Why You Should be Happy That the US Air & American Airlines Merger Won’t Go Through!

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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.

US Air American Air merger cancelled

Why the new American is NOT Arriving

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.

US Air American Air merger cancelled

There will be only 4 Major US Airlines if the US Air and American Airlines Merger is Approved (From DOJ Filing)

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.

Bottom Line

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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42 responses to “Why You Should be Happy That the US Air & American Airlines Merger Won’t Go Through!

  1. I agree completely. I may have missed it, but wanted to add, that it’s also good for those, who get airline credit cards for sign-up bonuses. More airlines = more competition and more incentive to provide better initial “hook” for the consumer.

  2. Agreed. I never thought this merger was a good idea simply from an award travel point of view. Seemed like all of the “good” about AA’s program would disappear after the merge. And of course less choice for consumers = higher fares and more fees. I hope you are right that this lawsuit is a kiss of death for the merger.

  3. Daraius. Thoughtful and thorough analysis. Congrats. Here is a reflection with a question at the end. I think one of the worst changes in the airline industry for those of us who have flown on a regular basis but do not have many business trips these days are the revenue requirements that Delta begun and United will institute next year. I would understand them for access to the top tier, but not sure what they are trying to accomplish with the rest of tiers. E.g. I am currently a United 1K, but more than upgrades I want to make sure I have the flexibility to book award tickets and change them for free, that should not be too much to ask. Even if I do not hit their revenue targets I would continue to fly on United to get to Premier Platinum. Here is the question: are you hearing enough backlash on the United changes that may prompt them or other airlines to change or do we just have to take it as the wave of the future?

  4. David Gutierrez

    A very good article. Glad to see the analysis.

  5. Daraius, As you rarely pay cash for any air trip, higher prices should not matter much to you. 🙂 Actually, there are likely some “good” points about a merger. I think an unbiased review needs to point out both sides, even if overall it may be unfavorable. My Lifetime Million Miler status on AA would likely help me if I flew US Air flights (for bonus miles, free bags, using miles, etc.). Not that I support a merger, but perhaps a stronger AA would be beneficial to “Elite” AA members.

  6. I think View from The Wing lays out a really good counter point to this point of view.

  7. I think the merger will still go through…US and AA will need to spend a few more $$$ to make everyone happy 😉

  8. 90k business class roundtrip to Asia, can’t beat that!

  9. Hi Daraius,
    I agree that less airlines = less competition, and this is bad for the consumer.
    I just wanted to book an award ticket with USAir and for all the four segments I looked into the least expensive category was all ‘sold out’.
    Looking at the available seats, 99% of the coach seats were open!
    what is the USAir policy regarding award travel?
    thanks,
    Maria

    • David S – I don’t expect the revenue requirements to go-away, and I personally wonder why it took so long to be implemented. It will take at least a few years for the airlines to get data to see if it is having an impact to the bottom line, so I wouldn’t expect any major change until then.

      @SAPMAN – Unlikely, because the Exec Plat upgrades would go away and there would be 4 elite status tiers from 3.

      @maria prel – Award seats vary based on whether the airlines think they can sell the seats or not. Just because a seat is available doesn’t mean it is for sale (some folks could not have picked their seats etc.)

      @Tony – It isn’t about fairness, but impact to the market dynamics. On the other hand, you snooze, you lose…

      @GeekAbroad – Good question, but I’d guess (and hope!) they remain with Star Alliance. But I don’t really know.

      @FortDub – You’re right, and I hope you are able to recover as much as possible.

      @Kent C – It is a takeover of American Airlines by US Air, disguised as a “merger.” US Air is the stronger of the 2 airlines, so if an airline does go under it will likely be AA.

      @Richard – A fund manager who “invested” in legacy airlines over the last few decades isn’t much of an investor. You bring up a fair counter-point, but there are other smaller airlines to compete with Delta and UA.

      @Billy D @Robert Hanson – THanks! That’s a very good observation, because most executives would feel similarly about consolodiation and raising prices (and that is to be expected and I don’t see any thing wrong with that belief). But the act of intimidating a rival CEO to not compete is a big no-no, and could very well be one of the main factors in the suit – that the CEO has already shown intent to act anti-competiviely. That said, I wonder who the rival airline CEO was, did he forward the email to DOJ, and if not, how did the DOJ get access to that email?

