Tuesday’s announcement that U.S. Department of Justice will try to block the mega-airline merger between American and US Airways sent shock waves through the travel sector. As the fallout begins, questions are being raised about everything from the timing of the move to possible hypocrisy on the part of regulators.
The “Cookie Jar” Excuse
The DOJ wants to block the merger largely because it would “lessen competition for commercial air travel in local markets throughout the United States and result in passengers paying higher airfares.” This is nothing new; air travel analyst Rick Seaney predicted a likely rise in ticket prices back in February explaining, “A merger guarantees two airlines will never compete in the future and competition is the main driver of cheaper airline ticket prices (along with oil, seat supply and consumer demand).” As for less service, Seaney also noted airlines have been whittling away capacity for years. So why the objections now, especially after three previous mergers – Delta/Northwest, United/Continental, Southwest/AirTran – sailed through the regulatory process? Says Seaney, “Being last to merge is evidently like getting caught with your hand in the cookie jar after your siblings have already partaken and split the scene.”
Question of Concern for Consumers
As Seaney and others have pointed out, airfares can and do rise in the wake of mergers, but the concern for airline passengers raises another question: Where is federal regulatory concern for consumers when it comes to government taxes on airline tickets? Yes, those taxes fund many worthwhile projects, but calls for more taxes are frequent and the consumer often foots the bill.
Airline Stocks “Tank”
Meanwhile, as the AP reports, airline stocks “tanked” in the wake of the DOJ announcement. US Airways, for example, “posted their biggest one-day drop since October 2011.” The article also pointed out that the airline’s stock prices had quadrupled after it began pursuing a merger with American. One industry research group that previously predicted a successful American/US Airways merger was a 99% certainty has now puts the odds at roughly half that.
Ex-AA Chief: “Absolutely Crazy”
American and US Airways spokespeople have been busy getting the word out – they plan to fight. A former American CEO also joined in; as reported in the Dallas Morning News, Robert Crandall called the DOJ move “absolutely crazy” then added, “You have to let American and USAir merge so that they become an effective competitor to Delta and United. Without a merger, neither [American or USAir] in the very long run can make it – be sure to emphasize ‘in the very long run’.”
Do Passengers Care
As the current battle – or at least war of words – rages in the name of consumers, reaction from flyers has been somewhat muted. As Seaney has noted, consumers are already unhappy about being nicked-and-dimed by airline fees (though they’re getting used to it). However, he thinks the bigger issue that trumps talk about what a merger could mean for airfares of the future is the economics of the here-and-now. “Demand is tepid,” said Seaney. “While the economy is getting better, times are still tough for many.”
Will the Merger Go Through?
As FareCompare reported yesterday, analyst Seaney does not see the government’s action as a “death blow” to the merger and anticipates some concessions and/or settlement will likely ultimately be agreed to. We will update with more information as it become available.
Question for readers: Should the merger go ahead?