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In February, I wrote that the proposed US Air and American Air merger is bad for most folks, but good news if you run or own an airline.
Fewer airlines almost certainly means worse service, higher prices, and less choice for consumers. Airlines don’t merge out of the goodness of their hearts, but to make money for their shareholders.
They do that by reducing costs and often by cutting service from cities (despite the airline executives saying that they won’t cut service when the merger is pending approval) or by raising the prices of tickets and fees.
Fewer airlines means that it is easier to get price increases and fees to “stick” and that consumers have no choice but to pay more. For example, have you wondered why fees keep on increasing to make changes to tickets or for checking bags?
The Justice department agreed with me and filed a lawsuit yesterday (thanks to Million Mile Secrets reader traderprofits for the link to the suit and email commentary) to prevent the merger, which almost certainly means that the US Air and American Airlines merger will NOT go through.
I don’t see this suit as a bargaining chip by the Department of Justice, but is designed to stop the merger from going through.
I also wrote that I didn’t expect the merger to be blessed easily by European and US anti-trust regulators, but I expect the merger to ultimately go through.
I was right about the merger not being blessed easily, but I expect to be wrong about the merger ultimately going through.
After reading the Department of Justice court filing, I don’t hold out much hope that the merger will go through. I’d guess that American Airlines and US Air will walk away from the deal like AT&T and T Mobile did when the Department of Justice opposed their merger.
Don’t buy US Air miles hoping that they will become American Airlines miles, though US Air miles are still valuable to use on their Star Alliance partners.
Why The Merger Is Bad
The Department of Justice filing has some great examples of how US Air CEO Doug Parker tried to get price increases to “stick” and even tried to shame another airline CEO into withdrawing a triple mile promotion.
Note that I don’t see anything wrong with executives trying to make more money for their shareholders, because that’s what they are paid to do. I just don’t want to pay more money as a consumer!
Here are some of the highlights from the Justice Department’s court filing. It is very clear what would happen if the meager is approved.
1. Make it Easier to Cooperate
The brief says:
By further reducing the number of legacy airlines and aligning the economic incentives of those that remain, the merger of US Airways and American would make it easier for the remaining airlines to cooperate, rather than compete, on price and service.
Translation: Fewer airlines means that it is easier to get higher prices to stick.
Doug Parker, the CEO of US Air is quoted as saying:
“Three successful fare increases – [we are] able to pass along to customers because of consolidation.” (emphasis added).
Similarly, he boasted at a 2012 industry conference: “Consolidation has also . . . allowed the industry to do things like ancillary revenues [e.g., checked bag and ticket change fees] . . . . That is a structural permanent change to the industry and one that’s impossible to overstate the benefit from it.”
Translation: Previous airline mergers have made it possible to raise billions of dollars for checked bag fees, ticket change fees, etc.
2. CEOs Take Liberty With the Truth to Get Mergers Approved
Most CEOs won’t tell you publicly that they will slash costs after the merger. But that is one of the main reasons why companies merge. Airlines are no different, and the brief quotes Doug Parker as saying:
Commenting on a commitment to maintain service levels made by two other airlines seeking approval for a merger in 2010, the CEO of US Airways said: “I’m hopeful they’re just saying what they need . . . to get this [transaction] approved.”
Translation: We don’t really mean it when we say that we won’t cut service to and from cities. We just say it to get the deal approved.
3. Higher HHI Index
In more than 1,000 of the city pair markets in which American and US Airways currently compete head-to-head, the post-merger HHI would exceed 2,500 points and the merger would increase the HHI by more than 200 points.
The Herfindahl–Hirschman Index (HHI) is a way to measure the amount of competition in an industry. The Anti-trust department considers an industry with a Herfindahl–Hirschman Index (HHI) above 2,500 to be highly concentrated which reduces the need for the players in that industry to compete.
The court filing ends with hundreds of city pairs where the HHI would be significantly above 2,500 after the merger. The brief says that merger is presumptively illegal in those city pairs.
Translation: There would be less competition in hundreds of city pair markets after the merger.
4. Willingness to Collude
The juiciest bit to me was when Doug Parker is alleged to have forwarded an email to a rival airline CEO about how bad a “triple miles” promotion was for the airline industry profitability. I was shocked to read this because many large companies make it VERY clear in their training to employees that such attempts to collude could be potentially illegal.
In 2010, one of US Airways’ larger rivals extended a “triple miles” promotion that set off a market share battle among legacy carriers. The rival airline was also expanding into new markets and was rumored to be returning planes to its fleet that had been mothballed during the recession. US Airways’ CEO complained about these aggressive maneuvers, stating to his senior executives that such actions were “hurting [the rival airline’s] profitability – and unfortunately everyone else’s.”
US Airways’ senior management debated over email about how best to get the rival airline’s attention and bring it back in line with the rest of the industry. In that email thread, US Airways’ CEO urged the other executives to “portray these guys as idiots to Wall Street and anyone else who’ll listen.”
Ultimately, to make sure the message was received, US Airways’ CEO forwarded the email chain—and its candid discussion about how aggressive competition would be bad for the industry—directly to the CEO of the rival airline. (The rival’s CEO immediately responded that it was an inappropriate communication that he was referring to his general counsel.)
Translation: Doug Parker pushes the envelope to get other airlines to not compete and maintain overall industry profitability.
5. The Merger Will Result in Higher Fees
The levels of the ancillary fees charged by the legacy carriers have been largely set in lockstep. One airline acts as the “price leader,” with others following soon after. Using this process, as a US Airways strategic plan observed, the airlines can raise their fees without suffering “market share impacts.”
For example, American announced that it would charge for a first checked bag on May 21, 2008. On June 12, 2008, both United and US Airways followed American’s lead. Similarly, over a period of just two weeks this spring, all four legacy airlines increased their ticket change fee for domestic travel from $150 to $200.
Translation: Your $200 change fee for a paid ticket was implemented because they are fewer airlines to resist a fee increase and compete.
A December 2012 discussion between US Airways executives included the observation that after the merger, “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.”
Translation: As the largest airline (if the merger was approved), American Airlines would continue to raise fees.
US Airways’ own documents estimate that “fee harmonization” would generate an additional $280 million in revenue annually—directly harming consumers by the same amount. A US Airways presentation from earlier this year analyzing the merger identifies American’s lower bag fees as a “value lever” that US Airways “will likely manage differently with tangible financial upside.”
Translation: We’d love to jack-up the checked bag fees after the merger.
US Airways also plans to institute its fees ($40 on average) for the redemption of frequent flyer tickets on American’s existing frequent fliers, who currently are not charged for mileage redemption.
You’d have to pay a $25 to $50 fee (in addition to the miles and taxes) to redeem your American Airlines miles, unless you were an American Airlines elite member.
I’m glad that the Department of Justice is filing suit to prevent the merger, and see virtually no chance of the merger going through based on the current filings.
A combined US Air and American Airlines merger almost certainly means fewer seats, higher prices, and less need for the airlines to compete for your business!
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