Must-know: An overview of the American Airline Group (Part 3 of 12)
American Airlines and U.S. Airways merger was conditional
The Department of Justice (or DOJ) opposed the merger between U.S. Airways and American Airlines stating that the reduced competition resulting from the merger would lead to higher air fares and poor customer service. It filed a lawsuit to prevent the merger on the following grounds:
- The merger would result in four airlines controlling more than 80% of the U.S. commercial air travel market making it easier for legacy carriers to co-operate and increase fares and ancillary fees.
- With control of 69% of the take-off and landing slots and 63% of the non-stop routes at Washington Reagan National Airport, the merged entity would operate as a monopoly and eliminate the benefits of competition to consumers.
- The capability of low cost carriers to compete with legacy carriers, Delta (DAL) and United (UAL), will be limited to their narrow network coverage.
- After the merger U.S Airway’s Advantage fares program would be eliminated—a consequence of this on competitive pricing explained in the next article.
- American Airlines would have otherwise implemented aggressive growth plans to come out of bankruptcy by increasing the number of flights and destinations served which would be beneficial for passengers.
The combined entity’s share in the Washington Reagan Airport (or DCA) would be as high as 68% and its share in New York LaGuardia would be 33%. Also, these airports are slot controlled with restricted access to new entrants which has already resulted in high fares. With the merger, fares would rise even higher, which would negatively affect customers.
The DOJ insisted on sale of slots and take-off rights in few airports to low cost carriers as a condition for approval of the merger. American Airlines (AAL) and U.S. Airways agreed to sell 14 take-off and landing slots at Reagan National Airport and 34 slots at La Guardia Airport in New York to low-cost carriers along with gates in five airports. The effect of selling the slots and gates on its market share is shown in the following chart. Southwest (LUV) and Virgin America bought the slots and Jet Blue (JBLU) bought flying rights at Reagan National Airport. American Airlines received $299 million on sale of slots in Reagan National Airport and recorded a gain of $305 million.
Browse this series on Market Realist:
- Part 1 - Overview: American Airlines Group Inc.
- Part 2 - Must-know: U.S. airline industry consolidation and restructuring
- Part 4 - Overview: American Airlines’ position in the international market
- Mergers, Acquisitions & Takeovers
- Investment & Company Information
- American Airlines
- U.S. Airways
- Reagan National Airport