Like nearly everyone else knowledgeable about aviation, I was astounded by the Justice Department’s attempt to forbid the merger of American and US Airways. And after reading all 56 pages of the DOJ brief, I was appalled at its hubris and lack of understanding of the dynamics of commercial aviation. I’m also still trying to figure out why the Attorneys General of six states signed onto this disgraceful exercise.
Let me begin at the macro level. What has been unfolding for the 35 years since the Airline Deregulation Act of 1978 is a painful discovery process as numerous airline companies have tried to develop viable business models (unconstrained by government route selection and price controls). Many new companies entered and failed, and the least nimble of what we now call “legacy” carriers went under (Braniff, Eastern, National, Pan Am, TWA, etc.). In the past decade the surviving legacies all went through bankruptcy proceedings and joined global alliances, but still had difficulty competing with the likes of Southwest, JetBlue, Spirit, Allegiant, and others with radically different (and profitable!) business models.
Clearly this says that the “legacy” sector should be shrinking, and the recent mergers of the survivors (Delta with Northwest and United with Continental, neither opposed by DOJ) seemed to be stopping the bleeding, thanks to less willy-nilly expansion and more careful pricing. The last best hope for American and US Airways is to do likewise—despite DOJ.
The Department of Justice’s concerns about diminished competition are focused narrowly on the legacy sector, as if Southwest and the others didn’t exist and weren’t growing and profitable. Southwest, thanks in part to its acquisition of Airtran (also unchallenged by DOJ) and its moves into major markets such as Atlanta, Denver, Chicago, and New York, has become, in reality, the fourth network carrier (after Delta, United, and the post-merger American). Instead of operating strictly point-to-point, Southwest’s share of connecting traffic is now up to 28% and its average route is 21% longer than 10 years ago.
And in the several weeks since the DOJ filed its antitrust case, both Allegiant and Spirit have announced many new routes. Allegiant will now serve 99 US destinations (most of them the kinds of underserved airports that the legacies have largely abandoned), while Spirit has penetrated such major hubs as Dallas/Ft. Worth, Denver, Minneapolis/St. Paul, and Chicago O’Hare. (If you want to read a well-informed critique of the specifics of DOJ’s case, check out Cranky Flier’s two-part assessment.)
As for the impact on airports, why the Republican AGs of Florida and Texas would seek to torpedo American’s best hope for long-term survival and growth is beyond me. Transportation Weekly suggests populist concerns about possibly reduced flights between Washington National and smaller cities in states like these if the merger goes through. But if the merger is killed, and American must struggle against megacarriers Delta and United, then it is major American hubs like DFW and Miami that are at risk of cutbacks. The former American stand-alone plan, based on the kind of large-scale expansion that has failed the legacy carriers, was rejected by all of the airlines’ creditors (as well as its employees) as highly likely to fail, yet DOJ’s brief presents it as a viable alternative.
I am not qualified to present a legal opinion on the strength or weakness of DOJ’s case, but my aviation background says that this case deserves to be rejected by the courts. It is based on a static model of commercial aviation, which DOJ thinks it can restructure with positive results for air travelers. Yet DOJ’s way of looking at aviation would never have predicted the rise of Allegiant and Spirit, with their radically different ultra-LCC business models. If there is any role for antitrust in a deregulated airline industry, it is to keep entry open to entrepreneurs and venture capitalists with potentially better business models—not to try to micromanage the shape of the industry.