Editorial Board

Grounding a Harmful Airline Merger

The $14 billion merger of US Airways Group Inc. and AMR Corp.’s American Airlines, which the U.S. Justice Department sued to block, would be bad for consumers. You needn’t take the government’s word for it: Just check the market’s reaction.

After the Justice Department filed suit on antitrust grounds, shares in US Airways and the industry as a whole plummeted. The 10-carrier Bloomberg U.S. Airlines Index lost almost 6 percent.

This raises a question: Why would the news that two carriers might not be allowed to form the largest U.S. airline cause competitors’ share prices to fall? The unsettling answer is that the merger would have left just four large companies serving the vast U.S. market, making it easier for all of them to raise prices and reduce services -- the hallmarks of an uncompetitive industry. It almost goes without saying that less competition results in companies that are less responsive to consumers.

This conclusion doesn’t arise from some anachronistic belief that big is bad. Rather, the airline industry’s crowded planes, higher fares, increased fees and Soviet-era service show what can happen when the number of players shrinks and those that remain have market muscle. Last year, the airlines successfully raised fares 47 percent of the time, on top of a 41 percent success rate in 2011, according to FareCompare.

The airlines’ near-decade-long unprofitability -- they lost more than $58 billion from 2001 to 2009 -- convinced antitrust officials to allow consolidation in recent years. And consolidate they did: Since 2005, US Airways merged with America West Airlines; Northwest Airlines Corp. combined with Delta Air Lines Inc.; UAL Corp.’s United Airlines Inc. hooked up with Continental Airlines; and Southwest Airlines Co. swallowed AirTran Airways. If US Airways and American follow, just four carriers would have 80 percent of the market.

In an industry that is already overly concentrated, the US Airways-American combo would mean even less competition on the hundreds of routes over which the two now elbow for passengers. At Ronald Reagan Washington National Airport, for example, it would control 69 percent of daily arrivals and departures. Such numbers are music to shareholders’ ears. Passengers who have no choice among carriers have no alternative but to pay for more expensive tickets and less hospitable conditions.

The Justice Department’s complaint states that the industry in the past preferred “tacit coordination over full-throated competition” -- a damning yet accurate statement. Some airlines used so-called price signaling: announcing a fare increase on selected routes, then awaiting their rivals’ response. Often, the higher fare would be matched.

American and US Airways could repair their merger agreement by giving up takeoff and landing slots in important cities such as Washington, which is served by two other airports. If the airlines use this remedy, trust-busters should make sure that slots don’t go to the four-carrier oligopoly. Instead, they should go to new entrants willing to give the legacy carriers a run for their money. The European Union recently adopted a similar solution. It gave permission for American and US Airways to combine on the condition that they give up highly coveted slots at London Heathrow Airport.

The airline industry has never been the most stable, especially since deregulation in the U.S. in the 1970s. During the aughts, mergers may have been the only option for some carriers fighting to survive. Now that the industry as a whole is making money, regulators are right to examine proposed mergers more skeptically -- and, when the market reacts as it did, to consider it a validation of their position.

( (Corrects reference to fare increases in fourth paragraph.) )

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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