Publisher's note: The author of this post is Michael Lowrey, who is an associate editor for the Carolina Journal, John Hood Publisher.
CHARLOTTE - To the surprise of industry observers, the U.S. Department of Justice in August filed to lawsuit to block the pending merger of US Airways and American Airlines. Contrary to much howling in the press and from the companies, unions, and communities involved, the DOJ's action was far from unreasonable.
Many, including the editorial boards of The Charlotte Observer and the Chicago Tribune, have questioned DOJ's action, arguing that US Airways and American are entitled to merge because the Justice Department hasn't objected to earlier mergers of big airlines.
Just because such household names as Delta and Northwest were allowed to merge in 2008, and United and Continental merged in 2010, does not make those mergers identical to the proposed deal between American and US Airways.
Each airline had its own strengths and weaknesses. And when this round of mergers began, American far and away was the largest U.S. carrier. The airline industry has evolved over the past five years, going from the depths of the Great Recession to strong profits today.
A key argument DOJ makes in its complaint highlights this point. The government notes that US Airways' business model is fundamentally different from American, Delta, or United. US Airways' hubs are in smaller cities than its competitors' - yes, that is a reference to Charlotte - and it doesn't get the same sort of revenues. To compensate, it must compete more aggressively for connecting traffic, offering what it calls "Advantage Fares," lower prices for a connection than American, Delta, or United do for a nonstop flight.
In city pairs where US Airways is not a factor, American, Delta, and United do not undercut each other in this manner, typically pricing a connection the same as their rivals' nonstop flights. Consumers have little reason to take a connection.
"The bottom line is that the merged airline would likely abandon Advantage Fares, eliminating significant competition and causing consumers to pay hundreds of millions of dollars more," said DOJ in its complaint.
Another contention made against DOJ's intervention is that the merger is needed to keep US Airways and/or American afloat. DOJ counters that both airlines' management had stated repeatedly before the merger was announced that they could survive as stand-alone entities.
And while American Airlines is operating under Chapter 11 bankruptcy protection, it has used the process to shed costs and become a formidable competitor, aiming to expand aggressively. Delta, Southwest, United, or US Airways aren't doing that now.
Indeed, the government argues that "after the merger, US Airways' current executives - who would manage the merged firm - would be able to abandon American's efforts to expand and instead continue the industry's march toward higher prices and less service. As its CEO candidly stated earlier this year, US Airways views this merger as 'the last major piece needed to fully rationalize the industry.'"
One can argue that much of antitrust policy is misguided, in that free-market forces develop new technologies and products that make existing monopolies and noncompeting oligopolies obsolete. Alas, the development of transporters a la "Star Trek" hasn't happened yet, so for the foreseeable future, airplanes are the most feasible way to travel large distances. Maintaining a competitive airline industry, as opposed to one characterized by a few oligopolists that see a need to compete against each other only in a few markets, would benefit all Americans.
Lawyers for US Airways and American are free to rebut the government's claims and show how their merger would promote competition. To argue that the merger is inherently good for consumers, though, ignores airline market realities in 2013.