Antitrust Law Daily Wrap Up, ANTITRUST NEWS: GAO Issues American Airlines-US Airways Report; Senators Call for Agency Caution in Review of Merger, (Jun 19, 2013)

By Tobias J. Gillett, J.D., LL.M.

The Government Accountability Office (GAO) has released a report featuring testimony from Gerald L. Dillingham, the GAO’s Director, Physical Infrastructure Issues, before the Senate Subcommittee on Aviation Operations, Safety, and Security, Committee on Commerce, Science and Transportation today, in which Dillingham presented the GAO’s perspective on the potential implications of the proposed merger between American Airlines and US Airways.

In addition, U.S. Senators Amy Klobuchar (D-Minn.) and Mike Lee (R-Utah) have called for a careful examination of the merger by the Departments of Justice and Transportation, and the airlines have notified the transaction to the European Commission for review.

The testimony drew on the GAO’s 2010 report on the potential implications of the merger between United Airlines and Continental Airlines, its 2009 report on the financial condition of the airline industry, and its 2008 report on potential mergers and acquisitions in the airline industry, as well as an analysis of the specifics of the proposed American Airlines-US Airways transaction.

According to the GAO, the airline industry has seen a series of mergers and acquisitions since deregulation in 1978. Prior to 2008, the industry saw a steady growth in capacity, with new airlines entering or existing airlines expanding when an existing airline exits the market or reduces capacity. However, the recession and rising fuel costs have stalled capacity growth, and it “has not rebounded despite a strengthening economy and demand for air travel.” In addition, potential entry into markets by low-cost airlines may be less likely to limit fares than it has in the past.

“A key financial benefit that airlines consider in a merger is the potential for increased revenues through additional demand (generated by more seamless travel to more destinations), increased market share, and higher fares on some routes,” Dillingham stated. Expanded domestic and international networks can increase the appeal of airlines to consumers, and mergers may permit airlines to reduce capacity on some routes, thus increasing fares. Airlines can also obtain financial benefits from “combining complementary assets, eliminating duplicative activities, and reducing capacity.”

The GAO estimates that the American Airlines-US Airways “merger would yield $1.4 billion in annual benefits from increased revenues and reduced costs.” However, airlines may also face challenges resulting from “the integration of workforces, organizational cultures, aircraft fleets, and information technology systems and processes.”

If approved, the merger would create the country’s largest passenger airline, Dillingham observed, as measured by capacity, operating revenue, and workforce. The two airlines overlap on 12 nonstop airport-pair routes, and “for 7 of these 12 nonstop overlapping airport-pairs (generally between an American hub and a US Airways hub) there are currently no other competitors on a nonstop basis.” Moreover, based on an analysis of ticket data, “for 13,963 airport-pairs with a minimum level of passenger traffic per year, there would be a loss of one effective competitor in 1,665 airport pair markets affecting more than 53 million passengers by merging these airlines.” However, most of those markets have effective competitors.

Senators call for careful review. U.S. Senators Amy Klobuchar (D-Minn.) and Mike Lee (R-Utah) have sent a letter to Attorney General Eric Holder and Secretary of Transportation Ray LaHood urging their respective departments to conduct a careful review of the proposed merger. The letter observes that the merger “would combine two of the country’s four remaining network airlines to create the largest airline in the country,” and that “the remaining three major airlines, plus Southwest, would control nearly 90 percent of the domestic airline market.”

“Whether it’s a family looking for affordable flights or a small business-owner looking for the best frequent flier program, we need to make sure consumers have as many choices as possible at the lowest prices, and that no airline or small group of airlines has a stranglehold on the market,” Klobuchar said. “I urge the Administration to take a close look at how this merger will impact jobs, fees, service and safety and I will continue to work to make sure we’re doing everything we can to protect consumers and boost competition in the airline industry.”

“The U.S. airline industry touches the lives of almost every American in some way. The merger between American Airlines and US Airways is thus a significant transaction with the potential to either benefit or harm millions of consumers,” Lee said. “By carefully weighing the evidence and engaging in rigorous analysis, enforcement officials can help ensure a competitive airline market that maximizes consumer welfare and allows our economy to thrive.”

European review. On June 18, 2013, the airlines notified their transaction to the European Commission. According to the Commission’s website, its review has a provisional deadline of July 23, 2013.

Companies: American Airlines; US Airways

News: Antitrust