Surprising most aviation experts, the Department of Justice decided to file a suit on August 14th to block the merger of American Airlines and U.S. Airways. While most analysts expected DOJ to require divesting flights at Reagan National, the consensus was DOJ and the airlines would work this out without the courts becoming involved.
Most experts agree that If DOJ had a real objection to these mergers, it should have objected to the Delta-Northwest, United-Continental or certainly the Southwest-AirTran mergers. Given that each of these carriers merged leaving us with three big airlines, the prevention of a fourth big airline that would provide vital competition with the other three is arbitrary and anticompetitive. Without a merger American and USAir will have trouble competing with the other big three. American is currently in bankruptcy and may not survive without a merger.
DOJ’s and the state attorney general’s stated objections are 1) highly concentrated markets, 2) coordinated behavior leading to higher fares and lower service quality, and 3) the elimination of head-to-head competition. But all of the previous mergers had these same issues and DOJ did not object then. The Cranky Flier does an excellent job tearing apart DOJs arguments on his blog.
Clearly there are other issues at play. DOJ is concerned about service out of Reagan National airport. The one other time the government sued to stop a merger, Reagan National was also affected–the 2001 proposal to merge US Air and United. Washington folks are likely concerned that service from DC will drop but since Reagan is the preferred of the three DC airports, this seems very unlikely. Total traffic from Reagan set a new record high for passengers in 2012.
Other airlines are interested in adding gates at Reagan. Delta swapped its gates with USAir for gates at LaGuardia. Delta would love to add more gates at Reagan. Southwest would certainly be interested in expanding at Reagan and would likely provide service to many medium sized markets. Further, there are also two other airports in the market. These airports are Washington Dulles where United has a hub and Baltimore-Washington where Southwest has a hub.
The real issue to the attorneys general of the various states is hubs. Cities want their airport to be a hub for at least one airline. The combined airline will have 8 hubs, 6 major and 2 minor, which is three more than it needs. But most of these hubs will likely see minor service reductions:
Dallas: American’s Dallas hub is the second largest in the world. American is unlikely to cut service here.
Chicago O’Hare: This airport ranks second in the U.S. both number of flights and number of passengers. American might cut a small amount of service but major cuts are unlikely
Miami: This airport may see cuts in domestic service as this is a geographically poor domestic hub, but this will be offset by an increase in international flights.
Charlotte: This airport may see a decrease in international service but will likely keep most of its domestic service. Despite having fewer than 2,000,000 people in the metro area, Charlotte’s US Airways hub is the third largest airline hub in the world.
Philadelphia: This hub’s fate is more challenging to predict. However, with the competition for gates in New York intense most analysts expect small service reductions in Philadelphia. The city is likely to remain a hub.
Phoenix: This hub’s fate is also challenging to predict. Sandwiched between Dallas and L.A. this hub is probably not necessary. But American’s L.A. hub is relatively small. Unless the airline can secure substantially more gates at L.A., American may not close its Phoenix hub. Regardless, Southwest also has a hub in Phoenix, so the airport will have quality airline service no matter what American decides.
New York City: This is another small hub for American. Both La Guardia and Kennedy have fewer than 100 American flights a day. NYC is an important metro area with Delta and United having larger hubs. American may close this hub but it is unlikely to matter.
The following chart shows airline hubs by region.
Table 1: Airline Hubs by Region
|
Airline |
Northeast hub |
Southeast hub |
Midwest hub |
Central hub |
Rocky Mountain hub |
West Coast hub |
|
Delta |
NYC-Kennedy, NYC-LaGuardia |
Atlanta |
Detroit |
Minneapolis |
Salt Lake City |
(Los Angeles, Seattle) |
|
United |
Washington-Dulles |
|
Chicago-O’Hare, Cleveland |
Houston-Intercntnntl |
Denver |
Los Angeles, San Francisco |
|
Southwest ** |
Baltimore-Washington |
Atlanta |
Chicago-Midway |
Houston -Hobby |
Denver, Phoenix |
(Los Angeles, Oakland) |
|
American/ US Air |
Philadelphia, (New York City) |
Miami, Charlotte |
Chicago-O’Hare |
Dallas |
Phoenix |
(Los Angeles) |
*Cities in parenthesis represent smaller hubs with fewer than 150 flights per day.
**While Southwest calls its hubs focus cities, the larger focus cities function as hubs.
So while hub closings are possible, they do not look to be a major issue. Many states/cities do not have to worry about losing their hub(s).
USDOT and States’ Attorneys General are using emotion—that of angry Americans–to guide their decisions. DOT knows (I hope) that they do not have a case. But they believe that they have to do something for Americans upset with airlines. Filing a lawsuit that they cannot win shows that these regulators sympathize with everyday Americans.
The reality is that Americans, particularly in smaller metro areas have long been spoiled. They have been receiving the benefits of great air service while the airlines have lost money and taken government bailouts. Cincinnati and Memphis could never support their hubs. Airlines wasted millions flying half full planes and offering discounts. This unsustainable business model forced every legacy carrier into bankruptcy at least once. Savvy leaders finally realized they had to make changes, including cutting unprofitable routes. By allowing previous mergers and blocking this one, DOJ is not only acting arbitrarily but protecting an oligopoly that excludes other carriers. DOJ is taking action even if such actions only make the situation worse.