Ask The Experts: Should American Airline, US Airways Merger Be Blocked?

Ask The Experts Should American Airline US Airwais Merger Be Blocked

The airline industry has returned to profitability in recent years, partly due to additional fees and partly because of consolidation, which has reduced competition. In 2005, for example, US Airways absorbed America West. Now, US Airways and American Airlines are set to merge. But should the deal be allowed to go through?

The U.S. Department of Justice initially moved to block the planned merger, saying it would be bad for consumers, only to announce a settlement on Nov. 12. The settlement enables the merger, on the condition that new behemoth carrier, which will fly under the American Airlines banner, reduces the number of flights that it services through Washington, D.C.’s Ronald Reagan National Airport as well as LAX, LaGuardia, Boston Logan, Dallas Love Field, Chicago O’Hare, and Miami International. The thought is that the new restrictions will enable more competition at these major airports — where American Airlines and US Air currently control as much as 70% of the market — and that will in turn reduce the cost of flights to major various major cities.

But will that ultimately be enough to make the merger worthwhile for consumers, or will the government’s initial fears be realized? The experts we consulted don’t see eye to eye on that question.

In favor of the merger

“I think the Justice Dept should allow the merger,” said Charles Kane, senior lecturer at MIT. “Competition is extreme and information is so transparent via Internet travel web sites. When was the last time you were on a plane with an empty seat?  That should be the greatest measure of competitive efficiency in the markets.”

John Strong, professor of finance at the College of William and Mary, notes that the proposed union of American and US Air is simply the latest in a string of airline mergers. After all, he says, Delta merged with Northwest, United with Continental and Air Tran with Southwest.

“While I do think there are some antitrust issues with this merger, I don’t think they are any larger or more important than those in the other deals,” Strong said.  “If the government were going to step in, it should have done so earlier – the barn door has already been opened.”

Anna Nagurney, Professor at the University of Massachusetts, believes the government has gone “overboard” in opposing the merger. On balance, she says, it might not harm consumers.

“We have conducted a lot of research on assessing synergies associated with potential mergers and acquisitions from a network perspective,” she said.  “If there are positive synergies, as in the form, for example, of cost reduction, and even risk reduction, this may, subsequently, be reflected in the prices that consumers pay, which may actually become lower. I think that what really is needed is a complete system-wide assessment of any large-scale merger as the American Airlines and US Air one would be creating, in effect, the largest airline in the world.”

Cooling off period

It’s possible the government’s opposition isn’t really opposition at all? Some experts we consulted see it as providing an appropriate “cooling off” period.

“Even though time is of the essence from a business perspective, it never hurts to take a step back and evaluate a move that will have such a profound impact on the airline industry,”

said  Malika S. Simmons, visiting assistant professor at the University of Missouri Kansas City.

“In addition to the US Department of Justice (DOJ), there has been opposition from the attorney generals of several states.”

While Simmons thinks the review is completely appropriate, she thinks it should be conducted in a timely manner. The merger, after all, was announced back in February.

As for the question of whether continued consolidation in the industry is bad for consumers, John Strong, a professor of finance at the College of William and Mary, says it will probably limit choices.

Limitations

“The industry is still pretty competitive, but if and when this merger goes through, there will be only four major airlines,” Strong said.  “This is fine if you live in a medium-sized city with connections to multiple hubs, but there will be higher fares in hub cities and for those small cities unfortunate enough to only be linked to one hub airport.”

Erik Gordon, clinical assistant professor at the University of Michigan, agrees. He says the Justice Department was right to oppose the merger, saying the industry has consolidated to the point that there is a danger of too little competition.

Meet Our Experts

 

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Charles H. McGill

Adjunct Professor of Finance, NYU Stern School of Business

The Department of Justice has opposed the proposed merger of American Airlines and US Air. Do you think this was the right course of action?

As a procedural matter, I think that the DOJ action is appropriate as it effectively extends the review process and allows for negotiations so as not to exacerbate high concentration at hubs notably including DCA. Hence, there is a general investor assumption that these problems will be resolved and an amended merger plan eventually approved.

Do you think there is enough competition in the airline industry? Is there a chance there is too much?

Over recent decades the industry has moved from a once highly-regulated oligopoly to a somewhat self-regulated oligopoly but with notable successful smaller competitors (i.e. Jet Blue, Southwest et al.). I suspect that new entry is also still feasible. Notably, over the long haul, airline coach fares have actually declined significantly in real dollars. There is competition and certainly not too much.

Do you think consumers have enough information about fees and other charges so they can make an adequate judgment about what a flight will cost?

