AMR-US Airways Merger Seen by U.S. as Squeeze on Fliers

Passengers booking flights to and from Dallas, Washington and Charlotte, North Carolina, face higher fares and fewer flights under the proposed American Airlines-US Airways Group Inc. (LCC) merger.

Concern that prices would rise across a range of markets was central to the argument made today by the U.S. Justice Department to block the $14 billion transaction. The planned combination is the biggest in a wave of tie-ups winnowing the ranks of major U.S. carriers to just five now from nine in 2005.

Bringing together AMR Corp.’s American and US Airways would only add to the clout enjoyed by competitors such as United Airlines (UAL), with the squeeze on consumers’ pocketbooks greatest in markets where American and US Airways compete head-to-head, the Justice Department said.

“This last merger in an unprecedented consolidation phase may be one merger too many,” said Vaughn Cordle, a partner with aviation market-research firm Ionosphere Capital in Clifton, Virginia. “This would result in the highest concentration this industry has seen.”

Direct competition by American and US Airways would be eliminated on nonstop service on 17 domestic routes generating about $2 billion in annual industrywide revenue, creating “strong incentives for the merged airline to reduce capacity and raise fares,” the U.S. complaint stated.

Hearing Delay?

The lawsuit comes just 48 hours before AMR was set to go to U.S. Bankruptcy Court in Manhattan to ask Judge Sean Lane to confirm its reorganization plan. Lane probably will delay the confirmation hearing until late September or early October, said Anthony Sabino, a specialist in airline bankruptcy who teaches law at St. John’s University in New York.

The late maneuver stunned analysts and investors, triggering a selloff that dragged the 10-carrier Bloomberg U.S. Airlines Index down 5.7 percent for the biggest decline since April. US Airways fell the most, tumbling 13 percent to $16.36.

A merged American would become the world’s largest airline by traffic, topping United Continental Holdings Inc.’s United, and would be able to raise ticket prices without risk of being undercut by competitors, the Justice Department said.

“Passengers to and from the Washington, D.C., area are likely to be particularly hurt,” the agency said in the complaint. US Airways now has 55 percent of the takeoff and landing slots at Washington’s Reagan Airport, a proportion that would rise to 69 percent under the merger, the Justice Department said.

‘Action List’

“That’s the kind of thing that’s going to be Item A on the action list” for antitrust regulators, Sabino said.

Routes from Dallas-Fort Worth International Airport, American’s home hub, and Charlotte, a US Airways hub, were among those cited in the Justice Department complaint as among those where “the merger is presumptively illegal.”

The government used an index used that tracks airline concentration on a market-by-market basis. Among flights between major airports, the routes with the highest scores were Charlotte-Dallas and Dallas-Philadelphia, giving them an index value almost four times the threshold for a market to be considered “highly concentrated,” the Justice Department said.

AMR, now the third-largest U.S. airline, and No. 5 US Airways vowed to fight the Justice Department lawsuit.

Airlines’ Response

“The DOJ is wrong in its assessment of our merger,” the airlines said in a statement that focused on the expanded route system at a combined carrier and didn’t mention fares. “Blocking this procompetitive merger will deny customers access to a broader airline network that gives them more choices.”

Allowing US Airways and American to combine would give the three biggest full-service carriers -- a merged American, United and Delta Air Lines Inc. (DAL) -- and discounter Southwest Airlines Co. (LUV) control of more than 80 percent of the domestic market, according to the Justice Department.

Cordle said his study of market concentration shows the clout enjoyed by the largest carriers would be similar to their control before the U.S. airline market was deregulated in 1978.

The prospect of further consolidation shrinking industry seating capacity and buoying fares helped send U.S. carriers to their best rally to start a year since the creation of the Bloomberg U.S. Airlines Index in 2000. That gauge soared 49 percent in 2013 through yesterday.

Airfare Increases

While the Justice Department focused on the prospect of future price increases, the industry has struggled to charge more for tickets this year.

Airlines have succeeded in two of eight attempts at broad-based increases in 2013, travel website FareCompare.com found.

That compares with an average 62 percent success rate from 2007 to 2012, the data show. Last year, airlines were able to raise fares 47 percent and the rate was 41 percent in 2011, Dallas-based FareCompare said.

Heightened competition among discounters is helping restrain airlines’ pricing, FareCompare Chief Executive Officer Rick Seaney said by phone before today’s Justice Department announcement.

“If you’re one dollar more than your competitor, you’re on page 20 of the online shopping results,” Seaney said. “I don’t see fares increasing.”

Airlines are now more dependent on ancillary fees such as charges for checked bags and rebooking tickets, which added more than $6 billion in 2012 revenue for U.S. carriers, according to the U.S. Bureau of Transportation Statistics. After adjusting for inflation, the average U.S. round-trip fare last year was $378, down from a peak of $456 in 2000, government data show.

Fuel Fallout

Michael Boyd, president of aviation consultant Boyd Group International Inc. in Evergreen, Colorado, said higher prices for jet fuel are to blame for rising fares. At $3.02 a gallon yesterday, fuel cost more than triple the 2000 rate.

“This argument that this would gouge the public -- the DOJ should have thought about that” while approving other recent mergers, Boyd said.

Daniel McKenzie, a Buckingham Research analyst based in New York, said in a note to clients that he now assesses the merger’s success as only a 40 percent probability, down from 50 percent.

“At a minimum, the DOJ move could be a posturing move to extract carve-outs from US/AA,” McKenzie wrote. “At most, it reflects a philosophical bias against further consolidation in the industry.”

To contact the reporters on this story: Julie Johnsson in Chicago at jjohnsson@bloomberg.net; Jennifer Surane in New York at jsurane1@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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