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An Airline Merger that Might Not Get Off the Ground

12:00 AM, Aug 17, 2013 • By IRWIN M. STELZER
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Previous mergers not only have been followed by fare increases, but the elimination or scaling back of hubs, depriving many travelers of convenient, nearby points at which to start their trips. The Government Accounting Office predicts that a merged company would de-emphasize US Air’s Charlotte hub in favor of American’s Miami hub in order to eliminate duplicate service to some 56 cities. Worse still from the point of passengers, these mergers never go smoothly. After three years of trying to get its operations in order, Southwest and AirTrans are experiencing delays, booking errors, and difficulty in combining their frequent-flier programs. United and Continental have had even greater difficulties combining operations: Late flights, lost reservations, disgruntled employees who often view passengers as interruptions in their ability to complete their crossword puzzles, and the lowest customer satisfaction rating in the domestic airline industry—at 62, a full 17 points below even the U.S. Postal Service, no paragon of efficiency.

None of this should be taken as the only possible interpretation of the facts that will be presented to U.S. District Judge Colleen Kollar-Kotelly, who is no newcomer to antitrust cases: She spent years overseeing the Justice Department’s settlement with Microsoft. US Air and American have retained some of the most experienced antitrust counsel in America to present their side of the story. The merger will create a stronger competitor for Delta, something American standing alone cannot do. Low-cost carriers will provide sufficient competition to prevent the merged company from raising fares and reducing service. The stronger company will be placing orders for hundreds of new aircraft, introducing Wi-Fi service, securing the high-paying jobs of thousands of employees and, as United CEO Jeff Smisek put it in an interview with Bloomberg Businessweek about his merger, making “the money we need to invest in the products our customers want.”

That story will be played against two bits of background music. The first is the industry’s history of multiple and for some carriers serial bankruptcies. According to the old saw, if you want to become a millionaire, first become a billionaire and then buy an airline. Defense lawyers will be warning that American, standing alone, will emerge from bankruptcy in a weakened condition, to which the antitrust team will undoubtedly respond that the past need not be prologue, that the conditions that forced previous bankruptcies have been corrected by cost cutting and better management.

The second bit of background music that the judge will hear is the moaning of customers dissatisfied with the myriad charges they face when changing flights ($200 on each of the major domestic carriers, proof that it is easy for few sellers to agree on prices without meeting in a hotel room), or checking baggage. Economists might like the idea of having each passenger pay only for the service he uses, but ordinary people, unread in theoretical economics but unnerved by surprise charges, disagree. The anti-merger witnesses will try to make the case that the $6 billion annually that the industry is exacting in these unpopular charges will rise as tacit collusion by the big four eliminates or reduces whatever competition remains in the industry.

A deal can be struck—forfeit some slots at Reagan, perhaps—but my guess is that the biggest investment in the industry right now is the Antitrust Division’s investment in this case, and it is not about to write it off with a settlement that leaves consumers as seriously disadvantaged as the Division’s lawyers say they will be.

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