Our former boss always has something good to say.
UPSIDE DOWN LOGIC
Sometimes you can’t help but wonder what the people who run our government are thinking.
On Tuesday, the Justice Department sued to prevent the merger of American Airlines and US Airways. According to Justice, the merger will mean less competition and higher prices for consumers. Surprisingly, Justice reached a different conclusion when evaluating the mergers between Delta and Northwest and United and Continental. Those mergers, between companies that were much more competitive with one another than are AA and US, have demonstrated that consolidating to build nationwide service ubiquity, gain economies of scale and reduce excessive competition is a sound strategy. Since the mergers were approved, the industry has added very little capacity, load factors have risen, and ancillary fees of all types have multiplied and increased. Remarkably, an industry renowned for losing money became profitable.
While consumers are paying more than they did in years past, and getting less luxurious service than they would prefer, a profitable airline industry is a positive for both the country and consumers. Absent profits, the industry will be unable to support the enormous capital spending required to refresh and increase its fleet, pay for the expanded and improved ground facilities needed to serve an ever growing customer base and provide decent jobs for its many employees.
But sustaining competition is also important for consumers, for having too few airlines that are financially able to challenge the largest competitors will remove the threat of competitive entry, which is the only constraint for companies that might otherwise raise prices or diminish service to an unacceptable degree. In a deregulated, capital intensive industry with formidable barriers to entry, competition should be encouraged.
Preventing the AA-US merger will reduce the industry’s competitive intensity and move the country closer to a major carrier duopoly. Neither American nor US serves a sufficient share of US and international cities to compete effectively with United and Delta for the corporate accounts that are an essential part of the customer mix for every major carrier. Nor are they large enough, individually, to achieve the economies of scale available to their larger competitors. Moreover, AA and US are essentially non-competitive, with far fewer route overlaps than either of the previously approved mega-mergers. Combined, AA and US will be slightly larger than either Delta or United; individually, they are each far smaller and will inevitably – over time -- be squeezed out of an industry in which both ubiquity and scale are uniquely important.
If Justice wants to increase competition in the airline industry, it should withdraw its suit and clear the way for the creation of a third major US carrier. Handicapping AA and US is unfair to their shareholders, their employees, their customers and the country itself, which needs a third major carrier to compete on its behalf in international markets.