  10. But it was OK for NW and DL and CO and UA, but not AA and US… Interesting……

  11. If the merger doesn’t go through will US Airways remain a Star Alliance member or still move to Oneworld?

  12. But it was OK for NW and DL and CO and UA, but not AA and US… Interesting……

    By this reasoning, since NW and DL were allowed to merge, all of the remaining airlines should be allowed to merge into just one. Perhaps it could be called The Airline…

    As more and more mergers occur, fewer and fewer airlines remain to compete, and each new merger reduces the remaining competition by an ever growing degree. So instead of previous mergers setting a precedent for approval, instead they set the bar even higher for approval.

  13. The company I own is an unsecured creditor to AA to the tune of about $15k, so not everyone is happy that this deal is on the ropes. I understand you’re looking out for the traveling public in this article – but some of that additional value created in a merger was going to “make whole” a lot of us creditors who otherwise have very little hope. And many of the creditors have their entire livelihood at stake, rather than the amount we have.

  14. What was the real reason or reasons for this merger in the first place? Is US Air in trouble and is this a buyout in disguise, claiming merger to placate US Air shareholders? Both AA and US Airways sites pretty it up with answers for the merger but what’s the real deal. If it’s really a merger, why will the “new” airline carry no US Air branding, only the AA name? I know this is typical of mergers, but always made me suspicious of the “merger” claim. Or maybe they’re just trying to increase prices by combining/consolidating? If US Airways goes under because of the Justice Dept decision, then the result will be the same either way, one airline, AA, will emerge and dictate the rules.

  15. Daraius,

    Even though more competition is usually healthy, in the airline industry competition has created a disaster. Have you taken counts of how many airlines have fallen to bankruptcy and how many times each of them has done so in the past decades? Airfare is low thanks to competition, but in America airfare is so low that airlines do not make profits. When airlines go bankrupt, everyone suffers. Mutual funds that hold our money that invest in airlines lose money. Employees get laid off. Legal costs rise. Restructuring costs money. The US government bailed out the big banks during the 2007 financial crisis precisely because the cost of bankruptcy would devastate the economy.

    It is no different for the airline industry. Even worse, if this merger is not allowed to happen there will be actually even less competition since no other airline will have the tremendous resources to compete with Delta or United, the two companies that have grown enormous through previous mergers. These two behemoths have the resources to crush both AMR Corporation and US Airways as stand-alone companies, and pretty soon we will see these two companies go bankrupt again. And it will not be pretty.

    The only way for American Airlines and US Airways to compete fair and square with Delta and United is for them to merge to consolidate their resources. Without this happening, Delta and United will enjoy market dominance and subsequently will likely devalue their loyalty reward points since there will be less incentive for them to reward loyalty customers – flyers simple won’t have much of a choice: Delta or United, and nothing else.

  16. Daraius,
    This may be one of the best and most intellectual pieces of journalism you have ever written and I applaud your detailed breakdown and honest admission that you were wrong in thinking that merger would eventually go through.

    A View From The Wing has a different opinion but even he sees the court filings as a reduced chance as the merger being successful in the long run. Furthermore, each merger is judged on it’s own merits, therefore forget about other airline mergers. This has to do with what is taking place now in the airline industry, i.e. the additional fees that have been added to passengers and millions of dollars a years that have generated by airlines over the past few years which leads to THE most important point.

    The one glaring red-flag of this merger which USAIR is going to regret is the actions by their CEO Doug Parker who forwarded that email to a rival airline in an attempt to “collude” with a rival airline about the triple miles promotion.
    Collusion is an illegal agreement between two or more parties, therefore secretive, to limit open competition by deceiving or misleading.

    That my friends is the one thing that the Justice Department does take extremely seriously and maybe the straw that broke the camel’s back and differentiates this merger from all of the other mergers. When it comes to Anti-Trust matters, in any industry in the which involves collusion and the Justice Department is involved. It is the beginning of the end of any merger
    and not a negotiating tactic. That’s not an opinion. That’s a fact.

    So when anyone wants to know why this merger is different than any other airline merger, or why this merger won’t go through, or in the end why this merger didn’t go through; they can thank greedy Mr. Parker for showing his true colors.

  17. Billy D + 1

  18. Crazy. We’ll have a failing AA and a U.S. Airways which will have to become a low cost carrier to compete with UA & DL. How will they cut costs? Um, does the second biggest cost to an air carrier, employees, register? Too, they certainly won’t need many new aircraft, you think? Meanwhile, UA, DL & WN will certainly raise prices wherever they think it will stick.

    Look, these are businesses. They exist to make a profit for their owners, the shareholders. Air travel at a price that is below cost is not a right, not even a privilege. It’s an option sometimes, a convenience most of the time and, maybe a hassle if it means reduced service and increased ticket prices as, hypothetically, in this case.

