Eric Holder and Warren Buffett must not talk much.
In suing to block the US Airways-American Airlines merger on Tuesday, Holders Justice Department argued that both airlines are doing just fine on their own. Without the merger, Justice says, American is poised to come roaring out of bankruptcy and make profits hand over fist.
Thatd be news to Buffett, arguably the most successful investor in U.S. history. Buffett has long warned about the difficulties inherent in the airline business, and in May called the industry a death trap for investors even with recent consolidation.
The US Airways-American merger is not about creating a cash cow. Its about surviving in a shrinking pool created in part by the Justice Department itself, which in the past five years approved mergers between Delta and Northwest, United and Continental and Southwest and AirTran.
Todays action proves our determination to fight for the best interests of consumers by ensuring robust competition in the marketplace, Holder said. A little late for that, dont you think, Mr. Holder?
Its not an industry obsessed with customer service, as any traveler will attest, and sadly this merger wouldnt change that. It is an industry, though, in which survival hinges on being big enough to compete with newly created behemoths, or small enough to serve a very narrow niche.
As US Airways biggest hub, Charlotte has a particular interest in the merger. Experts differ on what the combined airline would mean for the city; some suggest its proximity to Americans hub in Miami could put it in danger. But CEO Doug Parker told the Observer in March that the Charlotte hub would be safe, and in fact might gain flights and destinations. I cant imagine it gets any smaller, he said.
Parker also argued that the two airlines route maps are complementary, not overlapping. He said the company would be looking to grow its network to better compete with Delta and United, not shrink it.
Bill Baer, a U.S. assistant attorney general, told the Observer editorial board Tuesday that this merger threatens to reduce competition more than the other recent big ones did to the point of violating antitrust law. He said US Airways publicly and privately has urged consolidation as a way to have closer coordination among the remaining airlines. And, Baer suggested, one more big merger is one too many. At some point you get fewer and fewer legacy airlines and its easier to coordinate more and compete less, he said. The merger would certainly reduce competition on some routes. But the resulting airline would be better positioned to provide lasting competition to the other big three, including Southwest, and other low-fare airlines.
The other argument that the merger would result in higher fares is less certain than it would seem. A PricewaterhouseCoopers report in December found that the other big mergers did not spike fares or drastically reduce competition on most routes. So many factors, such as gas prices, influence airfares that its impossible to predict what would happen after this deal.
Its possible Justices suit is a tactic to wring concessions from the airlines, such as giving up gates at Washington Reagan Airport, though Baer told us many of Holders concerns cant be addressed that way. We hope hes wrong. Parker should offer, Holder should listen, and the deal should ultimately go through.
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