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):
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?
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?
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.
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 they really want this to be over quickly get JetBlue Southwest Spirit a share of the operation at national. Ultimately some cities will loose service which will cause Congress to not be happy and the cities that loose service to either potienally file suit or create an uproar.
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.
Exactly, making juvenile stupid remarks makes me just disregard any and all of your point. Once I get there, I just stop reading.
First off, you’re an idiot.
Second, if DCA is spun off, this merger is over.
First off, you’re an idiot.
Second, divesting DCA would end this merger. Isn’t going to happen.
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.
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.
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…
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 to do so publicly to try and garner sympathy as the underdog fighting the good fight. They’ve been pretty quiet about the whole thing so far. I suspect there’s another influential rat(s) in the room that called in a favor from the Texas pols (though WN might be involved, too). I have no idea who or why, but it’ll be interesting to find out over the coming weeks.
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?
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, regional or nationwide. Fares and fees keep rising: service levels keep decreasing. Like it or not, the Government intervention has commenced.
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.
Please reread my post. I did not say the Government created the market. I am saying the Government will RESPOND to the market.
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.
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 the merger (ala CO/UA with WN in EWR. Justice approved that merger the following day. Coincidence? Uh……NO!)
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 are many more connecting option for people to look at and choose.
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 champing to get into OAJ. But DoJ ignores the fact that if you want to get from DCA to OAJ, you can connect over multiple hubs on multiple carriers. It’s *hardly* a monopoly. Somehow in the DoJ’s mind, US is great for having connecting itineraries (they go on about how wonderfully inexpensive Advantage fares are), but when it comes to DCA, suddenly DL and UA connections are invalid.
great point on how they are talking out of both sides of their mouth on US!
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”.
Great analysis. Maybe the US/AA legal team should hire you as a consultant!
Arcanum – Ha, I think I’ll pass on that one. If I start consulting for airlines, I’d have to stop blogging. And this is way more fun to be independent.
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 earlier that might not be as much backlash in the travel community.
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”.
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.
JB – I don’t understand why bag and change fees have anything to do with this. Fees for the first bag were introduced in 2008 before Delta/Northwest, United/Continental, and Southwest/AirTran merged. Consolidation played no part in that taking hold. And change fees have gone up steadily for years as well. As David M says, this merger wouldn’t change anything.
For the life of me, I couldn’t imagine what bag and change fees have to do with this merger, either. But, I think Parker opened that can of worms on himself with the statement quoted in the filing. It may be taken out-of-context, and the whole while the fee argument alone may be easily refuted, to Bill’s point farther down in this discussion, I think DOJ likely included it — based upon Parker’s statement — in an attempt to paint its larger picture of how the general culture and thinking of airlines today is anti-consumer.
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 of effects of a merger in connecting markets is long overdue! Nonstop route overlap is really not a meaningful measure by itself.
It appears to me your view continues to come back to the fundamental inequity of how the US/AA merger has been analyzed by DOJ relative to past mergers (i.e., your pie graphs showing market concentration). I think it’s critical to remember in this discussion that — legally — past inaction by DOJ on mergers is not relevant to its current (or future) actions. Each merger is examined individually. That may not be fair, or make much sense to you, but that’s how the system is designed to work.
As I’ve stated repeatedly, I am not advocating for either side in this argument. I do, however, think DOJ has acted reasonably by filing this suit given its role. Now, we wait and see who prevails.
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.
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.)
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..)
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 @ DTW – There’s more to the “insanity” part of the story that I’m working on. Hope to have something further next week, but DOJ could be making a very big gamble by doing this.
I understand the argument that AA/US is just late to the party and so they’re going to have a tougher time than the first one to go down the aisle. But since the law hasn’t changed, it seems very strange that they would alter their analysis so significantly. But even though they have, I still see no argument that proves anything.
Well then, as I said yesterday, I look forward to that next post. I see plenty in DOJ’s arguments with which to disagree, but little that makes me wonder what exactly DOJ was smoking when they wrote the complaint.
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 market virtually impossible). You didn’t address those issues here, but I’d be curious to hear your thoughts/analysis on those larger forces at work in a future post.
Scott @ DTW – I have no doubt that there are occasions where efforts to collude have occurred. We’ve seen it since the early days after deregulation. There’s the famous call from Bob Crandall to Howard Putnam where he told them to raise fares and he’d do it the next day. That kind of absurdly blatant effort is, I’d like to think, rare.
But I did airline pricing, and what DOJ calls CMI is a very real thing. But also as DOJ says, it’s not necessarily illegal to do it. In general, however, I can tell you that most people were very respectful of avoiding pricing discussions with competitors. I’ve been in plenty of conversations with employees of various airlines who have excused themselves or changed the subject if the discussion got remotely uncomfortable. It was always taken very seriously.
