By Douglas Holtz-Eakin and Sam Batkins
Tuesday the Obama Administration issued a surprise ninth inning initiative to scuttle the proposed merger between American Airlines and US Airways. It was unfortunate timing, contained weak economic foundation, and likely cemented thousands of layoffs. In this process, the only thing the White House really accomplished was to antagonize its union allies (the Transport Workers Union (an AFL-CIO affiliated), pilots unions, and the Association of Flight Attendants) and burnish its reputation as the most aggressive regulatory regime in recent history.
The administration apparently didn’t trust the two companies to act in their own interests and generate a business model capable of turning profits. The legacy American Airlines certainly had problems on this front, declaring bankruptcy and posting after-tax losses of $5.7 billion during the past four years. The Justice Department ignored this recent history, showing omniscient confidence in the struggling airline. “A revitalized American is fully capable of emerging from bankruptcy proceedings on its own with a competitive cost structure, profitable existing business and plans for growth.” American and US Airways had a plan for growth and profitability, but the administration didn’t like it and substituted its own judgment.
The veto is predicated on a doomsday, “largest airline in the world,” scenario in which nationwide competition is impaired and airfares soar. Unfortunately, there have already been two test runs of this scenario in the past few years, without dire consequences for consumers or competition. Delta was saved with its merger with Northwest, and became the largest airline, and United merged with Continental, taking the title of largest air carrier.
Prior consolidation has not harmed consumers. According to the Bureau of Labor Statistics, it was cheaper to fly in 2012 than it was in 2008. Seasonally adjusted airlines fares actually declined this June by 1.7 percent, and in April, by 0.7 percent. Despite the recent consolidation, there has been no dramatic hike in airline prices, and the administration offers only speculation of possible fare increases if the proposed merger were approved.
What about competition nationwide? The DOJ’s “Horizontal Merger Guidelines” use a formula (the Hirschman-Herfindahl Index (HHI)) for determining the degree of competition. An HHI of 10,000 represents a complete monopoly, while a value of zero indicates infinite competition. On a nationwide basis, the airline industry was already moderately concentrated, and while the merger would have merited scrutiny, the combined market would still be only moderately concentrated.
According to our calculations, the nationwide HHI is approximately 1,760. The DOJ suit never listed an economy-wide HHI, instead it selected city pairs that would see increased market concentration. For example, the suit listed the Virgin Islands, Hawaii, and Riverside, California 186 times in its city pair appendix. The administration might be able to cherry-pick small markets that will be heavily concentrated, but on net, it’s far too early to declare the “new American” will take over the skies.
It’s perhaps more offensive that this lawsuit arrives 48 hours before the companies were to submit their reorganization plans to a federal judge. After a relatively turbulence-free merger process, markets are now in shock. American stock hovers around $2, losing more than 50 percent of its value in midday trading. The ink was even dry on American’s planes sporting new tail logos representing the merger.
Rejecting this deal does nothing for the 73,000 employees at American Airlines, stockholders, or the unions supporting the new company. According to the employees who wanted the merger, it will result in reduced benefits and fewer jobs.
The president’s aspirations for “building a better middle-class” will end up as rhetorical overreach if his agencies continue their pattern of regulatory overreach that produce only the rubble of vetoed mergers and thousands of lost jobs.
Douglas Holtz-Eakin is the president of the American Action Forum, a policy think tank. Sam Batkins is the Director of Regulatory Policy at the American Action Forum.