Culminating a process begun in January 2012,
US Airways Group
), the parent company of US Airways, and
(OTCMKTS:AAMRQ), the parent company of American Airlines, announced
in February 2013 their plans to merge. In March, Judge Sean Lane of
the Southern District of New York approved the merger, which would
create the world's largest airline.
Now, the US Department of Justice is seeking to block the
unification of the two companies, arguing that the new $11 billion
airline would seriously reduce competition for commercial air
travel and increase prices for consumers. On Tuesday, attorney
generals from six states and DC filed a civil antitrust lawsuit
against the merger. The challenge is likely to delay AMR Corp.'s
bankruptcy exit plan, which is part of the merger and was scheduled
In the Department of Justice's
from Tuesday, Bill Baer, the Assistant Attorney General who leads
the DoJ's Antitrust Division, stated, "If this merger goes forward,
even a small increase in the price of airline tickets, checked
bags, or flight change fees would result in hundreds of millions of
dollars of harm to American consumers."
Additionally, Baer made the case that the merger is simply not
necessary, as he said, "Both airlines have stated they can succeed
on standalone basis, and consumers deserve the benefit of that
continuing competitive dynamic."
The merger is also likely to cost hundreds of people their jobs. In
discussing the proposed deal, US Airways said it would close its
$32 million operations control center in Pittsburgh, which was
built only five years ago, and was partially funded by $3.75
million in Pennsylvania grants and tax credits. The facility
employs more than 1,600 people. The company would move its
operations to the Dallas-Fort Worth International Airport, where
American Airlines has its headquarters. The Attorney General of
Pennsylvania, Kathleen Kane, has said that, "If US Airways were to
close the operations center, [at] least 700 jobs [would] be lost."
US Airways would have little to no reason to close the center
without the merger.
Yesterday, news broke that the airlines would be fighting the
lawsuit with a team of high-powered lawyers. Representing American
Airlines, Joe Sims, a lawyer from the firm Jones Day, said of the
DoJ's claims, "If they are going to convince the court that the sky
is falling, which essentially is what they are trying to do here,
they are going to have to have more meat then they've shown us so
far." Sims was the lead counsel in the $13 billion 2008 merger of
Sirius and XM that created
Sirius XM Radio Inc
The airlines claim that their merger would actually allow them to
compete with the two currently dominant carriers,
) (which merged with Northwest in 2010) and the world's current
) (the product of the merger between United and Continental in
2012). Sims believes that the two airlines, without the merger,
will have trouble competing with even the small airlines, like
). "They will neither individually be as effective a competitor to
United, Delta, and Southwest [nor to] the other smaller low-cost
For expert insight into the contention between the companies and
the government, Minyanville spoke with Wayne Plucker, the Industry
Manager of Aerospace & Defense for the market research and
Frost & Sullivan
Plucker disagrees that the merger will increase costs
substantially, but his views on the deregulation of the airlines in
the late 1970s may lend support to the case against the merger. As
he told us, "Deregulation gave the airlines the opportunity to grow
beyond their wildest dreams and be incredibly stupid at the same
time." Without any major lawsuits against airline mergers before
this, the DoJ has allowed the major airlines to grow very large,
and now it's trying to make up for lost time.
Minyanville: Why is the US DoJ challenging this
To put it simply, it answers some key Congressional concerns and
shows that the administration is "protecting the consumer." To
[satisfy] the European Union's concerns, the American/US Airways
team allowed greater competition on the Philadelphia to London
route. Now, the Congress is concerned about the willingness of the
merged airline to keep hubs and therefore jobs at key airports.
While they have stated that operations will be largely unchanged,
every merging airline says that. The reality is that without those
economies, there is little reason to merge.
MV: Does your firm have an estimate for how many jobs will
be lost if the merger goes through?
If past airline history is any judge, several types of jobs will be
lost in succession. The first loses are typically some ticket
agents and administrative jobs at most airports where they both
operate. Then headquarters jobs as soon as duplicate operating and
training systems are cut. Next some of the less profitable routes
will be restructured where both airlines are currently operating
aircraft at less than capacity. The jobs loss there would be the
manpower to support those flights. For the American / US Airways
merger, they need to cut maintenance jobs, especially in the AA MRO
environment [the commercial arm of the American Airlines
maintenance and engineering division]. Tulsa would take a hit [the
company's largest maintenance facility is in Tulsa]. Thereafter, it
would be route-picking for best capacity versus revenue, which
would impact the number of hubs. Hubs that are also major
enplanement locations are likely to survive. Those that were
convenience hubs, used because they were available, are unlikely to
survive as hubs and become only destination airports. This makes
for a sizable loss of personnel, due to reduced required support.
MV: How much would the merger increase costs?
The merger would be unlikely to make much difference in cost for
consumers. Assistant Attorney General Bill Baer claims that past
mergers have resulted in higher costs. However, those cost
increases were more often normalization of industry wages after
bankruptcies and fuel cost increases. It is hard to find any
substantive evidence of direct cost effect from mergers.
MV: Is there precedence for this?
DoJ has pressed for information on previous airline mergers, but
has not taken it to this point. They have opposed
(T) and several others, but this looks like piling on with the
states' attorneys general.
MV: How can the airline industry be made more efficient and
more cost effective?
Actually, the industry is fairly efficient and effective. Most of
the cost was in personnel in the past. Now the biggest cost factor
fuel. Between the two costs, our cost as consumers has risen. Even
flying with virtually every aircraft full, the airlines profit per
is marginal. As [Richard] Branson said, "How do you become a
millionaire? Start as a billionaire and buy an airline."
MV: Did the government's deregulation of the industry in
1978 help or harm it?
The regulation and control before deregulation protected the
consumer, smaller airports, and the airlines. Deregulation gave the
airlines the opportunity to grow beyond their wildest dreams and be
incredibly stupid at the same time. When fuel was pennies a gallon,
that was survivable. Now, it is not. As to the consumer and
localities, it has been a mixed bag. Ticket prices are lower than
they should be on a cost basis, but we are being charged for
everything but the cabin air, and that may be coming. The
localities have been the biggest losers. Only the big airports have
survived. Was that in the best interests of either the localities
or the consumers?
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