My thoughts on comments made by Assistant AG Baer:

Q. Why is the focus on the legacy carriers?

BAER:  I think if you look at the documents we cite in our complaint, you’ll see the legacy carriers focus on each other. They say to a large extent, Southwest and the other low-cost carriers are not competitive constraints in many, many respects. They are for the routes they fly. But for example Southwest flies only about one third, maybe a little more than that of the routes that US Airways flies and American flies. They’re not a constraint on those other routes.

Note:  American Airlines flies about 3400 flights per day.  Southwest Airlines, curiously enough, flies about 3200 flights per day.  So, I really don’t know where Baer gets the idea that Southwest isn’t relevant.

Legacy carriers don’t exist anymore.  All have been entirely remade via bankruptcy and merger(s).  To act as if Southwest isn’t a competitive constraint on United Airlines, Delta Airlines, American Airlines and US Airways ignores a few facts.

1. Delta Airlines considers Southwest a major competitor in its home Atlanta market.
2. United Airlines has been given massive fits by Southwest in Denver most recently and in California for 2 decades.
3. American Airlines is so unaffected by Southwest Airlines that it has spent 3 decades fighting to keep Southwest blocked from competing in the Dallas market.
4. Southwest and US Airways have gone head to head in several markets and in Philadelphia, one would argue that US Airways won.

 

Q. Since DOJ has approved mergers in the past of American’s two largest competitors, it’s difficult to see why you would disallow this merger. And the airline industry was about to become a viable industry, and your lawsuit would prevent that.

BAER:  It’s a fair question. But if you look at the financial performance of US Airways and American Airlines over the past year, just the last quarter, each on its own is reporting record earnings. These two airlines are viable, healthy and in a position to be competitively aggressive and successful on a standalone basis.

The financial performance of American Airlines is not impressive to date and, in fact, it is exceptionally marginal when compared to Delta and United and . . . wait for it . . . US Airways.  It has a long, long way to go before it enters territory where it is earning on a par with its scale.

Now, US Airways has arguably done the best job of any airline given its handicaps but I also would argue that you should not penalize US Airways for succeeding and if you are going to look forward, then you should be looking forward at the likely long term fate for US Airways.  Over time, this airline will begin to face without more scale.

Q. You wrote that fares would go up and that the airlines would coordinate on setting fees. Why do you say that?

BAER:  We mentioned this in the complaint. There are documents that we cite out of the US Airways pile that talk about their efforts to take American’s fees, which in some cases are lower than the US Airways fees today, up to those levels. Even a few dollars in an increased baggage fee basically translates into tens of millions of dollars in extra revenue for the combined airlines but extra costs for the consumers.

I read this as a complaint that US Airways has been successful in raising its profits to cover the cost of its capital and therefore should be punished for being creative in operating its business in an industry that has had massive collective losses for 3 decades.  In other words, it’s better for the consumers to have an airline industry that remains predatory, sick and unable to stabilize and grow.

Q. Have you blocked any other merger with a lawsuit since the United-US Airways merger in 2001?

BAER: We also opposed, if I remember right, Northwest-Continental roughly about 11 or 12 years ago, I think. We were looking very seriously at the US Airways’ hostile bid for Delta about five or six years ago when that was abandoned. It’s not the first time. In terms of what we would have done if, when and but, it’s impossible for me to actually offer predictions. What we do is we take our look at the ones before us and when we see a problem, we go hard.

And Mr. Baer shows his ignorance in that the “merger” between Northwest and Continental wasn’t so much a merger as it was a joint venture.  Nonetheless, the DoJ did object to it and caused its demise.  That was also in 1998, not “10 or 12 years ago”.  It certainly wasn’t objected to in the current anti-trust landscape over the past 8 years.  The US Airways bid for Delta never got to the point where Justice would have even thought about beginning an investigation.

A very big concern of mine and, apparently, a concern of several financial analysts is that this investigation led by AAG Baer has, for the first time, focused on connecting flights in the competitive landscape.  To compare a one (or more) stop route with a non-stop route when it comes to air fares and competitive airlines is . . . bad, sloppy, foolish, naive, silly and many other adjectives.  And a good judge with a bend towards business will see that for the wide gaping hole that it is.

Baer also keeps a very hostile tone in his dialogue about these two airlines that strikes me as exceptionally personal.  Acting this surly this early on in the process just seems to communicate a personal bone to pick and that never serves the public well.   This seems out of place for an AAG and I wonder what his tone will be when the courts find that with carve outs, this is a merger that is lawful.

