2 Surprising Truths Behind the DOJ's US Airways-American Airlines Merger Decision
The world is full of opinions, particularly when they can be jotted down on the Internet. This truth is particularly evident in the financial blogosphere, so it's probably no surprise to see dozens of different takes on the recent news that US Airways and AMR's American Airlines have cleared the final hurdle en route to a merger.
News broke on Nov. 12 that the U.S. Justice Department had finally reached a merger settlement with both airliners. Some pundits believe this is good news for customers because lower-cost carriers will get access to assets in key markets (we'll get to that in a minute), while others warn that higher fare prices and fewer flight options may result.
The merger, which still needs approval from a D.C. Federal District Court and American's bankruptcy judge, is expected to close sometime in December. The combined value of the new company is $17 billion, and it will operate the world's largest airline by traffic. US Airways-American will operate 6,700 flights each day, larger than United's 5,300 flights per day and Delta's daily average of about 5,000.
Due to the sheer magnitude of the deal, it's worthwhile to understand why it went through. Two seemingly surprising truths played major roles in the DOJ's decision to approve the merger; let's run through them.
The DOJ's hand was ideologically forced
In 2008, Delta Air Lines merged with Northwest Airlines, creating the world's largest carrier at that time, which was only surpassed by the United-Continental deal in 2010. The success of these two mergers, in a way, forced regulators' collective hand.
As Richmond economics professor George Hoffer told DealBook earlier this month, "Once you created a super-Delta and a super-United, you had to create a super-American," he said. "The outcome was inevitable." I'd also throw Southwest into this proverbial pile, as its acquisition of AirTran has created what could be reasonably called a "super-Southwest."
With consolidation serving as the new theme of the domestic airline industry over the past half-decade, the DOJ has essentially nurtured an oligopolic market that now contains four major post-merger players. Delta, United, Southwest, and the new American will control close to three-quarters of all domestic air travel.
Rationally speaking, the US Airways-American deal fosters more competition among the so-called super airliners. It's obvious that some analysts don't agree that the merger will lead to lower fare prices across the industry, but one Justice official thinks otherwise.
Lower-cost carriers may actually benefit
That official is William Baer, the assistant attorney general for the antitrust division of the DOJ. One key aspect of the US Airways-American merger is that both sides have agreed to divest several slots in D.C. and New York to low-cost carriers via auction. Part of the settlement also requires US Airways and American to sell a handful of terminal gates and other related assets in Miami, Dallas, Boston, L.A., and Chicago.
The New York Times estimates these sales comprise about 15% of both airlines' takeoff and landing slots, but they should only affect 100 or so of the company's 6,000-plus daily flights.
In a press release, Baer revealed that federal officials think sales of low-traffic routes are a long-term positive for the airline industry at large. He calls the concession a "game changer," adding that the divestitures "will allow low-cost carriers to fly more direct and connecting flights throughout the country each day."
Baer, who has a long history of being quite rigid in antitrust proceedings, appears to truly believe that customers will benefit from the merger.
Another quote from the trustbuster is particularly telling:
As you know, we filed a lawsuit to block this merger out of concerns about the potential reduction in competition for air travel throughout the country. This settlement addresses those concerns and opens up the marketplace as never before.... Making slots and gates available to low-cost carriers will lower barriers to entry, providing the incentive and ability for those carriers to invest in new capacity, and positioning those carriers to provide significant new competition systemwide.
Baer also cites examples of previous divestitures picked up by airliners like JetBlue and Southwest as material evidence that prices have fallen in the past. In the latter scenario, when Southwest bought up Newark Liberty (New Jersey) assets from the United-Continental merger, Baer discloses that this dropped fares by over 10%, and passenger traffic subsequently rose by more than 30%.
Judging by the fact that the latest round of divestitures is expected to occur in seven markets throughout the country, it's reasonable to project that segmented price declines could follow. That's not a bad result from a DOJ that was ideologically forced to let a "super-American" join the consolidation-themed party in the first place.
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The article 2 Surprising Truths Behind the DOJ's US Airways-American Airlines Merger Decision originally appeared on Fool.com.Fool contributor Jake Mann owns shares of US Airways Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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