American-US Airways Merger Proves Bureaucrats Don't Understand the Economy

American-US Airways Merger Proves Bureaucrats Don't Understand the EconomyIn another heroic example of government interventionism, the Department of Justice filed an antitrust lawsuit last week to block the proposed merger of American Airlines and US Airways. With this, the government once again shows how they can choose winners and losers among competitors in a so-called free marketplace.

Announcing this on Tuesday, Assistant Attorney General Bill Baer said in an official statement, “If this merger were to go forward, consumers will lose the benefit of head-to-head competition between US Airways and American on thousands of airline routes across the country – in cities big and small.”

Officials say that this mega-airline, under the American Airlines banner, would have monopoly power to drastically raise airfare and stifle competition since they won’t be competing directly with each other. All this they argue despite the fact that US Airways and American currently compete on very few nonstop routes.

What’s more, DOJ officials must have very poor memory since in recent years they have already approved the same sort of mergers several times! 

Southwest and AirTran, United and Continental, and Delta and Northwest airlines all successfully merged, with the green light from the DOJ. Moreover, U.S. government data show that on an inflation-adjusted basis, average air fares are actually lower than they were 15 years ago and it is without a doubt that the industry is much stronger after these effective mergers.

Nonetheless, the DOJ drives on claiming that consumers will be hurt by this combined US Airways and American force.

Their argument rests on the assumption that both airlines would be perfectly fine if they didn’t merge, and that this is just a ploy to raise prices by eliminating competition. However, American Airlines is still going through bankruptcy proceedings and US Airways is still small enough to almost have a negligible portion of market share. So, neither airline is in good shape in the long run if they aren’t allowed to join together.

In fact, it’s questionable whether US Airways would even exist today if it hadn’t been allowed to merge at the end of its second bankruptcy in the previous decade. That merger clearly created more competition, because it created a stronger competitor.

A merged US Airways and American airline would be the largest domestic airline, but not anywhere near a monopolist. Take a look at the breakdown here of market share after this proposed merger:

Airlines, like any company in an open market, have to strike a balance between the right services at prices that produce profit and retain customers. It's laughable that the Justice Department thinks it is better positioned to determine this balance while dictating exactly how many airlines there should be operating and how big they should be to maximize competitiveness.

So, this begs the question: How can the DOJ approve some mergers and not others without clear reason why? How can Delta, United, and Southwest escape the grasp of the federal government unscathed? Do they hold some sway in Washington that their competitors American and US Air do not?

In fact, when Assistant Attorney General Baer was asked whether United and Delta lobbying against the merger had an effect, he replied, “We talk to anyone who wants to come see us and have a view on this.” 

Of course, he denies lobbyists made the decision.

Unfortunately, whether the DOJ’s case has any merit ultimately doesn’t matter. If they wish it, DOJ officials can prolong this lawsuit and slow the proposed merger to a crawl. The airlines can’t merge until the DOJ drops the case and that could cost them a fortune in court fees and time. It could take years to get through the legal hurdles, and in the end make the merger not even worthwhile.

All this is an unfortunate turn of events, but another example of how government picks winners and losers in the marketplace. And if this lawsuit continues, consumers stand to lose just as much as American and US Airways.