Finally, Assistant AG Baer keeps using phrases about the consumers getting the shaft.  That’s a pretty inflammatory piece of rhetoric and unprofessional and unbecoming of an Assistant AG.  It also reflects a partisan attitude which is not what we want in our government.

Let’s be clear:  The analysis offered by the DoJ is bad on so many levels as to beg the question “Who did this work?  A 13 year old?”

The repeated language about airlines now earning profits continually implies that punishment is due.  This is an industry which has been sick since 1978.  It only finally started to get its health 2 years ago and it is far from out of the woods in anyone’s opinion.

Knowledgeable analysis of the landscape today would find one very big concern that would exist without this merger:

Delta would be King, United would be Queen and the rest of the airlines including US Airways and American Airlines would be serfs.  Even Southwest Airlines, the darling of the “pro-consumer” bunch would be at very real risk.

Why?  Because Delta and United have the scale to dictate terms in the marketplace.  The others have no choice but to follow.  Because Delta and United will ultimately earn a health return on capital and be able to responsibly fund themselves whereas the others will have to rely on sickly cashflow and financial crisis every few years.

I am incredulous at how the DoJ tries to make arguments here first praising US Airways for being well managed and then in the very next sentence adopting the position that they should be punished for that very success.  They have seemingly picked through the various available arguments, chosen the ones that serve their personal interests, tossed them into a poorly crafted complaint and then gone out behind a lectern to declare that when they object to such a thing, they come “hard”.  (Yes, that word was used by Baer yesterday).

Isn’t it notable that the European Commission who would, in my opinion, ordinarily have a strong concern about competition issues surrounding this merger as it relates to flights into and out of London Heathrow (at minimum) found it necessary to only ask for and receive  a single slot pair for flights between Philadelphia and London?

One of the most regulatory oriented agencies in Europe who have no trouble shooting down proposed mergers (Ryanair and Aer Lingus, for instance) only asked for a single route to be flown by someone else.

Something smells very bad.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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The Department of Justice along with the Attorneys-General of six states (Texas, Arizona, Florida, Pennsylvania, Tennessee, Virginia and the District of Columbia) have filed suit to block the merger between US Airways and American Airlines citing concerns about the anti-competitive nature of the merger.

Before I go farther, let me say that this decision has one single merit behind it and that is the fact that I will be able to write weeks worth of blog entries on the inherit stupidity of this lawsuit.  I won’t be bored.

At first glance, what I am most upset about is the fact that this decision is founded on either some of the worth work done in investigation for a major airline merger or it is founded on political moves and either is distasteful beyond belief.

One example that grates on my nerves to a high degree is the citation that with this merger, only 3 legacy airlines will be left in the United States.  In point of fact, there haven’t been any legacy carriers left in the United States since the day after American Airlines filed for bankruptcy.

Those guys are gone.  They have neither the market power nor the market share they are credited with.  Indeed, they are now beginning to fiercely compete with each other in the domestic landscape.

And, more accurately, that statement ignores what factual data exists on the competitive landscape.  With this merger, there would not be 3 legacy airlines but, rather, 4.  They completely ignored Southwest Airlines.

Southwest Airlines holds about an equal share of domestic traffic in the United States compared to United Airlines, Delta Airlines and the combination of American Airlines and US Airways.

So, what the US DoJ and its cronies from The States have implied here is that 4 exceptionally healthy, broadly national and high competitive airlines is undesirable.  Instead, it is more desirable to have 3 highly competitive airlines with 2 other weaker airlines with substantially reduced market prospects going forward.

For the first time in nearly 50 years, airlines are either earning the cost of their capital or on the verge of it.  The required financial performance to be viable businesses in this industry is only just now being realized.

But political buffoons unable to do homework located in Washington D.C. have decided that now, long after Pandora’s box was opened, now is the time to try to draw a line in the sand.

The statement being made is that they are concerned about the high cost of air fares and believe that those air fares may, in fact, go up and “harm” consumers.

This statement goes to the idea that air fares are artificially high.  Interesting and before I go on, let’s not forgot the the forthcoming analysis of this idea comes from someone who has little sympathy for airlines and the fixes they get themselves into with respect to costs.

It is unsustainable for any airline going forward to be unable to earn a return on capital investment.  The capital markets will simply not buy into the idea of continuing to loan money to enterprises who cannot pay interest on their debts.

And unable to merge, they must go bankrupt again.  This time they will go Chapter 7.

More to come.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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