Airlines and Anti-trust

Airlinesand Anti-trust

TheConcerns that were Raised by DOJ about the Merger between theAmerican Airlines and US Airways

TheDepartment of Justice (DOJ) was concerned that the merger wouldreduce competition in the market. DOJ argued that the two Airlineswould collude with the other few airlines and increase the prices ofthe air tickets (Datla, 2015). In this case, DOJ was concerned theremight be a trade-off as analyzed by Oliver Williamson. The AntitrustDivision had an opinion that competition might be reduced through themerger since merging was like one firm was absorbing its competitor.As a result, competition pressure would decrease and thus give thecompanies an easy time to harm customers, who would have limitedchoices, by raising prices. Alternatively, DOJ was concerned aboutthe probability of the merger in enhancing competition when both ofthe airlines’ assets were to be under the custody of one firm andbe managed efficiently. DOJ was concerned more about theconcentration of carriers in the market as this would have influencedcompetition and in turn force the companies to improve theirservices.

TheResponse of the American Airlines and the US Airways to the DOJ’sConcerns

TheAmerican Airlines and the US Airways addressed the anti-mergerarguments by DOJ stating that the merger was set to enhancecompetition in the market unlike what the Department of Justice hadalleged that the aim of the merger was to hinder competition (Datla,2015). The two airlines argued that they wanted to merge their assetsto be managed effectively and increase the firms’ abilities tocompete effectively. Besides, the airlines maintained that therewould be economies of scales and the merger would have lowered theoperational costs. In turn, the firms would be able to offer betterservices and employ more workers.

TheDrawbacks of the Merger and Potential Benefits to Customers

PossibleBenefits

Thecompanies had promised their customers that they will be able totravel to more places as a result of the merger since it was expectedto make 6,700 flights a day. Besides, the firms were to providebetter services through nicer crafts that would have flats, Wi-Fi,and personal entertainment.

PossibleCons

Ifthe merger was implemented, the fares were likely to sky-rocket sincemarket concentration was to decrease. Also, more competition waslikely to rise because the fewer number of airlines would leavecustomers with lesser options.

DOJ’sSettlement on the Merger

DOJsettled the merger by ordering the two airlines to abandon some oftheir assets. The divested assets were to be managed by low-costcarriers (LCCs). The major goal of the Department of Justice was toensure that market concentration did not decrease as this would havepromoted monopolization. Also, the concentration of companies in themarket determined the probability of tacit collusion occurring. Ifthere are few businesses in the industry, then unspoken conspiracywill be easier to prevail than when the competition is high.Therefore, as a way of controlling collusion, the American Airlines,and US Airways were required to divest some slot holdings as well asabandon certain assets like the LaGuardia and Reagan National Airportin the New York. Furthermore, for the two carriers to merge, it was arequirement that they dissociate from some gates like MiamiInternational, Boston Logan, Los Angeles, Chicago O’Hare, andDallas Love Field to increase the presence of low-cost carriers inthese gates (Datla, 2015). The divested assets were to be under thecustody of low-cost carriers (LCCs). Therefore, the resolution of themerger issues was reached through the terms that required the twocarriers to abandon some of their assets to enhance competition inthe industry.

References

Datla,A. (2015). Airlinesand Antitrust: Scrutinizing the American Airlines-US Airways Merger(Sequel).Harvard Kennedy School President and Fellows of Harvard College.