So do I think that there are some isolated incidents where attempts have been made? Probably. But I would be surprised if there was really any meaningful action that saw two parties agreeing to do something. From my experience, I don’t think it’s as big of an issue as DOJ might like to believe.
CF – I think you missed my point, or perhaps I was unclear. The “CMI” activity described in the DOJ complaint, as you and I both know first hand, is very real and happens regularly — not on rare occasion. That activity may not be illegal, and perhaps does not rise to the legal definition of “collusion” (which is your word, not mine), but is nonetheless an example of anti-competitive behavior. I didn’t necessarily mean to imply the pricing folks at one airline pick-up the phone and directly collude with a competitor to price fix. But, when two competitors are afraid to compete on price because the risk of retaliation is greater than (or perceived to be greater than) the potential from competing for business in a given market, I can’t think of a better word to describe that scenario than “anti-competitive”.
I’m not sure I understand your response, CF. What DOJ terms “CMI” is, as you acknowledge, a very real thing… and it’s an example of competitors effectively controlling each other’s pricing. As my comment farther down explains in detail, the airline industry is far from a truly open market self-regulated by capitalism.
Scott @ DTW – It is not an example of controlling other airline pricing. Airlines can decide which moves to make and then respond how they see fit. When I was at America West and we converted to a low fare airline, several airlines filed very low fares in Phoenix. We ignored them and eventually they went away.
CF – It’s an example of controlling competition, which translates into a direct effect on prices.
Your experience at HP is a red herring because, as you describe, you weren’t simply competing on price but re-inventing the product to be a low-cost carrier. Separately, I can think of numerous occasions where carriers countered price-drops by matching fares and the result was that the initiating carrier ended-up abandoning its undercutting as a result. Does driving-out competition always work? No. But, it should never (or very rarely) work. That’s not an example of capitalism at work, but a clear example of how airline practices effectively (albeit not directly) coordinate pricing.
Again, at the risk of sounding like a broken record, I’m not saying that you — or a judge — won’t disagree and/or have a great counter-argument. I just don’t think DOJ’s argument is merit-less (let alone “insane”), either.
Scott @ DTW – We weren’t reinventing any product at America West. We simply changed our pricing strategy and nothing else. We didn’t become a low cost carrier – our costs didn’t change. We became a low fare carrier.
Every company deals with price competition all the time. Firms make moves and competing firms decide how to respond. There is no forced hand.
I had sex on an American Airlines plane many years ago. It was a lot of fun.
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!
Also southwest flies ROC to LIT via BWI.
WN – Good call. Southwest carried no passengers on the route last year so it didn’t show up in the data, but thanks to the AirTran merger, they do indeed serve it now. So we can expect an even lower HHI in that market.
I’d like to see evidence that these DOJ guys actually graduated high school.
looks like they are making up their stats.
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 to four. To me, that’s hardly oligopolistic.
There may be markets where competition is reduced more, but as Brett pointed out, there may only be four or five passengers per day traveling on those routes.
To me, the fact that this merger creates more possible routings increases competition, as the pre merger analysis by Jamie Baker and US Airways pointed out.
To me, the DOJ complaint is another illustration of the wisdom contained in my favorite quote from Mark Twain:
“There are three kinds of lies; lies, damned lies and statistics.”
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.
Thanks everyone for the comments so far. I’m going to respond to them later today, but first, it dawned on me that I could put an offer out there. If you have any markets you see in that DOJ list that interest you, let me know and I can put together the numbers for you the same way I did for Little Rock – Rochester. (I’m not going to do a million, but if you have a couple here or there that you’d like to see, let me know.)
Here are two that I’m curious about:
CIN-SEA (Why isn’t it CVG?) AFAIK, DL flies (or flew) CVG-SEA non-stop, whereas US/AA only offer connections.
Since I mentioned TUS-CLT in my comment above, it might be interesting to see the numbers.
I don’t want to be a pest, but it also might be interesting to look at Charlotte to Durango, CO. Why? It has the highest change in HHI on the chart, up 4752 to a 10,000 rating – i.e., a monopoly. It seems the current one stop routings use US through Phoenix, US / UA code shares via Denver or American through Dallas / Fort Worth. United also, in theory, offers single carrier service via Chicago and Denver (so there goes the “monopoly” to some extent if one looks at the real world). It also might be interesting to see how many people are beating down the doors to travel between Charlotte and Durango.
Not to belabor the point, but how many are beating down the door to go from Charlotte to Kahului, HI or St. Croix, VI? For that matter, how many are crying to go from Greensboro, NC or Birmingham, AL to St. Croix? All would be monopoly routes per the DOJ. Obviously I can’t buy the argument that there are no competitive alternatives to a merged AA between these points. People are known to book multiple stop itineraries. Again, quoting Mark Twain’s wisdom, “There are three kinds of lies; lies, damned lies and statistics.”
