Assistant AG Bill Baer, the face of the Department of Justice’s decision to file suit against American Airlines and US Airways to prevent a merger appears to be both naive and ignorant.

It is said:

“The bottom line, he said, was that the best solution was to try to kill the deal rather than try to find ways to make the merger more palatable.”

So, in other words, this fellow decided that it was better to kill a deal against two inferior airlines in favor of 3 vastly superior airlines because he thought that was a solution to competition.

Doesn’t that sound naive and ignorant?

He goes on to say:

“We filed the lawsuit today because we determined that the merger – which would create the world’s largest airline and leave just three legacy carriers remaining in the U.S. – would substantially lessen competition for commercial air travel throughout the United States.  Importantly, neither airline needs this merger to succeed.  We simply cannot approve a merger that would result in U.S. consumers paying higher fares, higher fees and receiving less service.“

It creates the world’s largest airline barely.  Just barely.  With United Airlines and Delta Airlines, they are really a Big 3.  From a domestic perspective, you would have had 4 major national airlines competing in all substantial markets against each other.

Delta Airlines, United Airlines, Southwest Airlines and the new American Airlines.

And given the moves made by Delta Airlines recently to attempt to take control of the California “shuttle” market, I would say that there is another bogeyman that bears watching and a lawsuit if he truly believes that competition is threatened today.

He also says:

“If this merger were to go forward, consumers will lose the benefit of head-to-head competition between US Airways and American on thousands of airline routes across the country – in cities big and small.  They will pay more for less service because the remaining three legacy carriers – United, Delta and the new American – will have very little incentive to compete on price.   Indeed, as our complaint shows, the management of US Airways, which will run the new airline, sees consolidation as a vehicle to reduce competition between the airlines and raise fees and fares.”

I repeat:  There wouldn’t be 3 legacy carriers.  There would be 4 US Super Carriers and they are already taking square aim at each other in the marketplace today.

Furthermore, US Airways and American Airlines have something like 12 direct city pairs in which they compete.  That’s it.  Mr. Baer believes that US Airways competes with American Airlines by offering lower fares on one-stop service against American Airlines.

Those who watch the industry and, you know, have a clue, will tell you that one-stop routes don’t compare to non-stop routes.  US Airways offers those competitive fares for the incremental revenue, not because they succeed in stealing customers from American Airlines.

Remember who the money making customer is:  business travelers

Who hates less than non-stop flights?

Business travelers.

I’m telling you that Assistant AG Baer almost seems senile in his arguments.

Baer goes on to say:

“The big three airlines – American, Delta and United – don’t like this aggressive price cutting by US Airways”

Who here believes that any of those airlines is frightened of US Airways and its so called aggressive price cutting?  That statement is so ludicrous as to make one wonder if Mr. Baer did any investigation at all.

“Today, American does not charge if you redeem frequent flyer miles.  US Airways charges an average of $40.  If the merger is allowed, US Airways is planning to take this frequent flyer benefit away and make American’s frequent flyers pay redemption fees.  By eliminating this competitive distinction between American and US Airways, the new airline generates an additional $120 million in revenue.  But you pay the price.“

Mr. Baer has clearly never redeemed miles on either airline and particularly hasn’t redeemed miles on American Airlines.  I assure you that there are fees associated with most redemptions for miles on American.   But notice how he villifies the US Airways management for daring to earn a profit.

Take notice:  American Airlines is in bankruptcy and doesn’t earn profits.   US Airways does earn exceptional profits.  But we don’t want airlines earning profits.  Is that clear?  Profits are *bad*.

Baer addresses the elephant in the room:

“You don’t need to go far from this very city to see another worrisome effect from the proposed merger.  Across the Potomac River, the merged airline would dominate Washington Reagan National Airport, by controlling 69 percent of the take-off and landing slots at DCA.

And, it would have a monopoly on 63 percent of the nonstop routes out of Reagan National.”

I guarantee you that the airlines’ were prepared to make a deal on this.  However, where was Mr. Baer’s worry when Delta and US Airways did a deal to get their monopolies on La Guardia and Washington National Airports respectively?

Where is his concern about the massive dominance American has in Dallas / Fort Worth?  Or Miami?

Where is his concern about United’s massive dominance at Newark and Chicago airports?

Or Delta’s control of Atlanta, Salt Lake City, Detroit and Minneapolis?

The insanity being offered by both Assistant AG Baer and AG Holder is a giant disservice to consumers and constituents.  Their massive lack of understanding of the industry will do substantial harm to the airline industry of the United States for as much as 2 decades.  It will potentially relegate US airlines to a secondary status in the world market.

