OLD LIES, CURRENT TRUTHS AND A MERGER
By Joe Brancatelli
August 14, 2013 --The delicious irony of the Department of Justice's opposition to the merger of American Airlines and US Airways is that the government's position rests both on the past lies told by the airline industry and contemporaneous truths that the two carriers have voiced about their proposed $11 billion combination.
Announcing its anti-trust lawsuit on Tuesday, the Justice Department marshaled a bureaucratic blizzard of statistics to claim the merger would lead to higher fares, higher fees, less service and less competition. The lawsuit echoes a recent Government Accountability Office report that raised disturbing questions about industry concentration after a rapid-fire series of mergers.
But Justice highlighted the blunt, unvarnished and unguardedly truthful words of top executives of US Airways (NYSE: LCC), who are slated to run the merged carrier, to buttress its decision to fight the combination with American Airlines (OTC: AAMRQ).
Will further airline-industry consolidation lead to higher fares? Justice answered by quoting US Airways president Scott Kirby: "Three successful fare increases – [we are] able to pass along to customers because of consolidation."
Will allowing US Airways and American Airlines to combine and create the world's largest carrier exacerbate the trend toward higher "ancillary" fees such as baggage charges? Justice answered with another quote from Kirby: "Consolidation has also ... allowed the industry to do things like ancillary revenues. ... That is a structural permanent change [and it is] impossible to overstate the benefit from it."
How about the "rationalization" of the commercial airline system, industry code for reducing competition and pushing fares higher? There Justice trots out a quote from US Airways chief executive Doug Parker: Merging US Airways and American Airlines would be "the last major piece needed to fully rationalize the industry."
The 56-page complaint goes point-by-point quoting both US Airways and American Airlines executives and internal documents to make a prima facie case against the merger. It even goes so far as to quote the airlines admitting that there is no compelling need for a merger because both carriers believe they would be independently competitive.
After the Justice Department action, Sun King-in-waiting Parker reacted furiously and vowed to fight on. The deal was good for consumers, would lead to more competition and "improve the industry as a whole," he claimed.
The problem with Parker's battle cry? Given the Justice Department's use of his own previous statements against him, his claims on Tuesday reeked of boxing promoter Bob Arum's classic quip: "Yesterday I was lying, today I'm telling the truth." To believe Parker's claim Tuesday that the merger would be good for fare- and fee-weary flyers, you have to believe he was lying earlier about the ability of the merger to raise prices and suppress customer choice.
That raises the other irony of the Justice Department's anti-trust action. Justice looked at the history of previously approved airline-industry mergers and decided that virtually everything the carriers said in order to gain government approval was a lie.
As shown in its lawsuit and the earlier GAO report, hoping-to-merge carriers fibbed when they claim competition would be enhanced. If US Airways and American combined, it would put more than 80 percent of the industry's capacity in the hands of just four big players, including Delta Air Lines (NYSE: DAL), which merged with Northwest in 2008; United Airlines (NYSE: UAL), which merged with Continental in 2010; and Southwest Airlines (NYSE: LUV), which merged with AirTran in 2011.
When airlines wanted to merge, they reflexively claimed (and the government blindly believed) that they would expand flight options. That, of course, is a lie. Airlines have shed capacity for years, partially by closing operations at hub airports they specifically promised they would keep open after a merger. Delta recently "dehubbed" Northwest's Memphis operation. American closed TWA's St. Louis hub after it acquired that carrier in 2001. The history of US Airways, itself the product of a series of mergers, is littered with a string of shuttered hubs.
Airlines' bold claims that they would protect the jobs of employees in their mergers? Untrue. According to government figures, airlines employed 23 percent fewer workers this past May than in May, 2001.
As for airline assurances that service would improve and fares and fees would remain fair after a merger, I leave that for you to decide. I'm guessing few business flyers would agree that the industry abided by pre-merger promises.
Of course, the government's decision to fight a US Airways-American Airlines merger may just be posturing. Although it used similar logic to successfully block the AT&T/T-Mobile merger, Justice may settle for concessions and eventually approve this deal.
The European Community blessed the combination earlier this month when US Airways and American agreed to surrender slots at London's congested Heathrow airport. That would make room for a new competitor between London and Philadelphia, a market where US Airways and American Airlines' partner British Airways would otherwise control all flights. The Justice Department may settle for a partial divestiture at Washington's slot-controlled Reagan National Airport, where the combined carrier would otherwise control about two-thirds of the take-off and landing positions.
If nothing else, the Justice Department action slows the merger's trajectory, which has been on a fast track since it was announced in February. US Airways chief Parker wanted to complete the deal in this fiscal quarter. Now he hopes the deal will close "before year end." And there is the matter of American's bankruptcy. It's in something of a legal limbo now. The judge in the case had approved American exiting Chapter 11 as part of a merger. Unless the two carriers strike a quick deal with the Justice Department, American would have to go back to its original plan and cobble together a stand-alone exit strategy.
That raises an intriguing possibility: Does the Justice Department action give American Airlines an opportunity to abandon the merger?
American chief executive Tom Horton, who took control on the day the airline filed for Chapter 11 protection in November, 2011, stubbornly resisted US Air's merger overtures for months. American's major labor unions were gung-ho for a merger, but few of the airlines' middle-level managers and C-suite executives were fans of the combination. None of those feelings have changed much. Few of American's top executives are slated to get posts in the merged airline and Horton himself will be ousted.
You might want to carefully read Horton's statement to American employees after Tuesday's DOJ lawsuit. Unlike Parker, Horton vows no campaign to get the merger approved. Except for a single, bland sentence, he doesn't even support the merger. And then he pointedly reminded employees that "all recent leadership announcements for the new merged American will be on hold."
The most delicious irony of all? The last time the Justice Department opposed an airline merger was in July, 2001. It sued to block the combination of the old United Airlines and the old US Airways. The merger collapsed in acrimony and United Airlines eventually walked away rather than fight the Justice Department.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
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