1. @CF, In your analysis did you consider the built in assumptions/limitations of HHI? Generally, these indexes have an analytical quirk, i.e. what you see in the numbers is very much subject to external behaviors not captured in the numbers. Depending on industry and relevant behaviors true competition can require as little as 1 firm or over 6. When taken in its totality, i think the DOJ complaint is suggesting that the passenger aviation market requires at more than 3 large network operators to be competitive. All those winks, nods, and in Doug’s case e-mails to competitors, through APTCO and press releases on general fare and fee raises speak to an industry that if left to its devices is collusive in nature. The sheer presence of 5 hub network operators lessens the impact of those winks and nods, but going to 3 will mean less risk someone doesn’t fall in line and ensure the customer has no alternative.
2. While WN is an important price disciplinarian, their effect is primarily felt at the outset. I seem to recall someone doing an analysis that the initial price drop with WN’s arrival diminishes over time and they are always near the original legacy carriers price after 1-2 years, sometimes because the legacy removes enough capacity to become a secondary player or each is satisfied about the retained market share. The only difference becomes the WN baggage and change fees, which generally give it a domestic advantage, but of course those flying beyond the border or are tied to contracts have no such choice. It is all an accomodation game, and there are diminishing benefits from WN’s presence, although they may have a strong impact on price inflation. BWI should be a cautionary tale to all those that proclaim an everlasting competitive effect of WN.
3. DOJ evaluating a merger on connecting service is not entirely novel, the key factor is whether connecting is service is a viable alternative and for which market. In air travel you have to recognized sub-markets, leisure and business, with business generally seen to be avoiding connecting service. there is congressional testimony from the late 90s or early 2000 that some may benefit from reading before chopping up DOJ’s complaint, especially when discussing airline merger review prior to 2000 when it was in DOT’s jurisdiction.
4. While insightful, @CFs analysis is undermined by the over playing the significance of a single route (the tree) to describe the totality of the market (the forest) that DOJ must consider. Yes, it might be a skewed market that one can slaughter the economists at DOJ on, but when combined with all the other data points and general intangibles you have a market narrative, which the DOJ is focused on. If it were solely about a handful of markets, DOJ could easily remedy through consent decree or divesture like in the case of DCA. I haven’t done the analysis or have access to the data, but I give some consideration that the folks in the Economic Analysis Group are not exactly spring chickens at this.
1) I see nothing that proves that having 3 vs 4 network carriers is going to result in greater collusion. The very limited examples shown don’t prove that. In fact, Doug’s email that was immediately reported to general counsel by the person on the receiving end shows that the industry takes things very seriously.
2) The Southwest Effect is not what it used to be at all, but that doesn’t mean it isn’t a real competitor within the US. It just means it doesn’t give you the same low fares that used to be there. But it’s still a serious competitor.
3) Feel free to send any links my way
4) I didn’t have time to go through every route to get the forest you describe, but these routes are highly representative of the market in general. Since yesterday, I’ve seen a lot further detailed analysis that shows this applies beyond just a single route. I have no doubt that airlines will have this all prepared for the judge to see.
Here is some testimony from 2000 by John Hannes, Deputy Assistant Attorney General at the Antitrust division.
GAO report on merger – http://www.gao.gov/assets/660/655314.pdf
Topgunner – Thanks for the links. The first one has a brief mention of connecting service but the real focus appears to be on the impact in a hub – so it’s talking about nonstop competition. And this merger has less nonstop overlap than others with only a dozen markets.
The second link I’ve already discussed extensively. The GAO data is inaccurate and misleading. I wrote a little about it here, but I also addressed it in-depth in PlaneBusiness Banter. Unfortunately, that’s a subscription site. I’ll see if I might be able to have her let me reproduce it.
CF – Indeed the focus was on the hub impact, but I wanted to dispel some arguments that DOJ has created a new standard by evaluating connecting service. Connecting service is not an entirely new criteria for this merger. I think in past mergers the hub consolidation was entirely dispositive of the anticompetitive effects and there was no need to look fruther, e.g. the United-USAirways proposed merger. I think with the way the airlines have consolidated, you were likely not to see overlapping hubs because everyone would be avoiding those kind of marriages based on prior DOJ challenges.
I will take a look at your review of the GAO data. I have generally found their analysis on various issues to be well considered, although not perfect. They might not be airline gurus, but they do have some sharp analysts, forecasters and researchers.
