge of the industry. I would hope that’s what happens in every industry they review.
I want to talk about one point you made here:
Great. But where is the proof that airlines are able to maintain prices profitably above competitive levels? It’s generally accepted that airlines are doing well right now, but “well” with airlines means profits that are still tiny compared to what you find in other industries. There is nothing to suggest that airlines will suddenly find a way to gain incredible market power if there is a merger. If they do, then new entrants will come in to solve that problem. If they don’t (which I find unlikely), then DOJ would probably look to break them up. But I just don’t see it getting to that point.
Brett….A surprising turn of events. While I agree WN raised an eye at the DOJ news, I genuinely believe they do not have the horsepower to coerce or manipulate the DOJ into anything along these lines……..Now that the cards are on the table, what do you believe it will take in terms of AA/US concessions to appease the DOJ into settling (or, perhaps, abandoning) their suit? What will it take to make this go away?
Arubaman – Great question, and I don’t know the answer. The DOJ used some pretty harsh wording making it sound like they weren’t open to any kind of settlement. But that could also just be a negotiation. Certainly National airport is the one place where real negotiation can happen. Where else could they really extract anything? I mean, NYC? But that’s not a market of concern. Maybe somewhere internationally? There’s just not much that can be given up outside of DC.
Each merger is judged on it?s own merits, therefore forget about other airline mergers. This has to do somewhat with what is taking place now in the airline industry, i.e. the additional fees that have been added to passengers and millions of dollars a years that have generated by airlines over the past few years which leads to THE most important point.
The one glaring red-flag of this merger which USAIR is going to regret is the actions by their CEO Doug Parker who forwarded that email to a rival airline in an attempt to ?collude? with a rival airline about the triple miles promotion.
COLLUSION is an illegal agreement between two or more parties, therefore secretive, to limit open competition by deceiving or misleading.
That my friends is the one thing that the Justice Department does take extremely seriously and may be the straw that broke the camel?s back and differentiates this merger from all of the other mergers. When it comes to Anti-Trust matters, in any industry in the which involves collusion and the Justice Department is involved. It is the beginning of the end of any merger and not a negotiating tactic. That?s not an opinion. That?s a fact.
So when anyone wants to know why this merger is different than any other airline merger, or why this merger won?t go through, or in the end why this merger didn?t go through; they can thank greedy Mr. Parker for showing his true colors.
Billy D – That letter from Parker is certainly damning, but not to this case. He sent that from US Airways as a standalone airline. Does anything change if he were running the new American and sent it from there? No. It’s just another example of “evidence” being used that shows nothing about how this merger would make the industry less competitive.
Now, if they decided to bring up collusion charges as a separate issue, that’s a whole different story. But it has nothing to do with this merger, and it’s pretty unlikely.
I’m sorry; here are the details of the email:
Doug Parker is alleged to have forwarded an email to a rival airline CEO about how bad a ?triple miles? promotion was for the airline industry profitability. I was shocked to read this because many large companies make it VERY clear in their training to employees that such attempts to collude could be potentially illegal.
In 2010, one of US Airways? larger rivals extended a ?triple miles? promotion that set off a market share battle among legacy carriers. The rival airline was also expanding into new markets and was rumored to be returning planes to its fleet that had been mothballed during the recession. US Airways? CEO complained about these aggressive maneuvers, stating to his senior executives that such actions were ?hurting [the rival airline?s] profitability ? and unfortunately everyone else?s.?
US Airways? senior management debated over email about how best to get the rival airline?s attention and bring it back in line with the rest of the industry. In that email thread, US Airways? CEO urged the other executives to ?portray these guys as idiots to Wall Street and anyone else who?ll listen.?
Ultimately, to make sure the message was received, US Airways? CEO forwarded the email chain?and its candid discussion about how aggressive competition would be bad for the industry?directly to the CEO of the rival airline. (The rival?s CEO immediately responded that it was an inappropriate communication that he was referring to his general counsel.)
Translation: Doug Parker pushes the envelope to get other airlines to not compete and maintain overall industry profitability.
Good Info Billy D! Honest Abe Parker will do or say whatever it takes to get what he wants. Yet, there are people who can see him do no wrong. He and Ichann come from the same cloth.
Cranky,
I’ll probably end up agreeing with you on the details, but I have to disagree on how you’ve packaged the big picture.
First off, it’s just silly to complain about “semi-regulation”. This is meaningless, because pretty much every industry is going to be “semi-regulated”. Every industry is going to have to abide by rules regarding safety, health, environment, collusion, fraud, anti-trust, etc etc etc. So the question is always whether any particular regulations are smart, not broadly whether we should be fully regulated or semi-regulated or unregulated. The way you posed it is more emotional, and simply does not lead to intelligent analysis or discussion.
Second, you’re approaching this from an airline’s point of view. You’re accusing the DOJ of not understanding an airline’s motives, basically. But perhaps you should go back and see the DOJ’s function. In the laws that govern these things, is the DOJ even supposed to weigh the commercial benefit to the airlines against the reduction in competition and assumed increase in consumer prices? I don’t know, but if you’re complaining about what DOJ did, you really have to go see and understand the laws that tell the DOJ what to do.
