Febuary 14 - American Airlines – US Airways Proposed Merger Problematic 


Benefits insufficient to offset consumer harms 

Introduction

An eleven-billion dollar proposal from American Airlines’ parent AMR Corporation and US Airways Group Inc. to merge their third and fifth largest U.S. airlines respectively is likely forthcoming by Friday, February 15, the day that non-disclosure agreements expire between the two firms. The transaction would create the country’s and world’s largest carrier by passenger traffic and would require various approvals from the U.S. Departments of Justice (DOJ) and Transportation (DOT) as well the EC’s DG COMP. If governmental analyses don’t force a regulatory tarmac delay, then decisions could be expected in some four to six months.

Summary Analysis

From a consumer standpoint – individual traveler or corporate travel department - there are few benefits to offset the negative impacts of this proposed merger that include reduced competition, higher fares and fees and diminished service to small and mid-size communities. To be clear, there is benefit in a financially viable air transportation system. However, previous mergers have already enabled seat capacity cuts, higher fares and billions of dollars in fees for ancillary services resulting in a financially strengthening industry. As such, consumer harms from this merger are indeed exacerbated, as there are no substantial countervailing consumer benefits.

The Right Regulatory Review Construct

Industry observers who suggest a quick takeoff and smooth ride through regulatory airspace point to previous mega merger approvals, relatively few overlapping routes and the need for these firms to be able to compete more effectively against giants Delta Air Lines and United Continental. However, Alison Smith, an antitrust lawyer at McDermott Will & Emery LLP in Houston, and a previous official in DOJ’s antitrust division, stated it well when on February 10, 2013 The Wall Street Journal paraphrased her analysis: “The key question is whether regulators believe the airline industry already is sufficiently concentrated.”[1]

Coordinated Effects A Big Problem

When there were eight network carriers, regulatory focus on route overlap and reduced competition in individual markets made sense. However, when the number of network competitors is cut in half, and headed for three, explicit or tacit agreements on market actions such as across-the-board fare or ancillary fee increases are made infinitely more achievable and take on far more importance than route overlaps. Furthermore, four network competitors since 2008, when radical industry consolidation began, have been able to dismiss in lockstep their best corporate customers’ demands for ancillary fee information, e.g., for checked bags. This is a huge sign that the market for commercial air transportation services is failing, and under this circumstance, how could prudent public policy suggest further consolidation of this industry?

This concern about competitor agreements is called “coordinated effects” in the U.S. and “collective dominance” in the EU and has been at the core of U.S. merger policy for some time. In 1986, for example, Judge Richard Posner wrote that the “ultimate issue" in reviewing a merger under the antitrust laws is "whether the challenged acquisition is likely to hurt consumers, as by making it easier for the firms in a market to collude, expressly or tacitly, and thereby force price above or farther above the competitive level.”[2]

The Problem Of Monopsony Power

Another important issue is that three mega network carriers would possess enhanced monopsony power and the ability to exercise this leverage to drive supplier prices below competitive levels for travel agencies, travel management companies, airports, global distribution systems, parts suppliers, caterers and all manner of supply chain participants. This central antitrust concern is addressed under the DOJ/Federal Trade Commission (FTC) HORIZONTAL MERGER GUIDELINES.[3]

No Failing Firms Here

For sure, a combined American Airlines and US Airways would have a bigger competitive footprint to compete with Delta and United Continental, but that’s the logic that has brought us to four network carriers, and if you continue to extend the logic the U.S. would be down to two closed network-carrier systems pretty soon, after one of these mammoth groupings acquires Alaska Airlines, JetBlue Airways and Frontier Airlines. What’s more, US Airways and American Airlines are not failing firms. The former is enjoying record profits while that latter is about to exit bankruptcy reorganization with billions of dollars in cash, lower operating costs and new aircraft on order.