Finally, on the issue of whether DOJ can objectively demonstrate greater collusion with 3 vs 4 competitors through data, they cannot for this particular instance without first letting the merger through and then fighting it later. Antitrust requires a measure of expectation and forecast, and that necessarily requires a mix of objective and subjective inputs. The objective data is selectively highlighting how during the time of increased consolidation you have had the great unbundling of services coupled with acts that are prima facie price signaling to seek coordinated action. The airlines are not amateurs and, of course, if any employee of basic competency got an email from a competitor deriding pricing activity, they too would follow internal procedures that require reporting the incident. It would be done because the action is so inelegant as to be embarassing if it were discovered by DOJ.
So the airlines resort to winks and nods, and such suspicion from DOJ is based upon those selective USAirways emails that imply industry coordination and an aversion to competiting with the the other legacies. With one less competitor the fear is that the risk to the would be colluders that there is an outlier airline who misses or ignores the wink is reduced and the returns for tacit collusion and coordinated industry action increase as there fewer unknowns/wildcards. Is DOJ wrong in that assumption and deciding that this would be a critical tipping point? Maybe, but they have more than stated a reasonable case upon which a full record should be developed and a judge then make a decision whether an injunction is appropriate, which is what a complaint is supposed to be about.
Topgunner – Sorry I somehow forgot to respond to this comment. On the GAO data, as was pointed out by a commenter when I first posted, this wasn’t a true report but rather just “testimonial” which apparently has a much looser standard. If you’d really like to see my arguments from PlaneBusiness, send me an email and I can probably get permission to send you a copy.
Thinking about the collusion question, I would actually think it would be easier to collude with more players in the space. It makes it easier to go unnoticed, fly below the radar. Seems to me that if you have fewer larger competitors, it would be much more difficult to get away with something like that because all eyes are on you.
Ok everyone. Here are the HHI stats you requested. I used the numbers from full year 2012 DOT data
Denver – Westchester (13 ppl per day each way)
5 airlines (though down to 4 now that AirTran is out, but they were only 4%)
United is biggest with 48% of market
HHI today 3,146. Would increase by 343 after merger.
Cincinnati – Seattle
Was this on the list? Delta has 80% of the market so HHI is around 6,800. The merger was only going to increase it a little. Or am I looking at this wrong?
Charlotte – Tucson
This one makes sense at first blush. There are 32 ppl per day each way. Four airlines with AA having 39% and US 29%. HHI today is about 2,950 but it’ll jump by over 2,000. One thing though – Southwest just started this market thanks to the AirTran merger. So it will start to reduce the HHI from that.
This tiny little market (2.5 ppl per day each way) has United with only about 5% of the market. If they show 10,000, they’re lying, but it’s still pretty high.
This market has 9.5 ppl per day and four airlines. But it’s a little messy because US puts some people on UA and vice versa, so that would be unwound. Hard to know how to account for that. But US has about half the market with American having 20%. It’ll go up about 2,000 from 3,500 today.
Huge! 1.5 people per day each way
Huge! half a person per day each way
And now masFlight stopped working. I’ll come back to this later.
Turns out it was problems with my internet connection and not masFlight. If anyone needs additional data pulled, let me know.
Cincinnati – Seattle was on the list – last page of the appendix third from the bottom. (Listed as CIN-SEA) Post merger HHI: 2858 with a change of 203.
Any clue why the DOJ lists it as CIN and not CVG? Its not like there are multiple commercial airports in the Cincinnati metro area. (And Cincinnati’s Airport is in Northern Kentucky, which makes me gleefully happy.)
Nick, I also noted one place where the route was listed as Philadelphia – Los Angeles, but the designated airport was SNA, i.e., Orange County. The DOJ also cites Riverside, California in a number of its examples, but usually shows the airport as PSP, i.e., Palm Springs. There are a couple of occasions where it designates ONT (Ontario) as the airport for Riverside. Maybe it doesn’t use ONT as often because it knows Southwest doesn’t serve PSP?
Nick Barnard – That’s just downright wrong if that’s in there. In 2012, Delta had 82% of the market, American had 5% and US Airways had 4%. The HHI today is 6,786. The HHI would go up 41 points in the merger. In 2007, by the way, Delta had 81% of the market while Northwest had 7%. The HHI was 6,680 and it spiked 1,064 after the merger. But again, apparently that was perfectly fine back then.
As for CIN, I have no idea. In some places, the pricing city code is different than the airport code. In Kansas City, for example, the airport is MCI but the city code is MKC. Maybe they use CIN because there is Lunken field with some limited local ops there. No clue.
But there are other problems here. They said they were using city pairs, not airport pairs, but they didn’t in all cases. They carved things out where convenient. Westchesters is in the same DOT city pair as NYC airports but not in this analysis, for example. So they carved things out where convenient, it appears.