By the way, what does Tennessee have to do with anything? I don’t see why they got involved.
tharanga – When I’m talking about semi-regulation, I’m referring to the commercial side of the house. I’m not talking about safety, health, environment, etc. Those are and should be heavily regulated. (Many will say they aren’t regulated well enough.) But on the commercial side, there seems to be an interest in regulation far more than there should be.
As for Tennessee, I have no clue. Same with Florida.
The other side of the coin that I listened to on NPR today and from what I have read elsewhere is simply the fact that this is seen as even more consolidation and US Air having close to a monopoly on DCA due to holding 70% of the slots. Since airfares have gone up since consolidation, the theory would be that more competition is great.
However, Cranky makes a very good point. If the competition is smaller, it can get squeezed out very quickly and then you end up with consolidation anyways. This merger would end up creating a large entity. At the same time, this might be the time for the niche carriers and maybe the likes of JetBlue or Frontier to enter into some markets. Frontier might be able to find some more solid ground.
I do not think a combined carrier would easily give up PHX to Southwest. I do think they will have to give up slots at DCA. It would give them a stronger position at LAX which is already a war between DL and UA and AA.
This sucks. It’s the first time I feel like CF is a shill. Think about all the options Cranky Concierge had when there were Worldperks, Onepass, and many other awards. Everything has it’s limits, including free markets. At some point (and I think we’ve reached it), there”s no more room to remove competition without seriously hurting consumers. You might say that startups and smaller airlines can then move in, and bring competition back. What, that’s not good enough for US? They need to BUY their way big?
Do you think US can’t compete based on their own merits in the marketplace?
They already provide meaningful competition in many markets, and if they can’t earn their way into becoming a larger or higher-ranked airline, then why would I support letting them buy their way to the top?
The fact is they can grow by providing a better product and taking market share from competitors. It seems like you think airlines can ONLY compete based on size. Is air travel really just a commodity? I sure as hell think flying Spirit is way different than flying American, which is way different than Virgin America.
Things often seem set in stone in a given industry until someone comes along and changes the game, as Netflix did with content distribution, Amazon with bookselling/retailing, and countless others.
US and AA may not have a RIGHT to merge (at least not without government scrutiny/blessing), but that doesn’t mean they can’t be the next Netflix. Or they can just mimic what other airlines do and be doomed to being ranked by seat/mile count. Seems like you don’t have much faith in either airline.
Anyway, love your work, just not today. Looking forward to tomorrow’s post.
AllUnderControl – I’ll admit I’m really curious what it is about this post that makes you think I’m a shill. There are plenty of commenters on here who repeatedly like this think that since we disagree, but there’s nothing in this post that’s inconsistent with anything I’ve said before.
The problem with all of your questions is that it’s not part of the government’s authority to answer them. If the companies want to merge, they have the right to do that. The government can rule on antitrust violations alone.
I think what makes me feel like you’re a shill is that you’ve heavy-handedly come down on the side of US/AA. You can’t possibly be in possession of all the facts. Perhaps the delightful Mr. Parker has left a smoking gun somewhere? If so, and DOJ reveals it, what will you say then? Why are you so sure this is a good thing? I guess I see how it might benefit you to try to convince your reader to support the merger. Way I don’t know is this: how will you make us whole after reduced competition results in exactly what Parker wants. More money from our wallets, fewer choices, fewer rewards, etc. “oh, sorry I blew that call?”
You’ll have nothing to offer. But hey, still have all your airline buddies.
But more importantly, other than trying to convince your audience to support this merger, what will you do for those who you convinced to side with you after capacity is cut, fares rise, service levels drop, and award programs slowly deteriorate?
Lastly , you’re wrong about the airlines right to merge. they have to EARN it, by following established rules. If they were colluding on price, planning massive capacity cuts, orchestrating a stranglehold… oh…wait…
The government CAN do something to protect consumers. And they’ve just done it. I say good, lets see what each side has to say for themselves.
PS: Ever try buying a diamond? How’d that go for you?
AllUnderControl – Here’s what bothers me about your comment. You have no proof about any of this, yet you assume that anyone who disagrees with you is a shill. There’s no reason you can’t respect my opinion and just disagree with me, as plenty others do. I’m not trying to convince anyone. I just write what I think and let others decide if they agree or not.
All I can do is look at the facts and hand at determine what I think is best, and I think a merger is absolutely best. I think it’s best for the industry, and I even think it’s best for me personally. I live in Long Beach. When the airlines merge, I will suddenly have a lot more options and lot more places I can fly without having to change airlines. There are plenty of people around the US who will get the same exact thing. And you know what? As someone who flies US Airways from Long Beach, I’m looking forward to more amenities that will come along with this merger, as most US Airways fliers probably are. It has never happened in the history of earth that every single person wins in a merger. But I see the benefits, and I’m excited about it from many different perspectives.
You’re right. I don’t have all the facts. And if DOJ would like to present some actual, real arguments to support the case, then I’ll be happy to listen and change my mind if needed. But DOJ has presented nothing useful in supporting the case. You also haven’t presented any facts – just presumptions about what you think will happen. I disagree with you.
