Group 2

AIRLINES AND ANTITRUST:

SCRUTINIZING THE AMERICAN
AIRLINES-US AIRWAYS MERGER

Aditi Roy BD21056

Eshita Kare BD21068
Pavan Srinath BD21082
Rishikesh Promod Nair BD21087
Shivam Pandey BD21094
Table of contents
1. Executive Summary ....................................................................................................... 2
2. Problem Identification ..................................................................................................... 3
3. Alternatives available ..................................................................................................... 4
4. Way forward ................................................................................................................... 5
5. Conclusion ..................................................................................................................... 5
1. Executive Summary

Following the footsteps of three major consolidations – firstly that of Delta Airlines and
Northwest Airlines in 2008, secondly between United Airlines and Continental Airlines
in 2010, and finally Southwest Airlines and AirTran Airways in 2011, American Airlines
and US Airways in 2013 proposed to come together to create what would have been
the largest airline company in the world. With projected revenues of nearly USD 40
billion, the potential to carry 200 million passengers annually, and employing over
100,000 workers, the proposed merger aimed at reviving American Airlines from its
ongoing bankruptcy proceedings and at the same time offer strategic advantages to
the combined firm.

Unlike the previous major consolidations in the American airline industry, the proposed
merger between American Airlines and US Airways faced a major roadblock as the
Antitrust Division of the Department of Justice intervened by filing a lawsuit citing the
anti-competitive implications arising out of it. Evaluating the deal based on a five-part
framework encompassing:

• Relevant Markets of Operations;

• Anticompetitive Effects;
• Barriers to Entry;
• Merger Efficiencies;
• Position of either firms in absence of the merger;

The Department of Justice stated that the merger held the potential to enhance market
power of the combined entity and hence needs to be blocked. The following concerns
were raised in the lawsuit:

• Passengers at the Ronald Reagan Washington National Airport being subjected

to high risks since the combined entity would control 69% of slots operated out of
the airport
• Concerns around the airline discarding their discount pricing mechanism leading
to price hikes
• Causing barrier of entries to new players in the industry

Despite strong allegations raised by the Department of Justice, United Airways and
American airlines were confident about the merger and the benefits it would derive to
the industry and the customers. Resultantly, the CEOs of both the firms were adamant
 in not conceding to the lawsuit raised against them by developing a vigorous defense
for their deal. Failing a settlement between the appellant and the respondent, the suit
will go on to a trail wherein the judge at the U.S District Court of Columbia would
decide the fate of the merger.

2. Problem Identification

The reason that such mergers are sometimes blocked by the Department of Justice on
grounds of Antitrust is to ensure that customers are not worsened by the consolidation
of a marketplace by a few large players. In this case, the Department of Justice
worried that the potential merger of US Airways and American Airlines would allow the
companies to collude amongst themselves, thereby hurting the general public.

The lawyers of both the firms were keen on presenting the case that the merger would
essentially increase the scale of the organization, thereby allowing the newly merged
company to enjoy better economies of scale and thus allow them to create several
new routes domestically, and increase capacity in existing routes as well. They argued
that the merger would allow the firms to complement each other’s services and thereby
improve customer satisfaction as well.

The Department of Justice on the other hand worried that the merger would have the
following adverse effects on the customer:

• Reduced competition in many of the markets in which both of the companies have a
vested interest.
• Increase in the additional fees that the airlines typically charge such as the checked
bag fees.
• Increase in the market concentration of the airline industry. Market concentration is
usually quantitatively measured using indices such as the Herfindahl–Hirschman
index. If the merger were to take place, the HH Index for the airline industry would
be around 2500.
• Possibility of American Airlines from discontinuing their expansion plans in various
locations.
• Possibility of reduced services offered by the airlines on account of having lesser
peer pressure to offer them.
 Apart from the previously mentioned potential advantages of the merger that the
lawyers from the firms provided, they also opposed the above-mentioned points from
the Department of Justice by mentioning that the Department of Justice did not take
into account the existence of the low-cost carriers that operated across almost all the
locations that both the firms operated out of. The lawyers argued that although the
market would be somewhat consolidated due to the merger, the existence of the low-
cost carriers would continue to provide the customers a low-cost alternative as well as
provide competition to the newly merged entity.

3. Alternatives available

a. Continue with the merger as planned:

Based on the testimonial that the lawyers of both the merging companies mentioned,
there are several potential benefits that might be possible only due to the economies of
scale that can be reached when the merger goes through.

US Airways also argued that they ought to be allowed to merge with American Airways
since the previous merger between Delta and Northwest as well as the merger
between United and Continental was allowed as well.

By not allowing to merge, US Airways was devoid of a level playing to compete with
the other players that were allowed to merge. In this case, the argument is that if there
is no possibility of failing airlines merging, they will go bankrupt, and hence inevitably
reduce the number of choices customers have anyway.

b. Cancel the merger owing to antitrust:

The Antitrust laws mentioned in the case were created with the purpose of ensuring
that customers and the general public do not suffer owing to the lack of choices
available as a result of market consolidation after a merger or acquisition.

As mentioned in the case, the Herfindahl–Hirschman index of the airline industry would
stand at 2500 if the firms were allowed to merge. To prevent this situation as well as
the general anti-competitiveness of the firm, preventing the merger from occurring
might be the best possible decision for the public interest to prevail over corporate
greed.
c. Continue with the merger, but impose restrictions:

In this possibility, the firms are allowed to merge to reap the benefits of larger
economies of scale and better services, however, certain restrictions are imposed to
hedge the downside risk of the merger as well. The restrictions placed on the firms can
ensure that the merging firms still remain competitive in most areas that they both
service in common.

4. Way forward

From the above discussed alternatives, the third route wherein the merger continues to
happen with certain restrictions seems to be the most desirable and probable
outcome.

Taking into consideration the multitude of contrasting arguments presented by the

Department of Justice and the merging companies, it can be seen that there is merit in
the arguments raised by both parties to a certain extent. For instance, concerns about
advanced fare programs negatively impacting customers held merit as the end
consumer would be victimized by the market supremacy that the companies would
have derived from the merger.

On the other hand, certain considerations raised against the merger seemed force
fitted to stop the deal and hence lacked logical standing. While it was argued on one
front that both the companies held the ability to generate profits individually, it was also
claimed that these companies coming together will generate costs that will outweigh
the benefits derived out of it.

Considering this, US Airways and American Airlines can incorporate amendments to

reform the contentious outcomes of the merger so that the deal can be closed.

5. Conclusion
The proposed merger between US Airways and American Airlines should be closed,
albeit incorporating structural reforms. Certain reforms can be made to regulate
utilization of slots in airports wherein the combined entity might be in a monopolistic
position, so as to avoid market power.