Why American-US Airways merger isn’t flying with the Justice Department

The proposed union between American and US Airways has raised concerns about steeper airfares and fewer consumer choices. The Justice Department filed an antitrust complaint Tuesday.

Warning of substantial harm to airline consumers, the Justice Department and a half-dozen states filed an antitrust complaint Tuesday, seeking to shut down the proposed merger between US Airways and American – two of only four “legacy” airlines still flying.

The $11 billion merger would create the world’s largest airline. The combined company, along with United and Delta, would be the last to survive the Airline Deregulation Act of 1978.

For more than a decade, legacy airlines have been joining forces, prompting US Airways management to say the proposed merger would “finish[ ] industry evolution.” The DOJ had previously approved the mergers of Trans World Airlines with American in 2001, Northwest with Delta in 2008, and Continental with United in 2011.

Smaller mergers included the 2005 one between US Airways and America West and the 2011 merger between Southwest and AirTran.

The current proposed union, however, has raised concerns about the airline industry’s evolution toward greater consolidation – especially about the potential for increased “coordinated behavior,” in which large carriers simply mimic one another’s prices rather than compete full scale.

The merger, officials say, would consolidate 80 percent of the airline market into four major carriers, including Southwest Airlines. There were nine major carriers in 2005.

“If this merger were to go forward, consumers will lose the benefit of head-to-head competition between US Airways and American on thousands of airline routes across the country – in cities big and small,” said William Baer, assistant attorney general for the DOJ’s antitrust division, in statement during a conference call with reporters Tuesday.

“They will pay more for less service because the remaining three legacy carriers – United, Delta and the new American – will have very little incentive to compete on price,” Mr. Baer continued. “Indeed, as our complaint shows, the management of US Airways, which will run the new airline, sees consolidation as a vehicle to reduce competition between the airlines and raise fees and fares.”

American and US Airways currently compete in routes together serving more than 14 million passengers annually and collecting more than $6 billion in fares, the complaint said.

Responding in a joint press release Tuesday afternoon, the companies vowed to mount a “vigorous and strong defense” of the antitrust suit.

"We believe that the DOJ is wrong in its assessment of our merger,” the statement said. “Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together. Blocking this procompetitive merger will deny customers access to a broader airline network that gives them more choices.”

But officials believe the merger is far from “procompetitive.” Baer gave an example of the DOJ's concerns, explaining the impact the merger would have on Reagan National Airport in Washington – a hub for US Airways. When JetBlue began service between Boston and Reagan National, competing head-to-head with US Airways, fares dropped more than 30 percent and consumers saved about $50 million a year.

“Similarly, consumers saved about $14 million in lower fares between Tampa [Fla.] and Reagan National after JetBlue started competing against US Airways,” Baer says. “But – and this is important – half of JetBlue’s slots at Reagan National are leased from American. If this deal is allowed, new American can terminate that lease and JetBlue’s ability to compete will be severely diminished. Consumers will pay the price.”

Even so, the suit came as a surprise to many industry observers, since the two airlines had already been approved by the European Union last week, after agreeing to give up gates at Heathrow Airport in London and Philadelphia International Airport.

The complaint also leaves American’s Chapter 11 bankruptcy in limbo. The airline, owned by Texas-based airline holding company AMR Corp., had lost about $12 billion since 2001 and had filed for bankruptcy in 2011, seeking to reduce labor costs and restructure its business plan.

"[This] merger provides the best outcome for AMR's restructuring,” the airlines’ statement said. “The widespread support from the employees and financial stakeholders of both airlines underscores the fact that this is the best path forward for both airlines and the customers and communities we serve.”

The complaint was joined by the attorneys general of Arizona, the District of Columbia, Florida, Pennsylvania, Tennessee, and Texas.