The Diminishing Influence Of Low Cost Carriers

As the American Antitrust Institute and Business Travel Coalition discuss in their August 2012 White Paper (http://bit.ly/YKbshf), “The Proposed Merger of US Airways and American Airlines: The Rush to Closed Airline Systems,” in previous airline mergers applicants made the case that low-cost carriers (LCCs) would remain the ultimate guarantors of market discipline on merged firms’ pricing policies. However, there are fewer LCCs, and significantly, Southwest Airlines removed the true low cost maverick AirTran from the marketplace. With rising labor costs, unstable jet fuel prices and easy market share increases all but gone, Southwest could answer shareholders’ demands for revenue growth by benefiting from higher overall industry prices. So, Southwest has an incentive to throttle back on their competitive aggressiveness.[4] Moreover, because of the structure of the industry and volatility of jet fuel prices, the prospect of new LCC entrant competitors is dim, at best.

A Need To Forensically Analyze Past Merger Projections And Promises

In 2008, when Congress held hearings about the then proposed Delta Air Lines – Northwest Airlines merger, Doug Steenland, CEO of Northwest, and Richard Anderson CEO of Delta, made all manner of projections and promises about how and when the merger would produce cost-reduction and revenue synergies, new efficiencies, better customer service and innovations while not abandoning routes, downsizing hub airports, withdrawing or degrading service to small and mid-size communities or gouging consumers in monopoly markets. Indeed, Steenland went so fare as to argue that it would be virtually impossible to raise prices.

In written testimony (http://bit.ly/12JjnAe) to the Senate Antitrust Subcommittee on April 23, 2008 regarding the merger, Doug Steenland on pages 13-15 sought to defuse objections that the merger would increase the prices paid by consumers for air travel. In a section entitled, “Technology Has Created a Transparency Revolution,” he testified:

“Over the past several years, online sites such as Orbitz, Expedia, and Travelocity have been created to enable customers to compare airline offerings directly. These tools have provided enormous benefits to consumers and have increased the price-competitiveness of the airline industry.  In fact, there are few businesses in which there is as much pricing transparency…A consumer can log on to the Internet and, at the push of a button, review choices available across a wide variety of carriers.  That same customer easily can sort those choices to find the lowest available fare and view extraordinarily competitive prices for both non-stop and connecting flights.”

Virtually, while Steenland was testifying, airlines were setting out to harm the very online distribution channel that they used to justify these mega mergers. Major airlines were ensuring, through expressed or tacit coordination, that newly introduced ancillary fees would be concealed from confused consumers who would not be able to efficiently comparison-shop the “all in” price of air travel (fares & hidden fees) across multiple airlines ensuring billions of dollars in supra competitive fees for themselves. This contemptuous industry policy still applies today, five years later.

Congress, DOT, DOJ, the European Parliament and the EC’s DG COMP should use the Delta/Northwest and United/Continental mergers to forensically analyze advocates’ projections and promises against the real-world outcomes before any additional airline industry consolidation is even considered.

Anti-Consumer Elephant In The Room

Of paramount importance, these governmental institutions need to evaluate this proposed merger in light of the strategic direction the world’s airlines, through their trade association, the International Air Transport Association (IATA), are seeking to go in with respect to ending price transparency and comparison shopping for consumers and corporate travel departments. If this merger were approved, the most toxic, anti-consumer price-escalating/stabilizing scheme in the history of the airline industry would be inadvertently facilitated.

In October 2012 in Abu Dhabi, IATA airline members passed a Resolution binding on all 240 of these competing airlines with respect to implementing a new global business model called New Distribution Capability (NDC). IATA is likely to request approval and antitrust immunity from DOT for the international aspects of its new business model.

Here’s the problem IATA is endeavoring to solve in the words of its Director General Tony Tyler, as astonishing as it might sound:

“We’ve done a great job of improving efficiency and bringing down costs, but we’ve handed that benefit straight to our customers,” Tyler says. “As soon as someone’s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers – and you’ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditize ourselves.” Tony Tyler, Director General, IATA - Flightglobal (http://bit.ly/TTV8f1) - February 2013

Before And After NDC

Today, when you want to evaluate air travel options from point A to point B you can go to a travel agency, whether brick-and-mortar or online, in the knowledge that it has access to virtually all the fares, schedules and available inventory (“content”) and shop anonymously. All the relevant options in the marketplace are returned to you, and you can compare easily and efficiently the posted prices of multiple airlines without having to divulge any personal information about yourself.

