What Comes Next?
Brian F. Havel International Aviation Law Institute, DePaul University College of Law, Chicago
The needs of a rapidly changing industry are being ignored.
The US Department of Justice (DOJ) shocked many industry observers by challenging the proposed merger between American Airlines and US Airways. While a court will soon assess the legal merits of the DOJ’s position along with the fate of the carriers’ plans, the mere decision to challenge the merger offers disturbing implications about the prospects for an improved, forward-looking US airline policy.
Reading the DOJ’s complaint one detects both an overreaction to this particular moment in the industry’s development as well as a twinge of regret felt by the Department about prior merger approvals. What is missing is a clear understanding of the future of US air passenger transport.
While a challenge in this case is not clearly an outlier by the historical standards of US antitrust law, it is a dramatic departure from how the law has been applied to other recent airline mergers. In prior cases the DOJ seemed to accept that the benefits to passengers from expanded network effects and the efficiencies caused by stronger airlines operating in a healthier industry trumped potential downsides for consumers from increased concentration within certain markets.
Reading the DOJ’s complaint this time around, one gets the impression that the agency has decided that industry consolidation has already gone far enough, if not too far, and that the convulsions that the market has experienced over the latter half of a tumultuous decade need not continue any further.
A number of empirical challenges could be raised to the DOJ’s assertions about the immediate past and imminent future of the industry. The agency’s claims that recent fare increases and ancillary fees were driven by recent mergers rather than rising fuel prices, and that the domestic passenger market can sustain significant increases in capacity going forward, are both suspect. But the larger concern is that the government appears to believe that an industry that has just begun to experience renewed profitability can be frozen in place and time, without the need to evolve further in anticipation of future challenges.
Foremost among those challenges is the unique limitation placed on airlines’ ability to form mergers across national lines despite the centrality of international service to the business models of the major carriers. The DOJ’s decision might be more defensible in a world where American Airlines or US Airways could seek merger partners from abroad. Concerns about the lack of competitors on US domestic routes could also be alleviated by removing the prohibitions barring non-US airlines from serving those markets.
Regardless of its ultimate fate, the attempted combination of American Airlines and US Airways will likely be the last significant act of the merger wave that has reorganized the US domestic market in recent years. What the government has shown by its eleventh-hour intervention, however, is that it lacks any vision for what comes next.
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