Within reason, yes.
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Malika S. Simmons

Visiting assistant professor, University of Missouri Kansas City, School of Law

The Department of Justice has opposed the proposed merger of American Airlines and US Air. Do you think this was the right course of action?

Even though time is of the essence from a business perspective, it never hurts to take a step back and evaluate a move that will have such a profound impact on the airline industry. In addition to the US Department of Justice (DOJ), there has been opposition from the attorney generals of several states. They agree with the DOJ’s assertion that the merger of American and US Air will reduce competition and increase prices for consumers. American and US Air counter that a merger will stimulate competition, and that it is necessary to compete again Delta and United, which have undergone mergers of their own in recent years. It is appropriate to evaluate which argument is more persuasive, but it needs to be done in a timely manner.

Do you think there is enough competition in the airline industry? Is there a chance there is too much?

The merger would leave just four airlines to service 80% of the entire US market. That reduced competition would certainly impact consumers. In many cases, where competition is reduced, consumers often pay the price, literally, and see a reduction of quality in services. That is certainly the case for the airline industry. Let’s look at what has occurred in the industry over the past 30 years. Among a variety of other changes that the industry has seen, we are now paying additional fees for baggage and leg room, something that would have been unheard of some time ago.

Do you think consumers have enough information about fees and other charges so they can make an adequate judgment about what a flight will cost?

Yes, for the most part the prices that you see when clicking through travel websites are the prices you will pay. As of January 2012, new rules from the Department of Transportation mandated that airfare prices must display the total cost, including government taxes and mandatory fees. By the time, consumers purchase their tickets, they essentially know what the baggage fees are and any other incidental fees that they will be charged. However, just because consumers know the total cost doesn’t mean they like it.
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Charles Kane

Senior lecturer, MIT Sloan

The Department of Justice has opposed the proposed merger of American Airlines and US Air. Do you think this was the right course of action?

I think the Justice Dept should allow the merger. Competition is extreme and information is so transparent via Internet travel web sites. When was the last time you were on a plane with an empty seat? That should be the greatest measure of competitive efficiency in the markets.
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John Strong

CSX Professor of Finance, Mason School of Business, College of William and Mary

The Department of Justice has opposed the proposed merger of American Airlines and US Air. Do you think this was the right course of action?

I think the proposed AA/US merger is the latest in a series of mergers that have consolidated and increased concentration in the industry. The US/AA deal was preceded by DL/NW, Air Tran/Southwest, and United/Continental. While I do think there are some antitrust issues with AA/US, I don’t think they are any larger or more important than those in the other deals. If the government was going to step in, it should have done so earlier – the barn door has already been opened.

Do you think there is enough competition in the airline industry? Is there a chance there is too much?

The industry is still pretty competitive, but if and when AA/US goes through, there will be only 4 major airlines. This is fine if you live in a medium-sized city with connections to multiple hubs, but there will be higher fares in hub cities and for those small cities unfortunate enough to only be linked to one hub airport.

Do you think consumers have enough information about fees and other charges so they can make an adequate judgment about what a flight will cost?

Frequent flyers understand this, I think, but the broader public could benefit from better up-front information. These fees and charges come from 2 sources — the airlines (baggage and seat charges) and the government (excise and security fees). The larger issue is the variety of fees and taxes imposed.
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Anna Nagurney

Professor, University of Massachusetts, Isenberg School of Management

The Department of Justice has opposed the proposed merger of American Airlines and US Air. Do you think this was the right course of action?

The Justice Department, in my opinion, has gone a bit overboard, to use another transport mode analogy. Other similar airline mergers have been approved. While there may be a few incidents of reduced competition (or market dominance), a less drastic approach and some negotiations could have most likely solved these issues.

We have conducted a lot of research on assessing synergies associated with potential mergers and acquisitions from a network perspective. If there are positive synergies, as in the form, for example, of cost reduction, and even risk reduction, this may, subsequently, be reflected in the prices that consumers pay, which may actually become lower. I think that what really is needed is a complete system-wide assessment of any large-scale merger as the American Airlines and US Air one would be — creating, in effect, the largest airline in the world.

If the merger does go through care must be taken to ensure that people do not lose their desired air travel connectivity. I am still trying to recover from the Delta-Northwest merger which resulted in a direct link from Bradley Airport (Springfield-Hartford) to Amsterdam Schiphol being cancelled and this flight was always filled and was profitable. The cancellation of this flight from our area to Europe has caused a lot of inconvenience for frequent travelers in our region who must drive two hours to Boston Logan or 3-4 hours to JFK for direct flights to Europe.