I’m sure you can go back and find plenty of posts over the last 7 years that I’ve written that show I’ve been wrong or I’ve changed my thinking. I don’t stick to a belief just to be stubborn. If circumstances change, then I’ll change my mind.
And of course, this isn’t all about facts. There is no way to say exactly how these combined airlines will look in a couple years. Maybe all your predictions come true and it’s the worse thing that ever happens. Fine, I’ll admit it if that happens. But looking from my position today, I just don’t see it. I see this merger being a good thing.
I can see your side of things, and your response makes some points that seem valid to me.
But, I am left wondering: why do you expect MORE amenities post-merger? Has Parker stated that they will be keeping any AA-specific benefits that interest you? Also, why aren’t you worried that Long Beach won’t follow in the footsteps of CLE or other post-merger casualties?
Thanks,
AUC
AllUnderControl – First, I don’t see how Long Beach would follow in the footsteps of Cleveland. We only have 5 flights a day to Phoenix on US Airways and none on American so there isn’t much to lose.
In terms of amenities, US Airways is pretty bare bones. I would expect post-merger we would see the airline retain the extra legroom seats American has recently added and keep some sort of inflight entertainment. Those are the two that I’m most interested in.
Cranky-
Please disclose if you have ever worked at one of these two airlines and if you currently own stock in either.
Thanks!
Full Disclosure – Nothing is hidden here. Links are in the header above. You can read my full bio and also see any affiliations, offers, or stock positions on my ethics page.
To answer your specific questions here, I own stock in no airline and haven’t for many, many years. I have never worked for American, but I did work for America West over a decade ago. That was under the same management team that would lead American if the merger goes through.
Although I don’t always agree with cranky about his opinion on the airline industry I have always found the information to be spot on. Cranky keep up the good work. I hope the wife and baby are doing well.
“The shock of the year” SORRY, its not a shock as I almost always flew out of Reagan-National when I studied in DC b/c it was convenient to get to from the city to the airport and to the West Coast (the old TWA red eye via St. Louis flights). Something tells me a few congressmen etc. also like flying out of Reagan-National b/c its convenient and want to make sure they can continue to do so by meddling in this merger!!!
Some people seem to forget that this is a personal blog and Bret is just giving his opinion.
If he wants to say he’s president of Bubble Gumland and that 2-headed martians are going to start an airline on Venus called Air Jupiter and take over AA, he can because it’s his P-E-R-S-O-N-A-L blog to say as he pleases. So acting like his words are law and he is the all knowing surpreme being that we must all listen too, is not correct. So no need to call him names or make accusations, just say you disagree and state YOUR opinion.
Ok. The DOJ don’t like a combination of US and AA. As Jamie Baker points out it seems thatnte
Brett, I don’t disagree with your opinions about the DOJ action but it seems you took it personally and lashed out because the DOJ so roundly criticized Doug Parker. I think you have it completely wrong about which airline is better positioned to go it alone should the merger fall apart.
The DOJ action was much worse news for Parker and US Airways than it was for AA and whoever leads them post-bankruptcy. This is the worst possible scenario for US Airways because it’s very likely their labor unions will finally reach a unified contract as a result of the merger negotiations, and they are going to want the same level of pay they were promised in exchange for their support of the merger. I think you are naive if you think they are just going to accept less because Parker asks them nicely. A 40% increase in labor costs is going to make it very difficult for US Airways to maintain their current profitability without losing market share. As for their International business; you think Star treated US Airways like a stepchild before, how do you think they are going to treat them now? This was Parker’s last chance to move US Airways to the next level and it’s blowing up in his face.
On the other hand, AA’s annual labor costs are reduced by about $400 Million if the merger is scrapped at the same time that US Airways’ will likely go up. Streamlined costs, a better product, and an expanded code share agreement with Jet Blue on the East coast will allow AA to start taking market share from US Airways and others.
Your continuous rants about how awful AA’s management is, when they have, up until this point, led the company through one of the most efficient bankruptcies in history, along with your prognostications of AA going broke again unless there is a management change make you seem petty and unhinged. It’s as if whatever personal vendetta you have against AA management blinds you to what is really happening. As another case in point, you act as if the new aircraft AA has on order will augment their current fleet and lead to overcapacity instead of replacing their older aircraft. That’s simply not true.
Another point, you spent a decent portion of one of your recent posts trying to convince us that consumers wouldn’t necessarily pay more after the merger. Well the professional investors on Wall Street strongly disagree with you judging from how hard they hammered all airline stocks when news broke of the DOJ action; clearly they thought this merger was going to be very positive for revenues and profits for the entire airline industry.
So the merger may or may not be / have been a good thing for the airlines involved and the industry as a whole. However, I can tell you this, while some of my friends at AA are mourning the fact that they won’t receive their bonus checks next month, they aren’t shedding any tears at the thought of less contact with their US Airways counterparts.
The DOJ out to save the units. The good old government taking over private industry..look what the DOJ did in the tray on Martin case they love to stir it up n Interfere in justice