Justice Department Seeks to Block AMR/US Air Merger

http://www.nytimes.com/2013/08/15/business/justice-dept-alters-view-of-mergers-by-airlines.html?pagewanted=all

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"Management is efficiency in climbing the ladder of success. Leadership determines whether the ladder is leaning against the right wall." (Stephen Covey)
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I have to join Bob Crandall (retired CEO of American Airlines) who questions what the people who run our government are thinking. On Tuesday, the Justice department sued to prevent the merger of American Airlines and US Air. According to Justice, the merger will mean less competition and higher prices for consumers.

So, what was this same Justice Department thinking when they evaluated the mergers of Delta and Northwest in 2008 and United and Continental in 2010? According to Crandall, these combinations (between companies that were much more competitive with one another than are American Airlines and US Air) have demonstrated that consolidating companies to build a nationwide service capability, realize economies of scale and reduce excessive competition is a sound strategy.

By allowing those two mergers, the US government has essentially created a "duopoly" with two super majors, the rest of the airlines and Southwest. Allowing this merger (AMR/US Air) would have created three super majors and Southwest (with smaller specialty airlines like Alaska Air which is well run and serves a purpose). Neither American or US Air serves enough US or international cities to compete effectively with United and Delta.

And, let's go to bat for American. I am not a fan of their management but it should be pointed out that, when most of the other airlines went bankrupt after 9/11, American tried to make it without doing that. American tried to keep their maintenance centers here in the US when other airlines went to other countries where it was "cheaper" (I won't comment on what I think the quality of the maintenance done in other countries is.).

And let's talk about "prices" for a moment: the airline industry was "de-regulated" in 1978 because Senator Ted Kennedy introduced a bill that he and his staff felt would lead to his re-election because "de-regulation" would lead to lower air fares. It did. So routes could go to anybody that leased a jet from GE (there are jets no longer in use that leasing companies are and were anxious to reactivate). To make a long story short, prices on many routes fell below what it cost the legacy airlines (like American) to operate. Segway to today: now we charge for "pillows," luggage, changing your flight plans, etc. American couldn't get its costs down or its prices up enough to survive or make a healthy profit.

According to Eduardo Porter, from 1979 to 2009 the airlines lost $59 billion on their domestic operations and $8 billion on their international flights (per Severin Borenstein at the Haas School of Business, UC Berkeley). Since the 1990s, US Air, United, Northwest, Delta, and Continental have all filed for bankruptcy, a couple of them twice.

As Bob Crandall says, if the Justice Department wants to increase competition, drop their suit and clear the way for the creation of a third super major. Justice has it backwards: what they're looking at is an industry trying to survive and a brilliant CEO at US Air (Doug Parker) who, among other accomplishments, got all the unions at American to agree that the best way out of bankruptcy is to merge with US Air. Getting all of the unions at any airline to agree on what time it is constitutes an accomplishment, let alone what Parker did.

I can't imagine the impact on jobs at American if this Justice Department suit drags on. And how about the best managers at both companies running for the exits. The best managers will get other jobs.

For Justice, there's a way to save face: get both airlines to drop a few routes and then withdraw.