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Antitrust Institute To Study U.S. Airline Competition

September 22, 2010 By: Staff

The American Antitrust Institute (AAI) reports that it will undertake a new study on competition in the U.S. airline industry, motivated by the 2008 merger of Delta and Northwest, and the proposed merger of United and Continental, both of which the AAI opposed.

AAI notes that this month the U.S. Department of Justice (DOJ) announced the closing of its investigation into the United/Continental merger, citing the parties’ commitment to permanently transfer slots and other assets at Newark Liberty Airport to Southwest Airlines. The divestitures purportedly address the DOJ’s competitive concerns in that case.

“We have reached the point where the positive or negative effects of significant and rapid consolidation in the U.S. airline industry should be documented,” said the lead researcher for the AAI study, AAI’s Vice President and economist Diana Moss. “Future merger decisions and aviation competition policy can benefit from objective, empirical analysis.”

In the last two years, the AAI noted, consolidation in the airline industry has reduced the number of legacy network carrier systems from six to four, assuming the United/Continental deal is consummated. The AAI believes it is possible that American and U.S. Airways will counter recent consolidation with one or more deals of their own, further reducing the number of airline systems in the U.S.

The AAI said it anticipates that its study will assess, among other things, the effect of recent airline mergers on: fares and other fees, quality of service such as flight delays and cancellations, capacity expansions or restrictions, entry by low-cost and other legacy carriers, and choices available to the U.S. air travel consumer, particularly those connecting passengers that are at risk from hub closures or cutbacks.

The AAI said the study will attempt to determine whether the claimed cost savings from mergers are actually realized and the extent to which they are passed on to the air traveler. The study will also examine whether entry by low-cost carriers (LCCs) has pro-consumer effects, or if mergers create opportunities for collusion or establish price umbrellas under which LCCs can compete less vigorously.

AAI said that the study of competition in the U.S. airline industry will help provide some context for evaluating the DOJ’s decisions on whether to challenge airline mergers.

“The DOJ’s press release approving the United/Continental merger is an example,” said AAI’s President, Albert Foer, “of a common failure to provide sufficient information and explanation to help the public understand the reasoning behind its decisions.” Foer explained, “The public should not be satisfied with an explanation that ‘The department conducted a thorough investigation.’ Of course we take that for granted.”

The AAI also pointed to other examples of a lack of transparency in the DOJ’s public statements. “For example, the Antitrust Division’s statement in United/Continental focuses on competitive concerns relating to hub-to-hub nonstop routes involving Newark, despite the fact that other hub-to-hub routes would likely also be adversely affected. In the 2008 Delta/Northwest case, the DOJ’s statement made no mention of apparent competitive problems, saying instead that the merger would produce “substantial and credible efficiencies.’ ”

The AAI has long advocated greater transparency in the closing of merger investigations. “This is particularly important now, as the number of legacy carriers falls and consumers are offered fewer choices on particular routes and across airline systems. AAI noted that system- based competition, or head-to-head rivalry between networks or platforms, will be a major focus of the study, “AAI said.


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