To make my main point again, all you guys are putting way too much stock in the minutiae of the complaint rather than the merits. I’m sure anybody can find one city pair or airport pair that supports any position. At the end of the day, the judge and/or jury in this case will have to decide yes or no — the decision isn’t split up into a thousand little checkboxes.
I have been chewing on the complaint for a couple days like everybody else. The more I think about it, the more I feel this merger is toast.
P.S. I rarely/never comment on blogs, but this has been a good debate to read. Thanks to those who directly responded to me.
Bill – Well, I appreciate you commenting. But can you enlighten the rest of us why you think the merger is toast? I see nothing in here that shows how the merger would decrease competition to an illegal level.
Bill, Your insights are very helpful. Thanks. If US Airways and American fight this (which it seems they will) it may very well be scheduled for trial. But just before the trial, I think they’ll reach a settlement, based on all of the evidence that’s been discovered. Trials have risks. You know better than most that no one knows how a judge will rule in a given case. As the old saying goes, “You’re better off with the devil you know, than the devil you’d don’t.”
CF – Help us out… what’s the definition of “illegal level”? That really hasn’t been spelled-out in this discussion yet.
Hi guys (CF and DesertGhost). One of the reasons that you don’t have to provide ALL your evidence in a complaint up front is because you don’t even have to have it when you file. Filing a case in federal court these days requires the plaintiff to write a complaint that alleges a “plausible” right to relief. (See the seminal antitrust case, Bell Atlantic v. Twombly, U.S. Supreme Court and I think it’s 2007.) As (I think) the Supreme Court explained in Twombly, having a plausible case allows the plaintiff to “unlock the doors of discovery” and use all of the usual devices to get more information about the defendants’ case. This discovery phase of a lawsuit involves the exchange of documents, taking of sworn testimony, the service of a jillion written interrogatories, service of subpoenas, and other discovery devices. This the government will now be able to go forward and do. If the government is serious about this case, it will serve a huge amount of discovery requests on both carriers and others, and will tell the court it needs a year or two at least to go through all of that and prepare for trial. But as a matter of practical reality, AA can’t wait a year or two — and the merger is going to fall apart in much the same way that the US/UA merger did twelve years ago.
I think the government did a good job with the Advantage Fares argument in explaining why US needs to stay independent. Forget all the other blatantly anti-competitive conduct like Doug Parker just forwarding threatening e-mails to that “rival carrier” (was it UA???) and the saucy e-mails. The government has a theory it will ride into discovery: US is a spoiler and has to stay independent to keep being a spoiler. If the government really wants to block the merger, all it has to do is stall for a year or two until Wall Street starts demanding results from AA and for AA to get out of bankruptcy. US will have no choice but to refocus on its own business. I think this is the reason the merger is toast.
By the way, the Supreme Court in the Twombly case really expresses serious concern over the scope and expense of discovery in massive antitrust cases. The sheer expense, torture, and delay involved in such a trial in the middle of a merger is going to lead the parties to shake hands and walk away.
Do I think they will settle, just over DCA slots or some other minor thing? No, I don’t. The statements from the government, and the broad-side nature of the complaint, seem to make clear that USDOJ intends to fight.
Oh by the way, everybody here is saying “well UA/CO and DL/NW got to merge, so AA/US deserve a shot too. What’s the difference?” The difference is President Obama. (And I voted for him twice — I’m not bashing the guy.) But hellllooo, guys, you had a “pro-business” president with Bush during DL/NW and there is a new sheriff in town for US/AA. Sorry, but that’s the deal. Republicans are not as aggressive on antitrust, they’re just not.
Agree with Bill-this merger is toast, and for the reasons he has stated. IMO, I believe the e-mails/memos from Parker are more important to DOJ than Bill states-but at the end of the day, Wall Street will say we want results NOW, and DOJ will use the legal technique called “We”ll make you Blind” ie there will be so much paper generated, read, and digested, this case will be years before it gets to court.
Scott @ DTW – Fair enough – it’s far from clearly defined. What we’re looking for is a substantial lessening of competition. I don’t see anything that proves that. Just a lot of speculation and accusation.
Bill – Thanks for the further discussion. I’m not as convinced as you about the timeline here. I’ve spoken with antitrust attorneys over the last couple of days. One thing that’s very different about a merger case of this size is that DOJ has been engaged in their own discovery process since before the merger was even announced. (That is, I assume, how they have all those emails in the first place.) In general, I’m told that merger cases process fairly quickly.
Now I certainly agree that time is of the essence here, but I’m not so sure that DOJ can actually stall. It sounds like we should know more after the first status conference. By the end of the month, I feel like we’ll learn more about whether or not DOJ is going to pursue the stall tactic and whether it’ll be successful.
