Is the American Airlines Antitrust Lawsuit a Fight Over Ancillary Fees?

american airlinesWhat’s behind the Department of Justice’s (DOJ) antitrust lawsuit to block the American Airlines – US Airways merger?

In its statement announcing the suit, the DOJ said the merger would “substantially lessen competition for commercial air travel in local markets throughout the United States and result in passengers paying higher airfares and receiving less service.” But in addition to worries over a lessening of head-to-head competition on major routes, especially those out of Reagan National Airport in Washington, DC, the DOJ statement also showed broader worries about the effects of airline consolidation on a host of industry pricing issues, especially those related to ancillary fees.

In its statement the DOJ cites remarks by airline executives crediting airline consolidation with their ability to push through price increases in the form of ancillary fees. At a conference in 2012, the DOJ quotes US Airways President Scott Kirby as saying, “Consolidation has also…allowed the industry to do things like ancillary revenues…. That is a structural permanent change to the industry and one that’s impossible to overstate the benefit from it.”

"In recent years, the airlines have introduced fees for those services, which were previously included in the price of a ticket,” the DOJ said. “These fees have become huge profit centers for the airlines. In 2012, domestic airlines generated more than $6 billion in fees from checked bags and flight changes alone. The legacy carriers often match each other when one introduces or increases a fee, and if others do not match the initiating carrier tends to withdraw the change. By reducing the number of airlines, the merger will likely make it easier for the remaining carriers to coordinate fee increases, resulting in higher fees for consumers."

Reaction from such industry groups as the Business Travel Coalition (BTC) also focused on pricing issues. In its statement supporting the lawsuit, the BTC cited its Congressional testimony of February 26, 2013, in which it said that “there is a coordinated airline war on consumers and price transparency.”

"Airline CEOs testify that the fare transparency and comparison-shopping enabled by the current system, and especially the online travel companies, will be more than adequate to protect competition and consumers from the consequences of radical industry consolidation," said BTC Chairman Kevin Mitchell. "They justify their mergers on fare transparency in one breath, and then turn to kill it off by withholding fees for ancillary services from travel agencies in the next breath, or by attempting to impose a new anti-competitive system for the worldwide pricing of tickets, as embedded in the International Air Transport Association's Resolution 787."

Resolution 787, or the New Distribution Capability (NDC), allows airlines to offer different prices to different consumers through the collection of personal data, name, the purpose of the trip, age, marital status, nationality and past purchasing behavior, the BTC said. The BTC argued that this new standard would limit airfare transparency and the ability of consumers to effectively comparison-shop between major carriers.

Not everyone is opposed to the merger, however. American Airlines and US Airways have released a joint statement defending the merger, saying that they intend to mount a “vigorous and strong defense” against the lawsuit.

“Integrating the complementary networks of American and US Airways to benefit passengers is the motivation for bringing these airlines together,” the companies said. “Blocking this procompetitive merger will deny customers access to a broader airline network that gives them more choices.”

In the statement the two companies also argued that the merger was the best plan for AMR’s restructuring, and that it would deliver the maximum return to AMR’s creditors and employees.

The editorial board of USA Today has also weighed in in support of the merger, pointing out that an airline industry with four major legacy carriers is not so different than one with three.

“Antitrust experts, using mathematical models to study competition, have long found that an industry of three is a huge improvement over an industry of two, but that a fourth makes relatively little difference,” the USA Today editorial board said. USA Today also pointed out that the push toward airline consolidation is a reaction to overall weakness in the airline industry.

On our Facebook page, our readers largely predicted that the merger would result in increased fares and would most likely go through.

“It will eventually go through and when it does you can bet airfare will be up industry wide and fewer selections,” said Aaron Mase. “I am glad it is being held up.”

Atrav Eldiva said, “To me this just means this mega merger is going to raise fares all the way around, and no one made a huge deal when United / Continental merged dominating more than 71% of departures out of EWR.”

Keep visiting for the latest updates on this developing story.


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