Regulators Sue to Stop American Airlines-US Airways Merger, But Why Now?

The Justice Department's suit slows a steady tide of airline industry consolidation.

The Department of Justice argues the merger between American Airlines and US Airways 'threatens substantial harm to consumers' by eliminating competition.

The Department of Justice argues the merger between American Airlines and US Airways 'threatens substantial harm to consumers' by eliminating competition.

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The Justice Department, along with six states and the District of Columbia, on Tuesday filed a lawsuit to block the merger of US Airways and American Airlines.

The department argued that such a merger "threatens substantial harm to consumers" by eliminating competition and making it easier for the largest airlines to maintain high prices. The merger would create the nation's biggest airline. According to the latest Department of Transportation statistics, the two airlines together accounted for more than 21 percent the domestic market share. The current largest airline, Delta, had a market share of 16.3 percent.

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If the government does succeed in blocking the merger, it would be an interruption in a long trend of airlines joining forces. The department last stood in the way in 2001, when it challenged a merger between United Airlines and US Airways. Since then, a wave of mergers has shrunk airline competition. Transworld joined with American, America West was folded into US Airways, AirTran combined with Southwest, Northwest joined Delta, and Continental joined forces with United.

All of that consolidation has left an airline industry in which business is heavily concentrated at the top. By some estimates, this merger would put 80 percent of the U.S. air travel market in the hands of the four largest companies.

That increasing concentration may be one reason why the Justice Department has decided to step in. The industry may have a "tipping point" of concentration, says Max Huffman, an associate professor at the Indiana University's Robert H. McKinney School of Law who has served in the Justice Department's antitrust division.

"My instinct is we're reaching that tipping point," he says. "When you get down to four airlines that effectively own air service in the U.S., these players are too big for any new entrants to come in and be a serious competitive threat going forward."

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A reduction of competition, according to the government's suit, has already hurt consumers.

"In recent years ... the major airlines have, in tandem, raised fares, imposed new and higher fees, and reduced service," the suit argues. "Competition has diminished and consumers have paid a heavy price."

There is evidence that past mergers have also boosted prices for flyers. According to a 2012 paper from the American Antitrust Institute, a Washington-based organization that advocates on behalf of consumers for competition, half of Delta and Northwest's overlapping hub-to-hub routes showed fare increases of 10 percent or more after those companies merged in 2008, and two routes saw a 20 percent increase. Meanwhile, prices grew on all United-Continental's flights studied after their 2010 merger, with four of 11 showing bumps of more than 30 percent.

Another factor that might come into play in the department's block on this merger is the economic climate, Huffman says.

"It was quite a different thing in 2010 to say, 'We need to merge because we're really on hard times here' than it is in 2013," Huffman says.

Though American is arguably facing tough times as it emerges from bankruptcy, the government's suit argues that the company is "fully capable of emerging from bankruptcy proceedings on its own," and that the revitalized American would potentially create competitive forces in the airline market. Likewise, the government argues that U.S. Airways is earning record profits and points out in the suit that "[e]xecutives of both airlines have repeatedly stated that they do not need this merger to succeed."

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The airlines have vowed to fight on. American Airlines and US Airways said in a statement that they would put up a "vigorous and strong defense" of their proposed merger. The airlines argue that benefiting passengers is the primary reason for the merger, and combining would create a "broader network that gives [customers] more choices" and increased service. The airlines also argue that combining would create greater efficiency. Combining airlines can mean cutting unnecessary equipment and airplanes, for example, which can allow an airline to cut costs and pass on savings to customers, Huffman notes.