The airline industry has been in the news lately, with the American-US Airways merger making headlines. The antitrust review of the merger by the US Department of Justice had been underway for a number of months, and most industry observers had expected the merger’s approval, with modest concessions on the part of the airlines to address potential concerns of the DOJ. Instead, the DOJ announced the filing of a lawsuit to block the merger, basing this action on its concerns about the merger’s potential anticompetitive effects. Such effects are possible because airline mergers eliminate a competitor on routes where the two merger partners overlap, with both providing service between the route endpoints. Reduced competition may, in turn, lead to an increase in airfares, harming passengers.

The DOJ’s action was surprising to observers because the government had in recent years approved two other mergers between mainline “legacy” carriers that were broadly similar to the American-US Airways merger: the Delta-Northwest merger and the United-Continental merger. Each of these mergers involved route overlaps between the partners that were similar in their extent to the overlaps in the American-US Airways case. As a result, many observers argued that the competition concerns raised by latter merger should be no greater than in the previous cases, where the merger applications were approved. This view led some observers to question the consistency of the antitrust standards being applied in the American-US Airways case. A counterargument offered by some commentators was that, because the prior mergers had raised the concentration of the industry, further concentration was not advisable even though the American-US Airways merger, viewed in isolation, was no more threatening than the previous two.

Other observers suggested that the DOJ was viewing competition in the wrong way. A different competitive concern, it was argued, is the existence of two mega-carriers, Delta and United, with no third carrier of comparable size to compete with them. Under this view, formation of such a carrier through the American-US Airways merger would enhance competition in a broader sense by creating a playing field where three mega-carriers compete in virtually every airline market in the country. These commentators argued that American and US Airways individually would be at a disadvantage competing with Delta and United, especially in attracting business passengers, who place high value on the vast network reach of the mega-carriers (which facilitates trips to almost any possible destination).

Although some observers think that the airlines and the DOJ may settle the case before ever going to trial, others view the DOJ as determined to block the merger. Any settlement would focus on Reagan National Airport in Washington, where the airlines together control the large majority of the traffic. Slot divestitures, which would give competing airlines scarce landing rights at the airport, would be required.

My own research with several coauthors predicts that legacy mergers will not have large effects on fares, contrary to the view of the DOJ. Our work shows that removal of one legacy competitor from an airline route (as would occur on overlap routes when a merger occurs) would raise fares by at most 4 percent. When these fare increases are added up across a handful of nonstop overlap routes and several hundred overlap routes that involve connecting (change-of-plane) travel, the aggregate fare increase from the American-US Airways merger is about $75 million per year. This number will tend to be offset by the hundreds of millions of dollars of cost savings and other synergies from the merger, which put downward pressure on fares, and by passenger convenience benefits (from network expansion, for example) that may be equally large in magnitude. As result, our research suggests that the merger is likely to be beneficial on balance, contrary to the expectations of the DOJ. The mergers partners will argue this view in court, and it remains to be seen whether they will be successful in winning their case.

What an American-US Airways deal means for fliers, courtesy of the Wall Street Journal
Airline merger can only help at JWA, economist says, courtesy of OC Register
American, US Airways may merge to form giant airline, courtesy of the Los Angeles Times
Analysis: Merged American Airlines-US Airways would offer more, could charge more, courtesy of Reuters

-Jan Brueckner, Economics Professor and Department Chair