Just as when the Department of Justice (DOJ) filed its complaint against the American Airlines/US Airways merger, the announcement of a settlement surprised many in the aviation world. Lawyers, salivating at seeing an antitrust case go to trial, were disappointed and consumers looking at a dramatic cutback in airline competition on overlapping connecting routes felt thwarted. But, upon closer examination, the DOJ settlement may develop into a competitive benefit for consumers.
The Consumer Travel Alliance (CTA) was a significant player in the deliberations over this merger. They were the first to introduce the concept of overlapping connecting routes into the discussions with a study of one-stop connecting routes completed in March 2013. This study, together with its raw data, was shared with the Government Accountability Office and with DOJ. Both of those offices conducted their own studies taking into account other parameters. Both arrived at the same conclusions as CTA — consumers would face a severe reduction in competition on these connecting routes and that the problem was national in scope. In discussions about possible remedies for this kind of elimination of competition, initially, the normal action of slot divestitures at only East Coast airports didn’t provide relief for consumers.
The Consumer Travel Alliance also focused on the cozy relationship between major airline executives and their obvious concerted action when it came to setting ancillary fees, especially the 30 percent increase in change fees from $150 to $200, that all legacy carriers imposed in unison. Furthermore, that action was taken with no justification and no change in aviation economics.
Finally, in meetings with DOJ, CTA noted that consumers would lose the low-price leader among legacy carriers. The organization noted route after route where US Airways managed to price themselves as the lowest cost carrier both domestically and internationally. CTA opined that the loss of US Airways as an independent, low-price leader would have a disproportionate effect on the overall price of travel and take away one-stop alternatives to nonstop service.
Each of those arguments resonated with DOJ and with congressional staff that met with CTA as this merger was being considered. Much of the DOJ complaint noted similar issues.
But with the recent settlement, how do the DOJ remedies solve the above problems? The jury is out.
The big question will be whether providing the low cost carriers — Southwest, JetBlue, Virgin America, Spirit and Allegiant — access to major airports will change the competition equation. DOJ’s actions, making the airlines give up physical infrastructure at major hub airports, is unprecedented and will change the competition landscape.
How? That is going to be the question as the low cost carriers bring on more aircraft and decide where they will aim their flights and their marketing dollars.
If the effects of selling slots to Southwest Airlines at Newark that was mandated when United Airlines merged with Continental Airlines are similar, consumers will see more service at lower prices. The Newark slots that Southwest Airlines took over have seen a drop in airfares of 13 percent and an increase in passenger traffic of 36 percent. Any similar results because of these slot divestitures would be welcome by consumers.
The divestitures of slots at Washington-Reagan Airport is fairly dramatic. US Airways and American were forced to abandon all of the slots that AA would have brought to the merger. Moreso, those slots being lost are all for full commercial aircraft. The New American is left with about 13 percent fewer large plane slots and they must still operate the regional aircraft slots (limited to 76-seat airplanes). The New American will only have 50 percent of the full-sized aircraft slots at DCA, far less than they would have had and less than USAir previously held. The merged airline’s influence at DCA will be sharply less than it was prior to this merger.
The new lineup of flights, taking into account the slot and infrastructure divestiture required of the New American and the performance of the low cost carriers in limiting the legacy carriers’ proclivity to raise prices, will be closely watched over the next two years. Very little will happen immediately. AA and US will have to digest each other and come up with a blended and functioning reservation and operating IT system as well as shift gates, change signs, merge unions, re-paint aircraft, get permits from the FAA, move US Airways’ from the Star Alliance and shift over to Oneworld and find a way to merge the frequent flier programs. The low cost carriers need to find more aircraft, begin advertising and examine how they can bear up against marketing pressure from not only the New American, but from United and Delta, both of which are threatened by any new JetBlue and Southwest service in some of their largest business traveler hubs.
This settlement strikes at Delta and at United with the infrastructure divestitures that will help make low cost carriers more viable from major airports and in terms of business travelers. DOJ has managed to go beyond the AA/US merger with this settlement and rearrange power to an extent at the biggest airports in the country. Perhaps they could have gone further, freeing up four gates rather than only two, but the changes are not insignificant even as they stand.
With this infrastructure divestiture, DOJ may have found a way to inject new low-price leaders into the national aviation system. Plus, DOJ in no uncertain terms has put the legacy carriers on notice that they are aware of the semi-collusion games that their management teams play with ancillary fees. The footloose and fancy free concurrent fee changes are probably a thing of the past. If not, DOJ may revisit these issues. The emails that DOJ uncovered showed an ugly underbelly and a cozy relationship between airline executives.
Another remedy would be for the legacy carriers to be forced to disclose their passenger-specific and flight-specific ancillary fees prior to purchase. That kind of disclosure would go a long way toward demonstrating, during the booking process, the better value offered by airlines like Southwest and JetBlue and would allow the free market to function bar better than it does today when consumers are denied easy access to the full price of travel for comparison purposes.
The Consumer Travel Alliance, together with other consumer groups, is examining legal actions that may still be possible to perhaps add another gate or two to the settlement at major non-slot-constrained airports and will be working to shine a light on the back-room decisions about antitrust alliances that the Department of Transportation engages in. They are just as harmful as anticompetitive mergers, but they are agreed to behind closed doors without public comment.
Finally, the State Attorneys General that joined in the complaint against the merger are being rewarded by forcing the New American to maintain present levels of service in their states and maintain hubs. This means that other states will bear the brunt of the New American’s “rationalization” efforts. The judge overseeing this case should place a requirement that no overlapping connecting route flights be eliminated for three years so that all 38 states with overlapping connecting routes get equal protection under law. It is only fair.
Consumer advocates still have lots of work to do in order to rein in the anti-consumer airline assault; however, DOJ’s settlement imposed on the airlines might rearrange aviation competition to help consumers in the long run.
Charlie Leocha is the President of Travelers United. He has been working in Washington, DC, for the past 14 years with Congress, the Department of Transportation, and industry stakeholders on travel issues. He was the first consumer representative to the Advisory Committee for Aviation Consumer Protections appointed by the Secretary of Transportation from 2012 through 2018.
