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By Alwyn Scott, Karen Jacobs and Nivedita Bhattacharjee
WASHINGTON, Sept 6 The U.S. government's effort
to prevent US Airways and American Airlines from merging could
hurt the carriers' ability to compete on increasingly tough
international routes, and that would probably mean fewer options
for business travelers.
In an antitrust lawsuit filed last month, the Department of
Justice focused on competition in the United States, arguing the
$11 billion combination of US Airways Group and
American's parent AMR Corp would harm consumers by
leading to higher domestic fares.
While the suit mentioned international routes that US Air,
American and competitors United and Delta fly, it cited no
international service in more than 1,000 routes that it said
would be "presumptively illegal" if the merger went ahead.
By leaving international routes out, the lawsuit overlooked
the fiercest arena of airline competition these days: long-haul
international flights that are vital to airlines' financial
Overseas routes are the most lucrative because airlines can
charge higher fares and typically carry more customers willing
to pay extra for business or first class seats. United Airlines,
which has the largest international route among U.S. carriers,
gets half of its revenue from international service. For
American the figure is 40 percent and for US Airways 25 percent.
Not surprisingly, airlines have been adding flights and
amenities in a race for market share on these routes.
Carriers in Asia, Europe and the Middle East in particular
have increased overseas flights to U.S. cities and plan to add
more. They have added cushy comforts: lie-flat beds, spacious
first-class cabins, cocktail lounges, even showers. U.S.
carriers are rushing to catch up.
Industry experts say that by preventing the merger, the
Justice Department would handicap US Air and American in that
race - a move that would eventually doom them.
Business customers would lose out because instead of getting
four U.S. competitors on international flights, or three under
the merger, the market for international flights would collapse
to a United-Delta "duopoly." Companies often negotiate preferred
fares in exchange for giving an airline most of their travel
business, and would prefer a third big player, analysts say.
"A stalled merger would harm the two potential partners on
their international routes by robbing them of capital to spend
on cabin and service upgrades in their international markets,"
said David Fitzpatrick, a managing director at AlixPartners.
Fitzpatrick said he recently returned from Asia on a flight
operated by a U.S. carrier with an old and tatty plane, a sharp
contrast to the flight out on Singapore Airlines.
"They needed to fix that airplane, nothing worked,"
Fitzpatrick said at the Reuters Aerospace and Defense Summit.
"It's no fun to fly on a bankrupt airline, or one that's on the
US Airways and American are still large domestic carriers
and presumably would have the ability to borrow money, buy jets
and compete. But they won't draw the best-paying customers.
"They're not counted out, but they're clearly not as large
as Delta or United," said Kristopher Kelley, an analyst at Janus
Capital in Denver.
"If you're a New York investment banker, or a pharmacy
company out of New Jersey, perhaps there's no reason to use
American," he said, because those aren't American hub regions.
And if the airlines have trouble earning money on domestic
routes, they won't have the money to invest in the lucrative
overseas routes. And "the profits that they might experience
with New York to Heathrow won't fund the whole airline,"
WEAKNESS IN PROFIT
From a distance it may appear that US Airways and American
could compete as separate airlines, including internationally.
The Department of Justice used the airlines' own statements
about their profitability to argue that they are strong enough
to compete as independent entities.
"We certainly don't need to merge with another airline," the
lawsuit quotes US Airways CEO Doug Parker as saying in mid-2012,
as the airline posted record second-quarter financial results.
Both airlines have relatively strong profit margins. In the
second quarter, US Airways posted an operating margin of 8.4
percent, just below Delta's 8.7 percent, which led the industry,
according to Robert Herbst, a founder of AirlineFinancials, an
analytic service. American's margin was 5.5 percent, better than
United's figure of 5.2 percent.
And American had $5 billion in cash and had just ordered 460
new jets, the largest order in history, when it entered
bankruptcy in 2011. Through bankruptcy, it cut labor costs
sharply and posted record profits in August.
But those strengths overlook the size and scope of United
and Delta, which also have lowered costs through bankruptcy and
merged with other airlines in the last five years, giving them
more time to integrate and build their routes and customers.
The two are particularly strong on international routes,
controlling 71 percent of capacity in 2012, compared with 29
percent for a combined US Airways and American, according to
"There's no question that over time Delta and United will
clean their clocks," Herbst said, referring to US Airways and
United and Delta also have a time advantage. If the merger
is stopped, American would need to renegotiate its labor
contracts, which were worked out in anticipation of a merger.
Similarly, US Airways had planned to join its
two pilot groups, themselves a product of a merger, in a single
contract through the merger process.
Herbst said that Delta and United have become so dominant on
international routes and the domestic routes that feed travelers
to international travel that US Airways and American will
struggle to attract business passengers who want to stay with
one airline for the whole trip.
Eventually, he said, the two erstwhile partners "will have
to pull out of international markets."
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(Editing by Lisa Shumaker)