Analysis: Merged American Airlines-US Airways would offer more, could charge more
(Reuters) - For travelers, the question of whether to let American Airlines and US Airways merge into the world's largest carrier may boil down to this: pay more and get more, or pay less and get less.
A new mega-airline, with the American brand name, would have more flights on more routes and could charge higher ticket prices on at least some. This would appeal to business travelers who generally favor convenience and comfort over price.
If the airlines don't merge, they might offer lower prices, but could ultimately be forced to cut routes or go out of business as they try to compete with much larger United and Delta, themselves the products of mega-mergers over the last few years.
Business travelers, who spend two or three times as much as those flying for fun, are likely to lose out if the merger fails, since there would be no third alternative to the large domestic and international route networks offered by United and Delta.
"If you're a corporate traveler, you're basically going to be faced with two stalwart airlines, Delta and United, and you'll have actually less choice at the corporate level than you did if this merger would occur," said Andrew Davis, an investment analyst with T. Rowe Price, which owns airline shares.
The merger "certainly was not looked at from that perspective" by the government, Davis said.
The U.S. Justice Department sued on Tuesday to block the $11 billion merger on antitrust grounds, arguing that allowing the fourth large U.S. airline merger in five years could lead to higher ticket prices and fewer choices for consumers.
The merger "would likely substantially lessen competition and tend to create a monopoly," the government complaint said.
The airlines are girding for a court fight, saying their bid to create the world's largest airline will provide a rival to challenge mega-airlines United and Delta, giving customers more choice.
NO 'SKYWAY ROBBERY'
The American-US Airways LCC.N merger would cap a wave of consolidation that has helped return the industry to modest profitability after the 2008-09 economic downturn. Delta Air Lines (DAL.N) acquired Northwest in 2008, United Continental (UAL.N) was formed in 2010 and Southwest (LUV.N) bought rival AirTran in 2011.
Southwest and other smaller airlines use a different business model, offering many direct domestic flights rather than hub-and-spoke connecting service.
U.S. government data show that on an inflation-adjusted basis, average air fares are lower than they were 15 years ago but have moved up modestly since 2007, largely due to a more than 40 percent rise in fuel costs over the last six years.
"This has not been skyway robbery," George Hobica, president of AirfareWatchdog, an airfare alert and travel advice service, said of rising air fares.
But airlines also have added charges for baggage, food and other services, making it more difficult to say whether travelers are better off over all.
U.S. airlines as a group had a third straight year of profitability in 2012, but earnings have declined since 2010, according to data from the U.S. trade group Airlines for America. Industry margins have shrunk from 1.6 percent in 2010 to 0.2 percent last year, the data show.
"Airlines are still making pitiful profits compared with other industries," Hobica said.
Continued expansion by carriers like JetBlue Airways and Spirit Airlines would be good for the market, he added. While he didn't necessarily see huge consumer benefits if American and US Airways merged, he said the combination would benefit both carriers financially and ultimately make for happier passengers.
"I think the benefit to consumers is that they'll be flying in newer planes and we won't see another bankruptcy," Hobica said.
RISK OF STAYING SMALL
Airline analysts and consultants said the DOJ complaint reflected government misunderstanding of how the industry operates and how it has changed. American Airlines, the No. 1 U.S. carrier before the spate of mergers, is now the third-biggest behind United and Delta.
The Justice Department contended that American and US Airways, the fifth-largest U.S. carrier, have posted improved financial results and can survive as independent carriers.
Robert Mann, an airline consultant in Port Washington, New York, responded that without the merger, American could ultimately be squeezed out of getting more business accounts.
"You get corporate accounts chiefly because you have the best network," Mann said.
Henry Harteveldt, a travel industry analyst at Hudson Crossing LLC, a consulting firm in San Francisco, said the government failed to consider upcoming changes in the competitive landscape. For example, Southwest will be able to launch new nonstop flights to New York, Los Angeles and other cities from its base of Dallas Love Field next year when the Wright Amendment, a federal law introduced in the 1970s, expires.
The Justice Department also contended in its lawsuit that American and US Airways could survive as independent airlines. But industry analysts said customers of American and US Airways would suffer over the longer term as the airlines are unable to invest in new products and services at the same level as their merged peers.
Delta, buoyed by its merger, has spent the last two years and billions of dollars upgrading plane seats, airport facilities and technology systems that have helped it run a more reliable operation.
"The facts are that Delta, United and Southwest ... have now become so large and so financially strong that it is pure fantasy to suggest that either American and/or US Airways will be competitive as standalone airlines," Robert Herbst, an independent airline consultant and former pilot, said in a report this week.
For American parent AMR Corp, which filed for bankruptcy in November 2011, a blocked merger would also put its restructuring back at square one, requiring the carrier to come up with new strategies to grow and pay back creditors [ID:nL2N0GG10M].
Jan Brueckner, a professor of economics at the University of California-Irvine who studies airlines, took issue with the view that fares will go up under a merger.
"Our work shows that legacy mergers don't generate large fare effects," Brueckner said. "The benefits of mergers - larger networks, greater ease in going places - probably dominate in determining the outcome."
Brueckner, an American Airlines frequent flyer, said he was excited that the American merger would offer new destinations.
"I was looking forward to my airline being the world's biggest and getting me to more places that I need to go, especially overseas," he said.
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