With the American Airlines and US Air merger, there would still be 4 major airlines controlling about 90% of the air routes in the U.S. How close are their corporate cultures? — Delta and Northwest had very different cultures and it took time to synthesize procedures and to even have the airline staffs be comfortable with one another’s business processes.

Do you think there is enough competition in the airline industry? Is there a chance there is too much?

There definitely is not too much competition. The competitiveness really depends on your points of origin and your desired destinations. There are regions in the Northeast, for example, where a round trip ticket to eastern Canada (I won’t mention the airline) on a cramped puddle jumper plane on which the steward can’t even stand straight nor serve you costs over $1,000.

To really make the airline industry competitive, I would like to see more investment in other infrastructure and modes of transportation — including rail.

Do you think consumers have enough information about fees and other charges so they can make an adequate judgment about what a flight will cost?

I think that, in some cases, we are dealing with information asymmetry. Airlines know not only their charges and fees but also the quality of the flight experience from the food and service provided to the level of staffing to any amenities offered, and that includes also those offered in coach. Since competition has driven fares in many locations to low levels, carriers are clamoring for other revenue streams. This has led to multiple types of fees and charges to raise revenue. On one hand, I understand why these are necessary and why carriers would rather keep the fare low and impose these fees and charges; on the other hand, it is almost impossible for the flying public to keep totally abreast of them. In addition, corporate and frequent travelers are often exempt from some of the fees, so that it is difficult to make a quick judgement as to which is the lowest fare.

As a frequent international business traveler, I have my share of fabulous travel experiences as well as horrific ones, and so much of the former rests on the courtesy and care of the airline staff, the quality of the meals (yes, you can still get fed well sometimes), and even the announcements made (or even better, keeping them at minimum so that there is peace and quiet on long-haul flights). And, let’s not forget the amount of leg-room on the plane!

Consumers will pay with their wallets and airlines will get repeat customers if the travel experience is pleasant and the arrival time is close to the scheduled time.
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Erik Gordon

Clinical assistant professor, University of Michigan, Ross School of Business

The Department of Justice has opposed the proposed merger of American Airlines and US Air. Do you think this was the right course of action?

Yes.

Do you think there is enough competition in the airline industry? Is there a chance there is too much?

The industry has consolidated to the point that the danger is too little competition, not too much competition.

Do you think consumers have enough information about fees and other charges so they can make an adequate judgment about what a flight will cost?

Yes. Most consumers buy tickets at online sites that make the total cost, including the array of taxes and fees, clear. The only surprises are charges for snacks on some airlines, and those charges Re irritating but small.
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David Becher

Associate Professor of Finance and Distinguished Fellow, Center for Research Excellence, Drexel University Fellow, Wharton Financial Institutions Center, University of Pennsylvania

The Department of Justice has opposed the proposed merger of American Airlines and US Air. Do you think this was the right course of action?

Well I think at first, a lot of people were surprised by the decision. The overlap between the two carriers is not that great and it seemed that the deal would get approval. The Justice Department, however, is looking at anti-competitive concerns using a broader measure than just route overlap. Apparently, USAir’s CEO has made a number of statements in e-mails concerning the ability of the combined carrier to alter pricing and other issues. The DOJ is using these statements against the airlines. It will be interesting to see how the airlines fight these charges, but I think at the least additional concessions or guarantees are going to have to be offered.

Do you think there is enough competition in the airline industry? Is there a chance there is too much?

One concern voiced is that the top four carriers will control 80% of the market and this made lead to higher pricing and less choice. To be realistic, the airlines are publicly traded companies that are looking to make a profit. This increased consolidation should allow them to face less pressure on fare wars and help protect the bottom line. In their eyes, they provide a service that comes at a cost. From the consumer point of view, having American as an independent carrier helps them. The notion is that American as a stand-alone cannot grow organically enough to compete with the biggest airlines. The only way, therefore, to grow substantially would be to cut fares and attempt to steal passengers. Other airlines would be forced to follow suit to compete and this would lead to lower airfares but less profits. American combined with USAir, however, would clearly give them the heft to compete and decrease the need to cut fares.

Do you think consumers have enough information about fees and other charges so they can make an adequate judgment about what a flight will cost?

I am not sure how much I can respond to this question. Clearly, there has been a push over the past few years to ensure that passengers are aware of the total cost of the ticket when using consolidator/discount web sites. I am not sure, however, that passengers factor in all fess (like checked baggage fees) when price shopping. Plus, it is possible to book an airfare without a seat selection and then later find out there is a possible charge for “premium” or “choice” seats in coach. I am not suggesting that the airlines are hiding this information but I am also not clear that passengers consider all these costs and they compare prices (on kayak or Priceline or some similar website).

 
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