Gotta agree with Bill here. Twombly is the guiding principle when drafting a complaint. DOJ does not need to bring all details in the complaint, just enough to make their anti-trust claim plausible and avoid dismissal under Federal Rule of Civil Procedure 12(b)(6). Once, that happens, DOJ can conduct further discovery and disclose the evidence that it already has in its possession.
CF gives a good analysis and I agree that the merger should be allowed, but it is misguided in the sense that he’s analyzing the business side of it, rather than the merits of the complaint under the Anti trust laws. Whether DOJ’s policy now wasn’t in place is different now, it doesn’t matter. There’s a different administration in power with different views. Asking why now and not before is pointless given that each administration sets its policy as it deems appropriate. That’s why we have presidential elections every four years.
AA/US can fight this, but less than 5% of cases make it to trial in federal court. This will either end up in a settlement, or there will be no merger at all.
To whoever was saying the change in administration is why the DOJ is acting differently then before: check your dates. UA/CO was approved under the present administration.
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.
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)
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..
“…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 thus far). What’s more, after more than a decade, JetBlue is nowhere NEAR the size of the major legacy carriers… and VA, of course, is a relative speck in the market. Spirit and Allegiant are, by their own admission, focused on niche markets not yet served by anyone or taking people off roads (or their sofas) rather than stealing traffic from other carriers. What’s more, as I’ve commented elsewhere in this discussion, the majors have so much power to control the market and block new entrants that breaking into even select markets requires an extraordinary effort and tremendous resources (like the kind of capital only a Richard Branson could funnel into an airline for years before it even takes-off).
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.
Scott @ DTW – Allegiant and Spirit are of course going to say that they aren’t targeting existing airline traffic because they want to go under the radar. But Spirit is absolutely targeting it and is growing quickly. Frontier is likely going to do the same once the sale is complete and they get some more capital.
There’s no question that it takes a lot of money and expertise to get things up and running – it’s not like opening a lemonade stand. But if there’s a need in the market, it’ll happen.
CF – I think you’ll find this speech to be an interesting read (from 2005): http://www.justice.gov/atr/public/speeches/217987.htm.
From where I sit at a major Spirit base, Spirit is anything BUT under the radar. Spirit and Delta, using DTW as one market example, provide two completely different products and services. It’d be like comparing Ford and Rolls Royce. Both companies sell products with four wheel and an engine that will get you where you need to go. But, Ford customers and Rolls Royce customers aren’t the same people. I am sure there are some Ford owners who would love to have a Rolls if they could afford it, but I also know people who could afford to pay cash for a Rolls today and would never imagine blowing that kind of money on a car.
If I’m understanding the DOJ complaint correctly, what they are saying is that the launch of a new Ford in a market is not considered to be effective competition for Rolls.
I understand by car analogy isn’t perfect, but I think it illustrates the DOJ argument well. I am sure that the emergence of more and more “mid-range luxury” sedans these days have put some added pressure on the luxury car makers (either pushing down prices or curbing their market), but at the end of the day, each company’s existence does not depend on winning each other’s customers.
Scott @ DTW – Spirit may be a bit of an extreme example, but can you really argue that Southwest isn’t a competitor?
Regardless, I think it’s very hard to argue that Delta is a Rolls Royce. In the pointy end of the plane, sure, but Delta is a lot of different products for a lot of different people. At its base level, Delta gives you a little more legroom, a seat assignment (if available), and a carry on without charging. They aren’t that far apart. And if you’re comparing that to Southwest, then Southwest probably provides the “better” product vs the base level Delta product.
I hadn’t discussed Southwest at all. But, since you brought it up, I think the industry consensus is that — at this point in time — Southwest is no longer a low-fare leader. The “Southwest Effect” of 20 (perhaps even 10) years ago is more or less dead. That’s not to say Southwest isn’t still an additional competitor in a lot of domestic markets, but they don’t do much for international markets — which was a particular focus of the DOJ analysis.
So, again, all I’m saying is that DOJ’s case is far from ludicrous.
… and, for what it’s worth, I’d disagree with you that Southwest is necessarily a better product compared to Delta’s economy product.
Scott @ DTW – I’m not sure what you’re reading, but DOJ didn’t focus on international markets at all. The complaint pretty much focused exclusively on domestic. HHI analysis was only for domestic, and the Advantage Fares are all domestic as well. But nice try to marginalize Southwest as if it’s not an important competitor.
You may not agree that Southwest has a better product, but there are a ton of people who would disagree with you. After all, Southwest carries more domestic passengers than anyone else. And as you point out, Southwest isn’t the low fare leader anymore, so people are choosing based on product and not price more often.
