Peskova v. Travel Service AS | Ireland

US Airways and American Airlines

Background
Submissions

Background

The Department of Justice, six state attorneys general and the District of Columbia filed a civil antitrust lawsuit challenging the proposed $11 billion merger between US Airways Group Inc. and American Airlines’ parent corporation, AMR Corp. The department said that the merger, which would resulted in the creation of the world’s largest airline, would have substantially lessened competition for commercial air travel in local markets throughout the United States and resulted in passengers paying higher airfares and receiving less service.

Submissions

The Department of Justice’s Antitrust Division, along with the attorneys general, filed a lawsuit in the U.S. District Court for the District of Columbia, which sought to prevent the companies from merging and to preserve the existing head-to-head competition between the firms that the transaction would eliminate. The participating attorneys general were: Texas, where American Airlines was headquartered; Arizona, where US Airways was headquartered; Florida; the District of Columbia; Pennsylvania; Tennessee; and Virginia.

'Airline travel is vital to millions of American consumers who fly regularly for either business or pleasure,' said Attorney General Eric Holder. 'By challenging this merger, the Department of Justice is saying that the American people deserve better. This transaction would result in consumers paying the price – in higher airfares, higher fees and fewer choices. Today’s action proves our determination to fight for the best interests of consumers by ensuring robust competition in the marketplace.'

In 2012, business and leisure airline travellers spent more than $70 billion on airfare for travel throughout the United States. In the years preceding the proposed merger, major airlines had, in tandem, raised fares, imposed new and higher fees and reduced service, the department said.

“The department sued to block this merger because it would eliminate competition between US Airways and American and put consumers at risk of higher prices and reduced service,” said Bill Baer, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “If this merger goes forward, even a small increase in the price of airline tickets, checked bags or flight change fees would result in hundreds of millions of dollars of harm to American consumers. Both airlines have stated they can succeed on a standalone basis and consumers deserve the benefit of that continuing competitive dynamic.”

American and US Airways competed directly on more than a thousand routes where one or both offered connecting service, representing tens of billions of dollars in annual revenues. They engaged in head-to-head competition with nonstop service on routes worth about $2 billion in annual route-wide revenues. Eliminating this head-to-head competition would have given the merged airline the incentive and ability to raise airfares, the department said in its complaint.

According to the department’s complaint, the vast majority of domestic airline routes were already highly concentrated. The merger would have created the largest airline in the world and resulted in four airlines controlling more than 80 percent of the United States commercial air travel market.

The merger would also have entrenched the merged airline as the dominant carrier at Washington Reagan National Airport, with control of 69 percent of the take-off and landing slots. The merged airline would have had a monopoly on 63 percent of the nonstop routes served out of Reagan National airport. As a result, Washington, D.C., area passengers would likely have seen higher prices and fewer choices if the merger were to be allowed, the department said in its complaint. Blocking the merger would have preserved current competition and service, including flights that US Airways currently offered from Washington’s Reagan National Airport.

The complaint also described how, in the years leading up to the application, the major airlines had succeeded in raising prices, imposing new fees and reducing service. The complaint quoted several public statements by senior US Airways executives directly attributing this trend to a reduction in the number of competitors in the U.S. market:

President Scott Kirby said, 'Three successful fare increases – [we are] able to pass along to customers because of consolidation.'
At an industry conference in 2012, Kirby said, 'Consolidation has also…allowed the industry to do things like ancillary revenues…. That is a structural permanent change to the industry and one that’s impossible to overstate the benefit from it.'
US Airways CEO Parker stated in February 2013, combining US Airways and American would be 'the last major piece needed to fully rationalize the industry'.
A US Airways document said that capacity reductions had 'enabled' fare increases.

As the complaint described, absent the merger, US Airways and American would continue to provide important competitive constraints on each other and on other airlines. At the time of application, US Airways was competing vigorously for price-conscious travellers by offering discounts of up to 40 percent for connecting flights on other airlines’ nonstop routes under its Advantage Fares program. The other legacy airlines – American, Delta and United – were routinely matching the nonstop fares where they were offering connecting service in order to avoid inciting costly fare wars. The Advantage Fares strategy had been successful for US Airways because its network was different from the networks of the larger carriers. If the proposed merger was completed, the combined airline’s network would look more like the existing American, Delta and United networks, and as a result, the Advantage Fares program would likely be eliminated, resulting in higher prices and less services for consumers. An internal analysis at American in October 2012, concluded, 'The [Advantage Fares] program would have to be eliminated in a merger with American, as American’s large, nonstop markets would now be susceptible to reactionary pricing from Delta and United.' And, another American executive said that same month, 'The industry will force alignment to a single approach–one that aligns with the large legacy carriers as it is revenue maximizing.' By ending the Advantage Fares program, the merger would eliminate lower fares for millions of consumers, the department said.

The complaint also alleged that the merger was likely to result in higher ancillary fees, such as fees charged for checked bags and flight changes. In the years preceding the application, the airlines had introduced fees for those services, which were previously included in the price of a ticket. These fees had become huge profit centres for the airlines. In 2012, domestic airlines generated more than $6 billion in fees from checked bags and flight changes alone. The legacy carriers often matched each other when one introduced or increased a fee, and if others did not match the initiating carrier tended to withdraw the change. By reducing the number of airlines, the merger would likely make it easier for the remaining carriers to coordinate fee increases, resulting in higher fees for consumers.

The department also said that the merger would make coordination easier among the legacy carriers. Although low-cost carriers such as Southwest and JetBlue offered consumers many benefits, they flew to fewer locations and were unlikely to be able to constrain the coordinated behaviour among those carriers.

American Airlines was at the time operating in bankruptcy. Absent the merger, American was likely to exit bankruptcy as a vigorous competitor, with strong incentives to grow to better compete with Delta and United, the department said. American had a short time before made the largest aircraft order in industry history, and its post-bankruptcy standalone plan called for increasing both the number of flights and the number of destinations served by those flights at each of its hubs.

The department’s complaint described US Airways executives’ fear of American’s standalone growth plan as 'industry destabilizing'. The complaint stated that US Airways worries that American’s growth plan would cause 'others' to react 'with their own enhanced growth plans…,' and that the resulting effect would increase competitive pressures throughout the industry. The department said the merger would allow US Airways’ management to abandon these aggressive growth plans and continue the industry’s current trend toward higher prices and less service.

The department’s complaint stated that executives of both airlines had repeatedly said that they did not need the merger to succeed. The complaint stated that US Airways’ CEO observed in December 2011, that 'A[merican] is not going away, they will be stronger post-bankruptcy because they will have less debt and reduced labor costs.' US Airways’ executive vice president wrote in July 2012, that, 'There is NO question about AMR’s ability to survive on a standalone basis.' And, as recently as January 2013, American’s management presented plans that would increase the destinations it served in the United States and the frequency of its flights, and would position American to compete independently as a profitable airline with aggressive plans for growth.

AMR is a Delaware corporation with its principal place of business in Fort Worth, Texas. AMR is the parent company of American Airlines. In November 2011, American filed for bankruptcy reorganization.

US Airways is a Delaware corporation with its principal place of business in Tempe, Ariz.

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