White Paper on AA and US Airways

Topics: American Airlines, US Airways, Delta Air Lines Pages: 12 (2117 words) Published: April 28, 2015


American Airlines – US Airways Merger

Executive Summary

The big news of the past few weeks in the travel field was the proposed and almost completed merger of AMR, the parent of American Airlines and US Airways. The merger creates the world’s biggest airline in the world. The recent injunction filed by the US Attorney General with the backing of the Government created a problem for the Airlines put a big question mark on whether the deal will go through or not. This white paper refutes the points stated by the Department of Justice as the basis of their argument to block this merger. Creation of this merger will benefit the passengers as well as the airline industry.

Situation

As you see in the table above, AMR (parent company of American Airlines) filed for bankruptcy on November 29, 2011, seeking relief from crushing debt caused by high fuel prices and expensive labor contracts that its competitors shed years ago. They were hit by the recession as well. All factors combines, they could not bear the sheer size of their Operations. Hence the bankruptcy filing. On February 13, 2013 the Boards of both the airlines issued a joint statement announcing the $11 billion merger which would create the World’s largest airline. The company was well on its way out of bankruptcy riding on the merger ticket, when the DoJ decided to spoil its party. Cut to August 13, 2013, when the Justice Department (backed by the Government) unexpectedly moved to block the merger, by filing a civil antitrust lawsuit, threatening to upend what was viewed as the final step in the consolidation that has helped return U.S. airlines to profit after years of heavy losses. They stated (in the lawsuit) that the merger would be detrimental to the passengers and the market at large. The worry was that the federal court may not approve the bankruptcy exit plan due to the lawsuit filed against the merger, which would force AMR back to bankruptcy.

Complication:

Like I mentioned above, the complications arose when the DoJ decided to oppose the merger and filed a lawsuit to block it. The airline industry, historically, has had a nearly unfettered run of mergers in recent years, and the American-US Airways combination was seen as the capstone. In no small part, this consolidation of the industry into a handful of carriers had the support of regulators. Starting in 2008, the Justice Department approved the mergers of Delta Air Lines and Northwest, United Airlines and Continental, and Southwest and AirTran. But antitrust regulators said these past mergers had in effect undermined the case for the American-US Airways combination. While those mergers helped the industry return to profitability and brought more stability, they also led to higher fares, regulators said. A union between American and US Airways would take the consolidation too far, the Justice Department said, hurting consumers and leading to substantially less competition and higher airfares and fees, and to less service to many airports.

Source: http://dealbook.nytimes.com/2013/08/13/u-s-seeks-to-block-airline-merger/

Major Points of objection that DoJ has:
(Words in Italics are from the original lawsuit filed by the DoJ)

i. Fares
Fares and fees started to rise, the number of flights—the industry capacity—started to fall.  Most of the legacy carriers had managed to cut their labor costs to the point that they were roughly equivalent to those of the “low cost” carriers such as Southwest and Jet Blue.

Source: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/15/why-the-justice-department-blocked-the-american-us-airways-merger/

ii. Washington Reagan
Passengers to and from the Washington, D.C. area are likely to be particularly hurt. The combined airline would have a monopoly on 63% of the nonstop routes served out of the airport. Competition at Reagan National cannot flourish where one airline increasingly controls an essential ingredient to...

Cited: Mouawad, Jad (2013, August 13). U.S., Filing Suit, Moves to Block Airline Merger. Retrieved from http://dealbook.nytimes.com/2013/08/13/u-s-seeks-to-block-airline-merger/?_r=1
Pearlstein, Steven (2013, August 15). Why the Justice Department blocked the American-US Airways merger. Retrieved from http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/15/why-the-justice-department-blocked-the-american-us-airways-merger/
Bhaskara, Vinay (2013, August 28). Why the DOJ’s arguments against the American/US Airways merger are DOA – Part I. Retrieved from http://airchive.com/blog/2013/08/22/why-the-dojs-arguments-against-the-americanus-airways-merger-are-doa-part-i/
Bhaskara, Vinay (2013, August 28). Why the DOJ’s arguments against the American/US Airways merger are DOA – Part II. Retrieved from http://airchive.com/blog/2013/08/25/why-the-dojs-arguments-against-the-americanus-airways-merger-are-doa-part-ii/
http://newamericanarriving.com/
Jansen, Bart (2013, November 12). Justice settles merger lawsuit with AA, US Airways. Retrieved from http://www.usatoday.com/story/travel/flights/2013/11/12/justice-merger-american-us-airways/3506367/
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