And while you consider all of the above, consider that it comes from a blue leaning, moderately liberal Democrat.

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Robert Crandall has gone postal over the merger lawsuit writing OpEds for the Wall Street Journal and providing quotes to the Dallas Morning News that require the use of “expletive deleted”.

Crandall echoes what the rest of airline industry world has said: The government is entirely naive and ignorant of the airline industry and leaving Delta and United as giants ultimately sees US Airways and American Airlines likely failing in the very long view.

Frankly, he said it way, way better than I did. But, then, Robert Crandall is well known for being scary smart, very articulate and very, very direct in his opinions.

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US Airways and American Airlines will fight the lawsuit and they have a very credible chance of winning.  However, regardless of the outcome of a lawsuit in court, real damage has been done already.

Both airlines have seen their stock prices drop considerably.  Furthermore, by making them the very public target of a Department of Justice lawsuit, real damage has been done to their business by casting them in a negative light.

American Airlines suddenly doesn’t have a bankruptcy exit plan that is viable.  Regardless of what CEO Tom Horton says about American Airlines being viable without a merger . . . it really isn’t.

Oh, it could exit and linger around for a few years.  Sure.  But creditors will get cents on the dollar, employees will lose more jobs and ultimately the next step for the airline could be a second bankruptcy.  This time a Chapter 7 filing.

Is it that gloomy for American or am I being dramatic?  Consider that the DoJ has declared war on airline mergers.  None will be entered into by other airlines for at least a considerably lengthy time.  American has no prospects to merger with other airlines either.

And American has already begun suffering a brain drain as a result of announced post merger leadership.  As an airline, its prospects are very dim going forward without a merger at this time.

US Airways can make it . . . kind of.  But I wonder if they can thrive now.  This is an extremely unfair sucker punch to the best airline management in the world presently.  How do they find another smart, viable merger partner with this swirling around the drain?

Can they win?  Yes.  The landscape is littered with precedent and our anti-trust laws are actually kind of weak compared to what people think they are.

But the economic damage will be done already and the merged entity will spend extra years trying to play catchup to 3 other airlines that will have a very, very substantial head start.

That is not the picture of competition.

And there isn’t a financial analyst out there who isn’t alarmed and appalled at this development in the airline industry.  Expect all airline stocks to suffer a while.

Furthermore, consider that airlines have just been told that their federal government does not intend to allow any future growth through mergers and acquisitions.  The path to growth organically is exceptionally expensive, time consuming and requires letting go of capacity constraint.

No one wins in that scenario.  It becomes a bloodbath.

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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.

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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.

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US Airways is, supposedly, being sued by two people who were flying as non-revenue passengers in first class for being asked to remove their hoodies and dress according to a dress code.

Why?  Because paying first class passengers were allowed to fly in hoodies.

It has long been common practice for airlines to enforce a dress code for those flying as non-revenue passengers.  Those dress codes are no longer nearly as strict as they used to be.  Today, “nice casual” or “business casual” is generally accepted even in First Class.

When I flew as non-revenue First Class passenger in the 1970’s, you wore a suit.  Period.  End of story.

The idea behind the dress code is not hard to understand.  You are expected to dress well to represent the company among paying passengers and so that you do not run the risk of drawing attention to yourself as a non-revenue passenger.  Paying passengers tend to resent people getting for free what they paid for.

Airlines vary some on what they’ll allow but I do not believe any US airline would permit hoodies and bluejeans in First Class by a non-revenue passenger.  (And if any airline would permit it, I would suggest they shouldn’t.)

Are dress codes wrong or class driven?

No, they’re not.  If you are flying as a non-revenue passenger, you are doing so on the courtesy of the airline.  They airline makes this privilege available to certain people as a benefit and a courtesy.  It is not a mandatory thing for them to supply and it really is a privilege.

So in return for not paying hundreds of dollars for your ticket, the airlines want you to dress appropriate, blend in well and represent the company appropriately.

They also want you to shut up about flying as a non-revenue passenger.  That is not for public consumption . . . ever.

And since these two jokers were on “buddy passes” which are tickets supplied by an employee of the airline, I can assure you that the employee who supplied them is mortified and no doubt started distancing themselves from these two creeps as soon as possible.  This is the kind of thing that gets one’s flight privileges lifted or suspended.

I feel bad for the US Airways employee who did these two jerks a favor and I hope this person is able to make it right with the company and their managers and retain their good name within the company.