CF – I’m sure there are people who would disagree with me… as would agree with me. It’s purely subjective. But, it’s disingenuous to suggest that the overwhelming majority (if even the majority) think one way or the other. I’m not the only person alive who believes that today’s Delta offers a solid product throughout the cabin. I’ve flown both WN and DL over the past few years, and while I have no complaints about WN, I have no more complaints against DL. DL offers me a seat assignment, more non-stop options from my home airport, great inflight service these days (generally speaking), DL provides more options for alternate re-routing in IROP situations (given their interline agreements), etc. I can’t speak for DL, but I think they’ve been outspoken that they are increasingly shifting toward a model where they fly fewer people at higher fares with a better product… which is the basis of my imperfect, but apt, Rolls-Royce comparison.
I don’t know how one could characterize my statement, “That’s not to say Southwest isn?t still an additional competitor in a lot of domestic markets” as an attempt to marginalize Southwest as if it were not an important competitor. The notion that DOJ dismissed Southwest as an important competitor is also bogus, since it clearly considered Southwest in its discussion on market concentration: “In 2005, there were nine major airlines. If this merger were approved, there would be only four. The three remaining legacy airlines and Southwest would account for over 80% of the domestic scheduled passenger service market…” (p. 14 of the complaint). But, as DOJ quotes one US exec as conceeding, “Yes we compete with Southwest and JetBlue, but the product is different and the customer base is also different.” (p. 18) I didn’t suggest that Southwest is not a significant competitor to the legacy carriers — but at least one US exec did.
Nonetheless, the argument that Southwest carrying more domestic passengers is evidence that it has won those customers by offering a better product than Delta (especially as Southwest’s price advantage wanes) is weak. First, at best, you could only make that argument in markets where WN and DL compete head-to-head with similar schedules and routings. Second, WN “flies the most passengers” because its average flight is so short and it is counting by passenger boardings. If you look at RPMs (for YE APR ’13, the most recent T-100 data available), DL led WN/FL in domestic traffic by nearly 12% (and UA by a tad more).
DOJ cites (top of p. 4) that Southwest (and JetBlue), “while
offering important competition on the routes they fly,” will have limited impact on international routes. It also refers to planned international growth by AA if it were to remain a stand-alone carrier… which, while we could debate whether or not was ever really going to happen anyway… is still documented as part of a vetted stand-alone plan for AA that DOJ can use as evidence to support its case. Whether or not AA’s international growth as a solo carrier would ever have matched some of its ambitious projections or not, I think it makes logical business sense to conclude that there would be an overall reduction in, at least, Transatlantic capacity in a combined US/AA… as well as probably South American capacity (to which CLT and MIA will become redundant gateways, whereas stand-alone US had already demonstrated a strong interest in growing).
Again, I’m not saying DOJ is right, but I do see the legitimacy of their arguments.
Scott – I never suggested the overwhelming majority of people think one way or the other. The point is a ton of people prefer Southwest. Southwest is competition to the legacy carriers. Period.
DOJ absolutely dismisses Southwest as a competitor except when it conveniently supports the case. They love that 80% number talking about concentration, but the proof of their argument is in paragraph 93 on page 33.
You are pulling out a couple of minor mentions about international when every shred of “evidence” being presented is solely domestic. They can throw around whatever words they want, but they have presented nothing beyond the domestic market.
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. The DOJ is picking out the winners and losers without allowing true competition to take place. You know the DL and UAL execs are “high fiving” everyone in sight! I wouldn’t be surprised if the DOJ is now added to they’re Xmas card list! If I were AA or US I would be steamed! The whole argument is stupid and embarrassing. The DOJ is really going to be looking like fools in a few months and the backlash is going to hurt some people in high places.
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. They pulled totally out of the market about 8 years ago. I would bet good money that the new AA with a CLT hub would actually add a new flight to EVV to compete against DL out of ATL. That would be good news to a small market city like EVV. I’m sure there are other city pairs that fit this argument as well. I wonder if the DOJ has thought about that aspect to this merger?
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.
Bravozulu -An excellent point. And the additional route options may, in fact, add competition to the marketplace, not reduce it.
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 it mean these are the ONLY things the government can rely on at trial.
Some of your post seems to suggest that the USDOJ has to fire all of it at once, up front in the complaint — like when you referred to the “one actual piece of proof” it has regarding fees. I just wanted to make clear that the government can use other evidence to make its case, and fully expect that it will introduce more than just this.
As a dabbler in antitrust law, I have to say I like the government’s theory, particularly with respect to Advantage Fares, which you didn’t really hit hard. If US plays the role of a spoiler in ruining the other three’s collusive conduct in charging the same exact prices, then it’s a valuable market participant we don’t want to lose.
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.
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.
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.”
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.
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.