    I started flying often for business in the late 70s, before deregulation. I joined several FF programs, AA first, in 1981. Airfares, inflation adjusted, far exceeded what they are today. Frequent flyer miles? Buy a ticket, then fly. That was it. Every airline stated that the award mile rules could change at their discretion and they have. This is political grand standing at it’s best.

  19. Not that it is actually a big deal to me but wouldn’t there be a few good things out of a merger for frequent flyers

    The cities that have US airways as a hub or focus city would have much more reward options using their American miles, and distance based Avois, after the merger

    Focusing on one less miles rewards program would be one larger pile of miles instead of two smaller piles. Adding routes could make redeeming awards easier, right?

  20. Whoa! Not so fast. Read B. Snyder’s piece today at crankyflier.com.

  21. I don’t think there’s really much doubt that this merger will go through in the ehd. Yes, details will need to be massaged and some slots will need to be relinquished, but THIS MERGER WILL GO THROUGH. Well worth noting that the DOJ has often filed against airline mergers — when I was working for the old Piedmont, the DOJ and a number of states (incl NY, PA, and WV) all filed against the merger. We all know what happened thereafter, don’t we?

    Don’t kid yourself. The AA/US is bound to happen.

  22. I saw the notes from the DOJ conference call today and they clearly characterized the current state of the airline industry and resembling an oligarchy. One airline raises its rates and the others follow suit? sounds like a version of price fixing to me. To be fair the airlines are not exactly cash cows so they have a right to survive. That said I think all the blow-back the travel hacking community is a concern that American and AAdvantange won’t survive (US Air probably will) without the merger. I think the fondness and loyalty AAdvantage generates has actually trumped the concern over the higher prices that inevitably come from less competition. Also I wonder if the impeding merger was a bargaining chip to help American restructure on more favorable terms and now that it looks dead – they are in much better shape.

  23. I saw the notes from the DOJ conference call today and they clearly characterized the current state of the airline industry and resembling an oligarchy. One airline raises its rates and the others follow suit? sounds like a version of price fixing to me. To be fair the airlines are not exactly cash cows so they have a right to survive. That said I think all the blow-back the travel hacking community is a concern that American and AAdvantange won’t survive (US Air probably will) without the merger.

  24. I think the fondness and loyalty AAdvantage generates has actually trumped the concern over the higher prices that inevitably come from less competition. Also I wonder if the impeding merger was a bargaining chip to help American restructure on more favorable terms and now that it looks dead – they are in much better shape.

  25. Pingback: Should I be worried about my US Airways miles? AA-US Merger Is Off - Travelthusiast

  26. This is a really great piece on MMS!
    I think Dougie may have pissed off one too many people. Blowback time.
    I think what AA must do now is a ridiculous promo…oh wait….

  27. Surely most of us are capitalists, and the DOJ’s actions here go against that. I’m seriously trying to understand. Why do we want the government deciding what for-profit businesses can or can’t do?

  28. Daraius,

    The airline industry is huge; legacy airlines have huge assets and equities. They also issue bonds to finance their operations. I don’t know why you decry fund managers that invest in airline companies – they are legitimate companies, and however you view those fund managers, the fact is that they hold consumers’ money. Every time an airline goes under, shareholders and bondholders lose money. And guess who those shareholders and bondholders are? We, consumers. We get poorer as a result of airlines going bankrupt.

    There is not much difference between a business and a consumer as people are misled to believe. Businesses are comprised of people, employ people and give people paychecks. Then people use their money to pay businesses for their services. Let businesses go bankrupt and consumers are out of money. We want businesses to succeed as much as we want consumers to save money. That’s basic economics.

    Now with fierce competition in the airline industry, the companies keep driving prices down to a suicidal level, then have no choice but file for bankruptcy. What benefits are there in airlines not being able to turn a profit?

    Smaller airlines like Southwest and Jetblue that can compete with DL and UA do so by restricting their niche, and that explains the dominant positions of the legacy airlines at many cities – the smaller airlines just refuse to compete in those cities since they don’t want to challenge the larger rivals head-on. So in those cities we only have AA and US Air to hopefully carry a reasonable level of competition. (Heck, Southwest and Jetblue don’t even fly international!) But US Air doesn’t have the size and resources, while AA is still trying to emerge from bankruptcy. Merging the two companies was the only viable way to create a meaningful rival with DL and UA.

    My main point is we need to stop the illusion about the polarity of consumers and businesses. We want both to gain. Let one suffer, and the other won’t live in peace.

  29. @Daraius – Perhaps you could give us a post on how to get the most value out of our 35K US Air sign up bonuses in case they’re not becoming advantage miles.

