The toxic tango of United and US Airways

Now that Continental has turned down suitor United, the latter is weighing a desperation move: merging with US Airways to create the world’s new largest airline (surpassing Delta-Northwest, assuming that goes through). The airlines may announce a tie-up within the next fortnight. Therefore, it’s time for another Merger Mania 2008 antitrust evaluation.

As you’ll remember from several months ago, there are a few key criteria by which the Justice Department will assess this merger:

• Would a merger result in a significantly more concentrated market?
• Would a merger raises concern about potential adverse competitive effects?
• Would competitors be likely to enter concentrated markets in a timely manner and sufficiently to deter or to counteract the competitive effects of concern?
• What efficiency gains does a merger offer?
• But for a merger, will either party to the transaction would be likely to fail?

United and US Airways are unlike Delta-Northwest and United-Continental in that they are both concentrated in similar parts of the country: the West, the Northeast, and the South. Look at the map below:

The combined airline has five hubs in the West, two in the Southeast, and two in the Boston-Washington corridor, plus four US Airways “focus city” operations in the Northeast. Even though US Airways drew down its extensive Baltimore operations after 9/11, the combined airline would operate most of the flights at two of the region’s three airports, including the slot-controlled and uber-desirable Reagan National.

As with most mergers, United-US Airways would have market share on nonstop routes between hubs. But United-US Airways would also possess significant market share between these and other major city-pairs, regardless of nonstops. According to recent DOT figures, among the busy routes on which United-US Airways would have market share are:

Pittsburgh–Washington, D.C. (100%)
Washington, D.C.–Providence, R.I. (99%)
Charlotte–Washington, D.C. (96%)
Syracuse, N.Y.–Washington, D.C. (92%)
San Francisco–Phoenix (91%)
Denver–Ontario, Calif. (89%)
Washington, D.C.–Portland, Maine (87%)
Washington, D.C.–Charleston, S.C. (86%)
Washington, D.C.–Indianapolis (86%)
Chicago–Greensboro, N.C. (85%)
Washington, D.C.–Savannah, Ga. (81%)
San Francisco–Baltimore (76%)
Denver–Pittsburgh (73%)

This is a huge number of important routes on which there would be substantially reduced competition. United-US Airways would have a virtual stranglehold on Washington travel. Some of these routes may become fodder for low-fare competition, but this would be limited in Washington by slot controls at Reagan National. Furthermore, since few of these cities are other airlines’ hubs, it limits the potential pluses for network airlines to add these routes.

The airline would also dominate if not shut out a number of small communities in the East and the West, including Bakersfield, Calif.; Binghamton, N.Y.; Durango, Colo.; Roanoke, Va.; San Luis Obispo, Calif.; State College, Pa.; and Yuma, Ariz. Low-fare competitors are unlikely to enter these markets due to their business models and route structures, and they may not offer sufficient yields for network competitors to increase frequencies above or reduce fares below current levels.

As for efficiency gains, according to a former antitrust lawyer at the Justice Department, “DOJ has found that integration of airlines with complementary networks like these can achieve efficiencies that benefit consumers.” United-US Airways does not offer this, and the pairing is therefore unlikely to be seen as increasing efficiency by the antitrust division.

Finally, on a business note, this pairing would seem unlikely. US Airways is still struggling to integrate after its own recent merger, and the two airlines have some of the most toxic labor-management relations in the industry. Any merger would have to close hubs to achieve efficiencies in the regions in which the airlines are dominant, which is not appealing to consumers, labor, or Congress. International synergies do not seem apparent either: although US Airways would love United’s Pacific route network, both US and UA have relatively feeble (and overlapping) transatlantic networks. United serves South America, but neither airline is strong in Central America and Mexico.

This should be slam-dunk for the Department of Justice: No. In fact, DOJ already made this decision. Here’s that former antitrust official:

The last major domestic airline merger DOJ investigated was in 2000-2001, United’s proposed acquisition of US Airways. United-USAir provides several examples of competitive problems that can arise in airline mergers:

• United had a large base of operations at Washington Dulles, and USAir at Washington Reagan and BWI. Therefore they were the only two significant competitors for nonstop service from the Washington area to a number of cities, such as Rochester and New Orleans.
• Similarly, the two were the most significant nonstop carriers in a number of hub-hub markets, including Philadelphia-Los Angeles, Philadelphia-San Francisco, Philadelphia-Denver, and Pittsburgh-Washington.
• With their strong east coast hubs, these were the only two carriers, or two of three, connecting some northeastern cities (such as Burlington and Albany) with some southeastern cities (like Greensboro and Roanoke).
• More generally, the merger increased concentration in large business centers along the east coast, possibly affecting bidding for corporate and government contracts.
• Finally, the merger would have lessened competition in several transatlantic markets.

Competitive problems like these convinced us that this merger would substantially lessen competition in numerous markets. DOJ announced it would sue to block this transaction, and United and USAir abandoned the deal.

If anything, these conditions have only grown less amenable to a competitive merger. Since US Airways merged with America West, it has added hubs at Phoenix and Las Vegas, which would reduce competition further with United’s Denver, San Francisco, and Los Angeles bases. That the two airlines are both in the Star Alliance may count in a potential merger’s favor, but on net the Justice Department is unlikely to approve this combination without significant modifications to the airline’s structure.

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