DOJ lawsuit vs AA-US reads like political document

Note: Some articles of interest:

  • Robert Crandall, former CEO of American, has this op-ed piece in The Wall Street Journal (via Google News, so it should be accessible to Readers).
  • With the concentration of airline service that the US Department of Justice is so worried about, this article argues that foreign carriers should be allowed to operate US domestic service.

The lawsuit filed by the US Department of Justice against the proposed merger of American Airlines and US Airways reads more like a political document than a legal brief.

It’s clear the true intent is to force American and US Airways to divest slots at Washington Reagan National Airport. But in throwing in the proverbial kitchen sink, DOJ has made a mockery of its own case.

DOJ claims more than 1,200 city pairs will be adversely affected by the merger, with most of these being connections since the non-stop overlapping routes number only about a dozen.

But lots of the city pairs cited by DOJ are pretty obscure. Just to pick a dozen examples:

DOJ Examples of Connecting Routes
1 Austin, TX-Palm Springs, CA*
2 El Paso, TX-Kahului, HI
3 Columbus, OH-Fresno, CA
4 Des Moines, IA-Kahului, HI
5 Kapaa, HI-Tucson, AZ
6 Albuquerque, NM-Salinas, CA
7 Albuquerque, NM-Kapaa, HI
8 Charlotte, NC-Grand Junction, CO
9 Charlotte, NC-Durango, CO
10 El Paso, TX-Salinas, CA
11 Charlotte, NC-El Paso, TX
12 Harrisburg, PA-Fayetteville, AR

Some of the cities listed in the DOJ complaint (like Salinas, CA) aren’t truly served by airlines but rather by nearby airports (in this case, Monterey (CA). In another, Palm Springs (CA) is actually shown in the complaint being served by Riverside (CA). DOJ seems obsessed with city pairs involving Kapaa (HI) and El Paso (TX). Figuratively speaking, the three people per year flying between some of the city pairs cited by DOJ are really going to drive the market (queue the sarcasm).

DOJ appears to be really stretching in its attempt to make an anti-trust case.

DOJ’s lawsuit is replete with uninformed and ill-informed assertions that in aggregate make it clear the department simply doesn’t understand the dynamics of the airline industry.

The lawsuit frequently quotes US Airways CEO Doug Parker and his long support of industry consolidation. This is a true statement. But Parker was hardly alone. Glenn Tilton, CEO of United Airlines through its bankruptcy, also was a strong supporter of consolidation—as were other CEOs.

DOJ contends that airlines routinely match non-stop fares on one-stop or connecting routes. This is a serious misstatement of fact, and DOJ cleary cherry-picked the examples contained in the lawsuit. One-stop and connecting fares are routinely far cheaper than non-stop fares, both US domestically and on international routes. As we search for fares between Seattle and the upper East Coast–routes generally not served by US Airways, which hubs through Phoenix–American and Delta Air Lines often have lower fares than United or Alaska Airlines. DOJ is dead wrong on this one.

DOJ’s concern about Washington Reagan Airport slot and route concentration is factually correct, but hub (or in this case, focus-city) concentration has long been a fact of life ignore by officials in Washington. Previous mergers, dating to the Presidency of Ronald Reagan, led to hub concentration at Minneapolis, Detroit and St. Louis, with nary a peep from DOJ. To absolutely no surprise, now that the politicians and bureaucrats in Washington (DC) will be affected, suddenly this practice is deemed inappropriate.

DOJ claims more than 1,200 connecting markets will suffer following the merger through higher fares. Although we aren’t terribly concerned about routes like Santa Barbara to Tampa, or El Paso to Kahului (HI), or Kapaa (HI) to El Paso, DOJ ignores the prospects of Southwest Airlines entering route such as Dallas Love Field to Phoenix once the anti-competitive Wright Amendment finally expires, an amendment DOJ never challenged and which restrained competition for decades. In fact, the legacy airlines’ one-stop service (and often even non-stop) is frequently cheaper than Southwest’s non-stop pricing. Price competition, while it will certainly be reduced, is unlikely to be as absent as DOJ suggests.

A key element DOJ ignores is that the proliferation of airlines led to irrational pricing, which while benefiting consumers, also led to scores of failures by airlines—which also eliminated competition. Profitable airlines in the long run provide stability for the consumer and for stakeholders—and the economy.

At the same time, the US government levies taxes that approach 25% of the ticket prices—something that costs consumers billions of dollars. Airlines can’t hike ticket prices to account for these taxes. Airlines, in fact, now often lose money on ticket prices (especially with the uncertainty over fuel costs). This means airlines must find profits in another place, and this is where fees come in. Government policies have had a direct effect on ancillary revenues.

17 Comments on “DOJ lawsuit vs AA-US reads like political document

  1. Perhaps DOJ wants to help improve the infra structure game- hot air by upgrading the monterey airport to Air Force One ( 747version) standards so as to gain access to Pebble Beach golf course and 20 mile drive. This would have a serious effect on airlines who fly long routes from Wash DC to Monterey. A merger of the biggies would reduce the competition for such a route, meaning delays for congresscritters and Chicago types in retirement… :-P – makes about as much sense as the other stressed citi pairs !!!

