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How US Airways and American Wrecked Their Own Merger

Rick Newman
The Exchange

In its legal complaint seeking to block the planned merger between American Airlines (AAMRQ) and US Airways (LCC), the Justice Dept. repeatedly cited evidence on how the deal would harm consumers from a surprising group of experts: executives of the two airlines themselves.

Since the two carriers announced their merger plan in February, executives from both have aggressively pressed their case for why a merger would make good business sense. US Airways shareholders would have to approve the deal, which would create the world’s largest airline. So would a federal bankruptcy court, since American has been working through a Chapter 11 filing for the past 20 months. That has given leaders of both companies strong incentive to explain how a merger would help cut overall costs, achieve greater scale and make the new airline a tougher competitor.

What’s good for business can be bad for consumers, however, especially in the cutthroat market for air travel. And Justice Dept. antitrust lawyers scrutinizing the deal found several ways in which executives at American and US Airways hope to enhance profitability at consumers’ expense. For instance:

The combined carrier would be able to reduce capacity, which typically pushes up fares. The DOJ complaint cites a US Airways presentation from 2012 — when the airline was privately building its case for a merger — that notes how a series of airline mergers has allowed bigger carriers to reduce seats on many routes and “reap the benefits.” US Airways and American would presumably be able to do the same thing if they merged to become the "new" American Airlines--the planned name--especially on routes where the two carriers currently compete against each other, but no longer would after a merger.

There would be less discounting. In 2012 US Airways sold at least 2.5 million discount tickets under its Advantage Fares program, which typically offers far lower prices for one-stop connections on routes where other carriers offer nonstops. An internal analysis at American found that, under a merger, the new airline would most likely kill Advantage Fares, because with American and US Airways no longer competing against each other, there would be far less need to lure fliers with discounts. “By ending Advantage Fares, the merger would eliminate lower fares for millions of consumers,” the DOJ complaint says.

Higher “ancillary” fees. Justice Dept. investigators examined internal US Airways emails and discovered executives agreeing that “even as the world’s largest airline we’d want to consider raising some of the baggage fees a few dollars in some of the leisure markets.” Since US Airways’ baggage fees are lower than American’s, the new carrier would “harmonize” fees by raising them to American’s levels, rather than dropping them to US Airways’ levels. And there would be other new charges for things such as frequent-flier mileage redemptions. Such ancillary fees, not usually included in the basic ticket price, have become an important source of revenue for airlines (and a source of aggravation for fliers).

Less competition. Mergers and takeovers make the most sense, from a consumer perspective, when one of the companies is likely to go out of business without such a deal. Yet the Justice Dept. cited US Airways CEO Doug Parker and a top deputy as saying that, once American emerges from bankruptcy, it is likely to be a stronger carrier fully able to compete on its own. US Airways has enjoyed strong profits recently as well. So a merger would basically reduce two healthy carriers to one and cut the number of big airlines from five to four.

The Justice complaint also includes a list of more than 1,000 routes serving 14 million fliers per year that would suffer a significant loss of competition under a merger, according to a government analysis. The most prominent is Reagan National Airport in Washington, D.C., which no doubt is a preferred departure point for many Justice Dept. officials when they travel.

US Airways and American have vowed to battle the Justice Dept. in court and continue pressing for a merger. It’s possible that the two airlines could agree to give up some market share at Reagan National and make other concessions that might persuade the Justice Dept. to withdraw its objections. Airline execs might also want to pipe down about new ways to raise fees and fares. And if there’s something in it for fliers, maybe they should start talking about that.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.