U.S. Airways/American Airlines Merger

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The U.S. Department of Justice has filed an antitrust lawsuit in an effort to block the merger of Tempe-based U.S. Airways and American Airlines. Airline expert Robert Mittelstaedt, who is also the former dean of Arizona State University’s W.P. Carey School of Business, will talk about the suit.

Ted Simons: Good evening, and welcome to "Arizona Horizon." I'm Ted Simons. The Justice Department today filed an antitrust lawsuit to block Tempe-based U.S. Airways' merger with American Airlines. Joining us now is Robert Mittelstaedt, he's an airline industry expert and the former dean of ASU's W.P. Carey School of Business. Good to see you again.

Robert Mittelstaedt: Nice to be back, Ted.

Ted Simons: All right. Is this action by the Justice Department a surprise to you?

Robert Mittelstaedt: It was a surprise to a lot of people because previous airline mergers seemed to have gone pretty smoothly without much objection, so it's definitely a bump in the road.

Ted Simons: What happened? We had delta and Northwest going through no problems, united-continental, relatively no problems. Big problems here? What's the difference?

Robert Mittelstaedt: Well, depending on how the process plays out, there could be some significant problems. I think what's behind this is two things. One is people beginning to ask when is a small number of airlines too few for competitive purposes. And so you hear it by saying we're going from four to three, we're really going from five to four because Southwest is a big player as well - domestically, not international like the others. And so that's one of the questions that's being asked legitimately. I think -- The cynic in me says the other reasons this probably affects Washington Reagan airport more than any other, and there's a lot of politicians and Washington people that suddenly say, "Oh, my gosh, this is our home airport, we've got to worry about this."

Ted Simons: We had on you last time discussing the fact the merger had been approved by all parties that were -- most parties that were needed. You mentioned that there might be a sticking point there at Reagan national in D.C., and that is one of the sticking points it sounds like duplicating routes is a big factor here. Correct?

Robert Mittelstaedt: Yes and no. There are not a lot of routes that they compete on directly. In fact, out of Washington, I talked to a friend in North Carolina earlier today who told me he saw something in the paper there, there are only two routes American and U.S. Air have exclusively, one is from Washington to Raleigh Durham. Those two routes, whatever they are, will be suspect certainly. But the whole system fits together pretty nicely in terms of not overlapping. This GAO study came out where they said, but if you consider connections, it's over 1,600 routes they compete on. Well, connections yes and no. Just because we have family in New Orleans we do back and forth there from time to time, you can get there on U.S. Air but you have to change flights in Charlotte to get to New Orleans. So I don't consider that really competitive with American where you change flights in Dallas to get to New Orleans, because you are going to fly an hour farther each way. So some of the information coming out here looks to be pretty shallow in terms of the depth of analysis that's taken place in terms of the competitiveness between these two companies.

Ted Simons: That same study would say competition would be reduced because of the connecting services, the overlapping and connecting services, competition reduced in 38 states, you're not necessarily buying that?

Robert Mittelstaedt: I'm not buying that. It depends on whether you want to connect in Montana to go to Miami or not.

Ted Simons: Well, OK. The feds are basically saying eliminates competition, puts consumers at risk of higher prices, puts consumers at risk of reduced services. Are these valid concerns?

Robert Mittelstaedt: I think an awful lot of this is conjecture based on somebody saying, I think this is what will happen in the future. Rather than any hard evidence that anything like this is going to take place. The point that I keep coming back to is that airfares in this country are a bargain compared to what they have ever been in the history of the world, especially if you go back to the pre-deregulation days. We literally are paying maybe 20% of what we paid 30 years ago to fly. And an airfare from the East to West Coast today costs you less than you might pay for your first couple of nights in the hotel when you get there. So it's not that, in an absolute sense, there's a problem, and I think that going with three major airlines competing hard with each other, not only domestically, but to to get people into their international routes, I don't think you're going to lessen competition.

Ted Simons: I guess that's the big question, though, isn't it? If prices are what they are now, and you see that as one of the best bargains in the history of airfare, does that get compromised with this one more merger?

Robert Mittelstaedt: I don't think it will. But the problem is that's all conjecture, regardless of which side of the argument that you're on. There are laws against collusion, laws against all sorts of things. But one of the examples people use, all of the airlines increased baggage fees, except Southwest; Southwest is still out there doing something different. And yes, if one of them tries it and it works, the others will try it too. But that happens in any industry. That's not unique to the airlines.

Ted Simons: What happens next? Are we going to get countersuits from the airlines?

Robert Mittelstaedt: Well, they certainly will fight the suit. It's not yet a countersuit, but the first step is that a judge has to hear this, and decide whether to grant an injunction or not. If they grant an injunction, that stops it where it is, and they plan to go to a trial. And if it goes to a trial, it's a judge trial, not a jury trial, it still just goes on for some period of time, and a judge has to decide whether the damage to the public at large is greater than the advantages of such a merger.

Ted Simons: What kind of time frame are we talking about here?

Robert Mittelstaedt: You just don't know. There's a lot of stuff that can go on. They could get into negotiation if the injunction is granted, and it may get resolved before it goes to trail, or it could go to a full-blown trial.

Ted Simons: How likely is it, as we stand right now, that this merger doesn't happen?

Robert Mittelstaedt: I think from a legal standpoint, and this is -- This has political and economic and personal things swirling all around in terms of people's preferences and their airport and everything else, I think it's just much more difficult to project what's going to happen here at this point. But I think it gets to be 50/50, because of all the factors at work.

Ted Simons: 50/50, that's interesting. That's a far cry from what we've been hearing.

Robert Mittelstaedt: It looked like a done deal before.

Ted Simons: No kidding. Last question -- Let's say that there is no merger. What happens to both airlines?

Robert Mittelstaedt: Well, the reality is that both airlines are competing against much larger, better, capitalized broader route structures against Delta and United if they can't combine. And if they can't combine, they still have to fight to be able to buy the best airplanes to provide the highest level of safety, to provide training, all these other things that are more difficult to do as a smaller player. From a pure marketing standpoint, it's harder to attract the public. You have to spend the same marketing dollars, even though you're a smaller player. I think it becomes a difficult challenge for them going forward. I believe it would make -- The merger makes sense, but there's a very complicated process by which this is going to get figured out.

Ted Simons: Complicated indeed. Good to have you. Thanks for joining us.

Robert Mittelstaedt: Nice to see you again.

Robert Mittelstaedt:Former Dean of W.P. Carey School of Business, ASU;

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