  2. You link to Mr Crandall’s op-ed links to the DOJ complaint instead. I saw an interview on TV with Mr Crandall a couple weeks ago. His basic assessment was kinda like this:…”Say you have two gorillas in a room–and two monkeys. You better hope the two monkeys get together and become a third gorilla–otherwise the two gorillas will beat up the two monkeys and you’ll be left with two gorillas.”

  3. Monterrey, CA may be the commercial airport closest to Salinas, CA, but SJC is just an hour away.

  4. @rick jones..only if there isn’t any traffic…;-)

    I personally hope this merger doesn’t go through. I have never been a fan of Doug Parker and after reading some of his comments, it doesn’t seem he has a problem “stiffing” customers and employees.

    If Parker was such a “great” CEO, why did both DL and UA “stonewall” him?

    I like the way Horton was turning AA into a great carrier.

    • DL and UA stonewalled him because their CEOs wanted to be in charge.

      Parker’s “stiffing” customers is hardly unique. Although we don’t agree with your characterization about stiffing employees, he’s hardly alone in this area, either.

      • While I agree, Scott, Parker isn’t alone in stiffing employees, I would say he has had some 7 years to settle the union problems from the merger with America West, and has ignored it.

        • The pilots unions first had to sort out their issues (which went to an arbitrator and court) before the corporation could deal with the pilots. They never could agree. Out of Parker’s hands.

  5. Wonder if DOJ rounded up help and filed suit in order to support certain unions in accordance with administration desires ? Naww…

  6. This will be interesting indeed. Would Boeing and its mighty lobbying muscle want this merger to go ahead? Or perhaps they’d prefer to keep AA separate?
    I’m not entirely sure what side Airbus will stand on either. Could we see the two manufacturers holding hands on this one?

  7. Scott, the reason why the DOJ has never challenged the Wright Amendment is that it’s the Constitutional right of Congress to regulate interstate commerce, which is exactly what the Wright Amendment does. So there’s zero grounds on which the DOJ could challenge the Wright Amendment, unfortunately.

    It’s also why the DOJ (or FTC) gets to challenge mergers — because Congress wrote enabling legislation to permit them to do so.

    Congress can do whatever it wants to interstate commerce. It’s an enumerated power listed in the Constitution.

    http://en.wikipedia.org/wiki/Commerce_Clause

  8. This is a straight forward Sherman Act anti-monopoly complaint; like hundreds that have been filed since the 1930s. I don’t see any political statement contained within. This is no different than the other airline mergers having to satisfy regulators to ensure there is adequate competition. This case is either hampered by AMR’s bankruptcy process (and the bankruptcy’s trustee’s duties conflicting with other parties) or an unwillingness of the airlines to hammer out an agreement with the government to ensure that competition continues.

    The government makes a compelling case that the airlines move in lock-step with each other in setting fares, offering services, charging for amenities and that competition is necessary to protect the consumer. DOJ does not make the case that has been made elsewhere that in routes without adequate competition, the fares are typically higher and that when competition arrives, the fares decrease.

    The appendix is the result of a diffusion index of city pairs that DOJ claims that competition would be adversely affected (in any way) and not otherwise cited in the complaint (e.g. important information is put in the body of the text, less important is put in a footnote or appendix). It would be a mistake to view the appendix as something other than preliminary summary evidence supporting the DOJ’s claims.

    As any lawyer knows, all court cases are about the here and now (frozen in time to when the complaint is filed) and not the future potential plans of nonparties to the litigation. Wright amendment expiring or not expiring; Congress’ plans to pass a law or not; Southwest adding a route or not adding a route is not germane or material to the alleged violation of anti-monopoly law that the merger would create.

    http://en.wikipedia.org/wiki/Airline_Deregulation_Act is the law that caused the consolidation of the industry. Because the fares were government regulated and because rent controls are anti-competitive, the consumer was did not benefit.

  9. Having quite recently “enjoyed” several trips with US-based airlines, it appears that they are less competitive in the more profitable long-range routes. Interestingly, most people are “flown in” the USA by foreign carriers, instead of being “pickup up” by US-based airlines.
    I would never propose foreign airlines to enter the US market. The market is so big that it attracts pretty much everybody, without offering opportunity for US-based airlines in turn. Strong international players would use aggressive pricing to drive existing players out of the market.
    From the customers perspective: the US-based airlines at least have no profit margin, hence no-one can argue that they charge more than necessary (compared to Apple’s 40% margin on its operation). And >50% of pain in US domestic air travel is no fault of the airlines themselves (the airports suck in multiple dimensions).
    Heard a discussion the other day that the infrastructure is chronically underfinanced, be it airports or the air traffic control (say: NextGen).

  10. Well, the solution if obvious then. Since Parker seemed to have provoked the DOJ with his remarks and his frankly outrageous and and illegal email to Delta about price fixing, and since everyone seems to like how Horton was turning around AA, why not get rid of Parker, and let Horton and his team run the combined company? OK, and get rid of a few slots at DCA to appease the polictical nimbys.

    • Well, not everyone likes how Horton has run AA. We’ve been a huge critic. Parker and his team will do a far better job than Horton and his team of running the new American.

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