AMR and US Airways Response to DoJ lawsuit

AMR and US Airways each filed their response to the Department of Justice lawsuit and you can find all manner of references to it online yourself.   The theme is what is important.

The DoJ and many anti-trust experts say that the law says a merger must be evaluated in the context of “now” rather than on the history of an industry.  In other words, while a merger between Delta and Northwest may have been “good” for consumers in 2008, that has no bearing on an American Airlines / US Airways merger in 2013.

The two airlines have indicated they feel otherwise and I’m inclined to agree because it’s those other mergers that have set the stage for the market conditions today.  Each airlines’ responses give a hint as to how they will defend themselves in court in the near future.

Both airlines make the case that the DoJ context for evaluating the merger was wrong in that by evaluating airport pairs and doing so on a connecting basis runs contrary to reality.  I agree.  In fact, time and again we have seen that the airlines with hierarchical superiority on a route (non-stop flights, one-stop flights, two-stop flights, etc) are the ones who tend to dominate on a route.  For example, on a route such as DFW to LGA (Dallas to New York City), the airlines with non-stops will carry most of the traffic whereas the airlines with just one-stops and two-stops will simply follow the prices set by the non-stop airlines.

Put another way, comparing one-stop conditions to non-stop conditions doesn’t yield a rational picture of the market.  These two airlines really want that to be the prevailing view because when it comes to where they directly compete on non-stop routes, there is a very tiny amount of overlap.  I think the airlines have a good chance of causing this to be the relevant view in this trial.  It passes the “sniff” test.

The second theme is that the airline industry spent approximately 30 years in a condition that prompted serial bankruptcies, mergers and conditions that found the airlines unable to deliver a consistent financial performance no matter who the airline was.  The question asked is why would the DoJ wish to perpetuate conditions that might financially advantage individual consumers but which is unsustainable as an industry?

They aren’t wrong.  I myself wondered if the airlines would ever be able to find some steady state in which to not only operate in but earn reliable profits in.  They have managed this admirably since 2009 or so and it has gotten a bit better.  Airlines earn profits despite a very weak economy and continuing oil shocks.  This is what we want.

And let me point out that no airline is running around and earning egregious profits at anyone’s expense even today.  Not a single one of them is ExxonMobil earning billions of dollars in profits each year.

I think that to make the argument that mergers continue to be needed to ensure a healthy industry is going to be more of a struggle.  Presumably attorneys and experts who are far above my pay grade will find a convincing way to do so.  I am skeptical not because I think it is an unworthy argument.  I am skeptical because I think it is an argument that doesn’t address anti-trust law very well.  It’s not a “consumer” argument in the eyes of most although I would argue that a healthy and competitive airline industry *is* best for the consumer even if prices are higher than they were in 2005.

Finally, they are clearly going to talk about markets in both domestic and international terms.  Here is where the arguments get very strong.  When they break down the market shares domestically, they rightly point out that the combination of these two airlines hardly ripples the market shares.  Southwest is the biggest airline domestically and has been for years.  The  merged US Airways and American Airlines won’t challenge them for dominance.

While you are chewing that over, let’s go to the international side of things and consider that not only do the airlines have to compete against each other on routes but that they also have to compete against other international airlines who, fairly frequently, enjoy lower costs than those same US airlines.

I like the domestic and international market arguments a lot because they embody clear, relatively easy to understand facts.  They are truthful and pass a lot of sniff tests.  This is where the DoJ made its biggest mistakes because it decided to “create” a picture of where the consumer was impacted that was based on carefully chosen criteria which ignored other, substantially mitigating facts.

This is where the lawsuit is won, in my opinion.  These are the facts that one should hang one’s hat on and they have the additional benefit of being very true.

 

 

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