After a decade of “rapid consolidation” in the U.S. airline
industry, the U.S. Department of Justice filed a lawsuit in mid-2013 to block
the proposed merger between American Airlines and US Airlines. The question I
investigate here is whether the government’s opposition to this merger is fair
to the stockholders and employees (including managers) of the two airlines.
Given the undoubted proliferation of empirical studies on the probable impacts
of the merger on the industry (e.g., competition), the ethical question of justice as fairness may have slipped
between the cracks.
At the time, the merger was expected to create the world’s largest airline, not to mention
the largest American (or US) airline. Even though the government had blocked
the merger of AT&T and T-Mobile two years earlier and forced Anheuser-Busch
InBev to significantly change the terms of its takeover of the brewer of Corona
earlier in 2013, the New York Times characterized the antitrust division of the
U.S. Justice Department as having “a newly aggressive approach.”[1]
The division had allowed a “nearly unfettered run of mergers in recent years.”2]
Even the regulators were on board.
Should these two airlines merge? Image Source: NYT
Beginning in 2008—the year of the financial crisis—the
Justice department approved the mergers of Delta and Northwest, United and
Continental, and Southwest and AirTran. “While those mergers helped the
industry return to profitability and brought more stability, they also led to
higher fares, regulators said. A union between American and US Airways would
take the consolidation too far, . . . hurting consumers and leading to
substantially less competition and higher airfares and fees, and to less
service to many airports.”[3]
Eric Holder, the U.S. Attorney General, said his department was determined to
ensure “robust competition in the marketplace.”[4]
According to the Justice Department, the merger would result in four airlines
controlling more than 80 percent of the U.S. market for commercial air travel.
Whether there has been much real competition in what may actually be oligarchic
markets in the U.S. is a question for another day. Here, the question is
whether being the last in line, reaching the counter just after closing, is
fair. Of course, the analogy breaks down in part because American and US
Airways did not have to wait for the other mergers to have been approved. The
question, better stated, is whether being the merger likely to reduce
competition below a threshold is fair to the owners and employees of the two
airlines, given the fact that the Justice Department had approved other mergers
in the industry in the preceding five years.
That the “vast majority of domestic airline routes were
already highly concentrated” suggests that maybe the Justice Department should
not have gone on a sort of spending spree in allowing all of the preceding
mergers.[5]
Put another way, if the overwhelming number of existing routes were already
highly consolidated, why all of a sudden was another merger too much due to its
impact on competition? Is there much competition in a highly concentrated
market? If not, then why didn’t the government draw the line earlier, opposing
one or two of the earlier mergers? Robert Mann, a former airline executive, has
characterized the Justice Department as “late to the game with concerns over
airline industry consolidation.”[6]
Given that American sought the merger to avoid bankruptcy, should the
stockholders and employees of American as well as US Airways suffer from the
government hitting the brakes because it had been speeding?
On the other hand, consequentially speaking, the proposed
merger was expected to harm consumers, perhaps even more than the previous
mergers had. The consequences of the last guy putting a card on top of a house
of cards are very different than the preceding consequences—hence the last guy. In this sense, having a
threshold of risk makes sense. The risk to competition had become too great,
even if this was due to the preceding mergers. That the government should
probably have raised the hurdles higher for those mergers does not mean that
government should stand aside as consumers have to pay “hundreds and hundreds
of millions of dollars” more as a result of the proposed merger, according to
William Baer, the assistant U.S. attorney general in charge of the anti-trust
division.[7]
Who should pay—the consumers or the
stockholders and employees of American and US Airways? Is there a third option
that is not averse to the financial interests of any of these groups? If not,
who should pay? If the airline industry was already heavily consolidated,
presumably at the expense of competition, implementing Holder’s aim would
entail going beyond disapproving the proposed merger to pro-actively break up all of the existing major airlines based
in the United States. The airlines coming out of such an act would have
different ownerships as well as
managements and boards of directors. All of the mega-airlines would be treated
the same in being broken into two or three airlines each.
