The Justice Department’s surprise lawsuit to block the proposed $11 billion consolidation of American Airlines and US Airways appears to doom the latest airline mega-merger, at least in its current form. But for airline passengers, the prospect of two stand-alone airlines is mostly good news.
Stopping the transaction will keep airfares affordable and fees in check by maintaining the present level of competition, according to the federal government. It will also give consumers more choices in air travel. “By challenging this merger, the Department of Justice is saying that the American people deserve better,” said Attorney General Eric Holder in a prepared statement. Six states — including Arizona and Texas, where US Airways and American, respectively, are based — and the District of Columbia joined the DOJ in the antitrust lawsuit.
In a joint response, American and US Airways called the regulators “wrong” in their assessment of the merger and promised to mount a vigorous defense of their plans. “Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together,” they insisted.
Just a few weeks ago, few thought that the government would challenge the merger. The proposed coupling had already been cleared for takeoff by European Union regulators and American Airlines’ shareholders and creditors. But a separate lawsuit filed in San Francisco federal district court challenging the airline deal, a slew of news reports questioning the wisdom of the merger, and congressional testimony from passenger representatives appeared to turn the tide on what most observers believed was an inevitable deal.
“This merger would have had the potential to clobber competition,” says Charlie Leocha, director of the Consumer Travel Alliance. “The consequences would have been dramatic.” (Disclosure: As the co-founder of the CTA and as a consumer advocate, I also asked the DOJ to take a careful look at the merger.)
The government objected to the transaction for several reasons. It says that American and US Airways compete directly on more than 1,000 routes where one or both offer connecting service — more than 30 percent more routes than the United Airlines merger with Continental Airlines affected. Those routes represent “tens of billions of dollars” in annual revenue, according to regulators. American and US Airways “engage in head-to-head competition with nonstop service on routes worth about $2 billion in annual routewide revenue,” according to the Justice Department. Removing that competition “would give the new airline the incentive and ability to raise airfares.”
A particular area of concern was Washington’s Reagan National Airport, where the new airline would control 69 percent of the takeoff and landing slots. That would translate into higher prices and fewer choices, the government claims.
Some experts think that the deal is still possible, but not as it’s currently proposed and probably not this year. Both airlines will have to come up with a Plan B — perhaps an offer to divest themselves of certain gates or landing slots — in order to secure the government’s permission. This assumes that the DOJ is in a bargaining mood, which is unlikely. “We think a full-stop injunction is the right outcome for consumers,” Assistant Attorney General William Baer said at a news conference after filing the antitrust lawsuit.