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.
“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.
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