Under NDC, this public availability of content that consumers take for granted would be severely limited, i.e. “rack rates,” equivalent to the high prices posted on the backs of hotel guestroom doors. Anonymous comparison-shopping would be largely a thing of the past. Here’s why.

Under the agreement among the airlines designed as the launch pad for NDC, before an airline would even consider responding with an offer to you through your travel agent (or on the airline’s website) it expressly has the right to demand the following personal information about you, at a minimum, upon which they would (but would not be required to) price their offer to you: your name, age, marital status, contact information [i.e. email address], frequent flyer numbers [on all carriers], nationality, travel shopping history, travel purchase history and whether the purpose of the trip is business or leisure.

The right to demand this intrusive information about you, the consumer, as a condition for quoting you any prices between points A and B has been euphemistically dubbed “authentication” by IATA. Your personal details would then be broadcast to the countless airlines that might offer service as opposed to being sent only to the carrier from which you chose to buy a ticket, the current practice. Airlines would combine this information with what they might already know about you from your frequent flyer program membership and data they purchase about you. You would no longer have returned to you all the air travel options in a market, but rather, only what airlines think you deserve to see. Obviously many of these items of personal information, such as whether the purpose of your trip is business or leisure and past shopping and purchase history, are designed to enable airlines to profile passengers from whom they can extract higher prices. 

In short, NDC has been carefully engineered by airlines to cure the problem IATA’s Director General perceives to exist in the current distribution landscape of publicly available fares that any consumer can compare and purchase on a non-discriminatory basis – namely, that airlines “undercut their competitors and hand the value [of greater efficiencies] straight to passengers.”

Importantly, the proposed American/US Airways merger, if sanctioned by Washington and Brussels, would increase the chances of success of IATA’s new business model by orders-of-magnitude. Why? US Airways has been a long-time competitive outlier and maverick in content distribution matters.

For example, in 2000 and 2001 when only airline-owned Orbitz had access to airlines’ web fares, US Airways was the first to break ranks and offer them to travel agencies and their corporate clients. Likewise, in 2006 when American Airlines took the industry to the brink of airfare content collapse, US Airways was a significant early-mover participant in full-content agreements averting a calamity for corporate travel programs and individual consumers alike.

If American, a full supporter of NDC, were to swallow maverick US Airways, then the chances that a competitively relevant competitor, in the world’s most important aviation market, would reject this over-the-top anti-competitive and anti-consumer IATA initiative, would be dangerously diminished. This represents the über manifestation of the coordinated-effects antitrust problem cited above, i.e. competitors pursuing a market-structure change understand implicitly that they should cooperate, including LCCs that would benefit from rising prices without directly participating.

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Editor’s Note: If a merger proposal is announced, Business Travel Coalition and the American Antitrust Institute will be updating their August 2012 White Paper, including a full range of remedies and an in depth analysis of IATA’s initiative.

[1]The Wall Street Journal - U.S. Likely to Clear Airline Deal (February 10, 2013) available http://online.wsj.com/article/SB10001424127887323511804578296221685366486.html

[2] Hospital Corp. Of America v. FTC, 807 F.2d 1381, 1386 (7th Cir. 1986). See also FTC v. H.J. Heinz, 246 F.3d 708 (D.C. Cir. 2001)("Merger law 'rests upon the theory that, where rivals are few, firms will be able to coordinate their behavior, either by overt collusion or implicit understanding, in order to restrict output and achieve profits above a competitive level.") (quoting FTC v. PPG Indus., 798 F.2d 1500, 1503 (D.C. Cir. 1986.)

[3] U.S. DEPARTMENT OF JUSTICE AND FEDERAL TRADE COMMISSION, HORIZONTAL MERGER GUIDELINES (GUIDELINES), §11 (August 2010), available http://www.justice.gov/atr/public/guidelines/hmg-2010.pdf.

[4] Los Angeles Times - Is Southwest Airlines losing the luv? (February 11, 2013) available http://www.latimes.com/business/la-fi-southwest-airlines-20130210,0,7839164.story