  30. Daraius – below is the story from the Dallas News written by the Texas Attorney General on why he joined the DOJ lawsuit. Your points #1, #4 and #5 in your story are directly addressed as three of his many reasons why he joined the lawsuit. Kudos to you.

    As far as Richard’s point that “merging the two companies was the only viable way to create a meaningful rival with DL and UA” all I have to say is that AA was poorly managed and had to file for Bankruptcy. They are successfully emerging from Bankruptcy by showing a company-record quarterly revenue and profits. Finally, “colluding” with competitors does not create a meaningful rival.

    http://www.dallasnews.com/opinion/latest-columns/20130815-attorney-general-greg-abbott-why-i-challenged-the-american-airlines-us-airways-merger.ece

  31. Billy D,
    You could easily say any airline that has gone bankrupt was poorly managed, so the whole industry is poorly managed?
    AA posted record revenue and profits because other airlines posted large revenue and profits as well – it was a good quarter for the industry. One quarter doesn’t speak for long term viability, especially when the fundamental problem of cutthroat competition hasn’t been resolved.
    What airlines need to do to survive together is to raise average prices to a level where some companies will make profits, and then compete around that level. It is useless to compete at a level where no one is making money.

  32. great article, i am glad Parker’s remarks were exposed to more customers than he’d have liked.

    again as AA elite SAPMAN pointed out, every coin has 2 sides. after the DOJ news, my AA stock shrink to 1/3 this week. I think this absolutely qualifies as one of the “good points about a merger. “.

  33. Richard – I totally agree. However, when I see blatant collusion taking place. You must admit, it takes away from the confidence you have in the CEO’s running those airlines.

  34. Billy D – I agree that the communication being leaked out definitely dealt a blow to the merger plan: it scares consumers of increased prices which would be inevitable to keep airlines alive. If you were the CEO of an airline company, I bet you’d recognize also that some degree of collusion would be needed to remedy the suicidal competition that’s ongoing.
    Next time you have a few minutes of free time, check out the stock price history of each of the airlines that are significant enough to offer international flights. The oldest date you see on the chart is when they emerged from bankruptcy:

    AA: 2011+
    DL: 2007
    NW: 2007
    UA: 2006
    US Air: 2005

    It’s not a pretty picture. This is what cutthroat competition did to the industry.

    That’s what cutthroat competition did to the airline industry.

  35. Billy D – I wanted to clarify that most of the “you”s in my post refer to MMS readers in general, not to you in particular!

  36. As a person with many miles in both airlines sitting here in the ex-TWA and Ex-AA hub that is STL I have to agree with you. I was a fan of the merger in hopes of getting more flight availability at STL but I don’t think it will matter.
    I also wonder if US will still head over to One World anyway.
    I also wonder if there may be some anti trust violations at some level between the two CEOs and airlines. Just speculation on my part.

  37. Brilliant analysis, Daraius. I have to admit, I wasn’t sure what to think about this merger. On one side, I’ve kinda been looking forward to it, having accumulated sensible amount of miles in both programs. But in the end, there is no way around the fact that less competition hurt the consumer, especially considering the actions of the US Airways CEO. Am I looking forward to paying a fee for redeeming an AA award the US Air way? Nope, can’t say I am.

    And Rob, antitrust laws exist in order to protect capitalism by protecting competition. In this particular case, the government is doing EXACTLY what it’s supposed to do.

  38. Andy: Agreed that the government is supposed to protect competition. Why didn’t they do anything when competition led to airlines slashing prices to below cost and went bankrupt as a result? Why did they only step in when businesses do what they are supposed to and make profits?
    As I have stressed, businesses and consumers are really the same; each one of us is part of a business and is a consumer at the same time. Both consumers and businesses can profit from healthy competition which should lead to businesses making money and consumers getting the goods and services they need.
    Funny that you should mention capitalism. Isn’t profit (or surplus) one of the fundamentals of capitalism? In this age, the only economic system in which businesses don’t make profits is a communist economy.

  39. I for one certainly hope you’re right about the US Airwaays/AA merger being nixed by the lawsuit. As an AAdvantage million miler, I use my AA points for about 75% of my air travel and have only paid for a handful of flights anywhere in the last decade. After reading you article, I certainly would begin liquidating my points and shifting my business to other airlines rather than give my business to a company with as big a prick as Doug Parker at the helm.

  40. It’s funny because you were wrong. And the only unexpected thing is that US/AA settled instead of stomping the DOJ in court, and I’m somewhat disappointed in them for that.