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…)
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 so low. Given the concessions that the US team gave to labor unions in order to win their endorsement of the merger, I just don’t see how they’d be able to contain costs low-enough to keep their “quantity over quality” approach to connecting traffic viable.
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.
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 they’ll offer at low-prices… but, in fact, a premium product that will cost more. I get the distinct impression that the new AA will — unashamedly — shift to the “make more money flying fewer people at higher airfares” approach that has proven successful for the other two legacy combinations.
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.
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 merged American won?t continue Advantage Fares” is patently false. You may not be convinced by said evidence, but that’s different than saying no evidence exists.
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 reasonable to believe that if AA and US merged, AA/US would stop selling lower “Advantage Fares.”
Bill, it’s also reasonable to believe the New American will continue to offer Advantage Fares if it’s to it’s “advantage.”
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.
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 the country. That’s a huge advantage over the competition that must use other airports with higher landing rates. It really has nothing to do with labor rates. This cost advantage will always remain intact as long as CLT doesn’t raise rates. The execs at the new AA would be fools to abandon a popular program that can’t be matched by other airlines. I ask again-“has the DoJ investigated the landing rates associated with “advantage fares”?
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 absolute certainty ? but that doesn’t mean there isn’t evidence to suggest future outcomes. To suggest that there is ?no evidence? or ?nothing to indicate that the merged American won?t continue Advantage Fares? (to quote your words) is just not true.
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.
…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.
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.
Bill – Thanks for making the point. While I don’t expect DOJ to present everything up front, I would hope that they would have presented any actual evidence. I see nothing in here that proves the point.
Regarding Advantage fares, what’s overlooked is that US Airways actually gets a higher average fare in these markets than without. It just means lower walkup fares and higher advance purchase fares. So either way, one group will win.
One thing I’m sure about is that if American continues to serve Miami-Cincinnati nonstop, then certainly the Advantage fares in this market would go away.
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.
Ron – Doug didn’t do that to Pittsburgh. US Airways began dismantling Pittsburgh after bankruptcy #1, long before America West go involved.
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)
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 that an anti-competitive market already exists (and would only be exacerbated by further consolidation).
Again, I’m not saying who is right and/or will ultimately prevail — but the government’s argument is far from ludicrous.
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.
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 I am sure they will), but it’s really a red herring because each merger is reviewed independently.
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.
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.
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 somewhere.
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.
Who is to say that US will not stop the advantage fairs at any minute, of any day, regardless of the merger….
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 be working masterfully?
@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.
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.
123 – While fee policies may have contributed to US Airways pulling out of Pittsburgh, ultimately it was simply because Pittsburgh isn’t big enough to make for a good hub. There’s not enough local demand to support what US Airways had in the market.
While Pittsburgh wasn’t big enough neither was Charlotte then. However today CLT has grown as a result of lower fees. Ultimately and simple arithmetic points to the fact that it is about the fees. Today CLT which started as a private airport, is one of the world’s busiest airports, number six in terms of operations and over 700 daily dep.
SB – Charlotte has grown because its geographical location is unique. It provides the only Southern hub opportunity outside of Atlanta. So you get a lot of little cities around the Southeast that you can serve where the traffic behaves like local traffic. Without Charlotte, they just don’t have options. Pittsburgh, meanwhile, is bracketed by hub locations on either side. If Pittsburgh were in a different place, maybe it would have survived. But it’s not.
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?
Bonnlass – What about it, specifically? There’s a big fight between the various political entities as to who gets to control the place.
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?
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?
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.
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 recent precedents and thought, what the hell, I might as join the DOJ suit because (a) it doesn’t cost me anything and (b) it fortifies a strong negotiating posture for obtaining job and service level guarantees from the post-merger USAA?
CF, others, interested in any other thoughts on this. I know it’s somewhat tangential to the DOJ case but an important tangent IMO, especially to those served by or working for USAA hub cities/states.
Bill – I don’t think it’s much of a negotiating tactic but rather a political move in most cases.
Put aside DC, because that is a real concern that could be addressed to satisfy the district I’m sure. Not sure about Arizona, but I assume it’s sour grapes over losing an HQ and uncertainty of what will happen. Could bit them if the merger goes through, however.
But in most if not all of the other states, these are attorney generals who are now kicking off campaigns for governor. They’re looking for some air time and want to look like they’re supporting the people. (In particular, if they’re Republican it probably won’t hurt their chances to do this, but it might sway moderate Dems.) That’s my guess.
The Texas one makes no sense otherwise. They’re getting the HQ of the largest airline in the world. Seems pretty silly to try to fight that.
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.
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.
For those who are interested, my review of the GAO study on PlaneBusiness is now live on the PlaneBuzz website – no subscription required.