 

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Remember the JetBlue flight where the captain had to be locked out of his own cabin due to unstable behavior on his part? The aircraft diverted to Amarillo, the captain was hospitalized and the passengers were accommodated with another flight crew and compensated for their inconvenience. Well, a group of those passengers is now suing JetBlue because they were “in fear for their lives” during the episode.

No doubt it was a tense and even scary moment in some respects. Unpleasant at the least and inconveniencing as well.

But a lawsuit here is just silly. Fear alone and fear that lasts a short time and fear from an event that had a good and successful outcome isn’t justification for suing an airline for millions. I wouldn’t question the fear but I do strongly question just how much fear one experiences when the airplane stays in control and the misbehaving captain is corralled and controlled in fairly short time? It’s not good, it’s not ideal but let’s face the facts: It wasn’t the worst situation that could happen either. Try a landing on a short runway in rain with a 20 knot crosswind component.

Shame on the passengers for their agreeing to be a part of this lawsuit. This is acting like a child rather than adult on their part.

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US Airways and its pilots have come to an agreement to drop the lawsuit that US Airways filed against its union for a work slowdown.  A permanent injunction will be entered into the record, US Airways will be the “winner” and both sides pay their own legal costs.

Color me wholly unsurprised.  This was a bad move on the part of the pilots union as there was already precedent in courts going against them and it wasn’t a good way to get the company’s attention. 

Instead, the union should be working to unify its membership and get them on an integrated seniority list and then a new agreement with the airline.  These pilots have been working off two different seniority lists and without a new negotiated agreement since 2005.  That’s 6 years of bickering that admittedly, has benefitted US Airways in that it has kept pilots wages relatively lower than its competitors. 

The dysfunction shown by US Airways pilots has stunned me at times.  Particularly that of the “East” pilots (aka former US Airways pilots and not America West pilots).  First rejecting an ALPA negotiated integration and then forming a new union that could be under the control of the “East” pilots, no one has benefited from this behaviour. 

Furthermore, it’s hurt the company as well.  Until its labor problems are smoothed, US Airways doesn’t look like a good merger partner to anyone else.  After all, who wants to have three different pilots agreements and a labor group that has to be operated like three different airlines?

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I know that these days it seems as if I’m at war with American Airlines but the truth is, they just keep running into walls.

ABC News has THIS story about a woman named Danielle Covarrubias who became pretty angry at American Airlines losing her bag.  However, when they also refused to refund her bag fee, she decided to sue American Airlines for $5 million.  The class action lawsuit was filed in Washington state, where Ms. Covarrubias lives.

But after a few days, it’s come to light that, according to American, Ms. Covarrubias wasn’t on the AA flight.  It was cancelled and she was re-booked onto another airline which lost her bag.  That was from Grand Rapids to Chicago.  No one disputes the bag was lost but it appears it was returned to her the following day.

AA says that they do allow a refund claim in these events as a part of a lost bag claim and it is unclear if Ms. Covarrubias filed such a claim.  Regardless, it points up what I’ve been saying for more than a year.  If you’re going to charge a bag fee, be prepared to deliver or refund that fee when you don’t deliver it on time or at all. 

Travelers are enraged and there is enough traction for a class action lawsuit such as this.  Even if this one doesn’t end up in court, I do believe there will be another that does.  When it does, the issue will be over whether or not an airline is entering into a contract to carry that bag with guarantees and I don’t think their fine print will save them.  There is plenty of law to show that there is an implied contract and that breaking the contract means you owe a refund of some sort.

Revenue from ancillary fees such as this looks great to airlines but they haven’t yet really felt the pain of what those fees imply.  To be honest, I’m a bit surprised that it has taken this long to see something like this. 

More important, it’s another case of airlines shooting themselves in the foot.  This problem was easy to solve and even easier to avoid.  Give a refund instantly when you lose or misplace a bag for which a customer has paid a fee. 

That much is a no-brainer.  It isn’t hard to empower an employee to do so.  You only have to ask 2 questions to arrive at an appropriate action:  1) Did the customer pay a checked bag fee and actually check a bag?  2) Did the bag arrive with the customer?   If the answers are Yes and No respectively, make that refund immediately.  Credit it back in exactly the same manner for which it was paid and do it instantly and with sincere regrets over the trouble caused. 

Denying that refund automatically is not only a bad PR strategy, it’s just simply wrong.  In this country, we do not expect people to pay for things they didn’t get.  Airlines are styling these fees as “services” and, in this case, service is exactly what the customer didn’t receive.

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