Brace, brace

FLYING conditions were perfect, it was widely agreed, when American Airlines and US Airways announced in February their intention to take off together. But on August 13th the airlines unexpectedly found themselves fighting severe headwinds as the Department of Justice and six state attorneys-general filed a lawsuit to ground the proposed merger for being anti-competitive. The trustbusters argued that this was a bad deal for passengers who would face “higher air fares, higher fees and fewer choices”.

The new airline, to be called American Airlines Group, would be the world’s biggest, with around 187m passengers a year and more than 100,000 workers. After decades of consolidation, this would leave over 80% of America’s domestic air-travel market in the hands of only four airlines: the new one plus Delta, United and Southwest. Nor would the concentration of the industry be certain to stop. There is speculation that one reason the trustbusters decided to fight this deal is that they suspect that the new airline is planning a further merger with United. Their action may also indicate that the Obama administration intends to take a tougher line on antitrust laws in its second term.

Is this concern justified? There are many industries where “robust full-throated competition persists despite less than a half-dozen major players,” says Peter Clark of University College London, a co-author of a new book on mergers, “Masterminding the Deal”. Examples include telecoms, retail, oil, chemicals and media.

Moreover, American and US Airways compete directly on only 12 domestic routes—which helps to explain why the merger was expected to win approval. Yet the lawsuit shows that antitrust enforcers are taking a broader view of competition than has been typical when considering airline mergers in the past, by comparing the price American charges to fly direct between two cities with what US Airways charges between them with a stop en route. Such flights take longer but are a lot cheaper. The antitrust authorities fear these attractive one-stop fares, which in some cases have been set low and energetically marketed by US Airways to win business from American (as well as Delta and United), would go after the merger.

American and US Airways say they will mount a “vigorous defence” of the deal. They will need to provide compelling evidence that passengers will benefit—presumably not least by the new airline providing stronger competition to Delta and United. They will also have to explain away a treasure trove of internal e-mails uncovered by the antitrust watchdogs which appear to show airline executives dreaming of the many ways they will be able to charge more after a merger.

The airlines may try to settle the lawsuit before it gets to court by giving up certain routes to rivals or guaranteeing prices and services. If they are wise, these will be concentrated on Reagan National Airport in Washington, DC. The new carrier would control 69% of landing slots at an airport under the noses of regulators and politicians. This might constrain the operations of a rival, JetBlue, which leases slots from American and competes with US Airways to provide price competition on routes favoured by the nation’s politicians.