US lawmakers discussing the US Airways plan to merge with American Airlines parent AMR, asked CEOs from the two companies repeatedly on Tuesday if the deal would mean higher fares or reduced service for the flying public, and were told it would not. The merger of American and US Airways, which is subject to various approvals, would create the world's largest air carrier. The deal is worth about USD$11 billion.Senator Amy Klobuchar, the new chairman of the Senate Judiciary Committee's antitrust subcommittee, argued the deal would mean the top four US airlines would control 80 percent of the US market, and that people needed to know if fewer airlines would mean higher fares.Further, she worried aloud, smaller cities were unlikely to get convenient, inexpensive service.Senator Mike Lee, the top ranking Republican on the committee, agreed and noted: "Many of my constituents in Utah complain about high fares flying in and out of Salt Lake City."But Douglas Parker, CEO of US Airways and Thomas Horton, CEO of American Airlines, both repeatedly said that the deal was good for consumers because it would make a new airline that would better compete with Delta and United. And, they argued, small cities would be helped."The way that those cities are served is through hub and spoke airlines. There's not enough demand in most of those cities for point-to-point service," said Parker.Parker further argued that the American and US Air networks were largely complementary, and that there was no need for the airlines to sell any assets in order to win Justice Department antitrust approval to move forward with the deal."We don't believe it would be good for consumers to divest any slots," he said.To preserve competition, US antitrust regulators typically require airlines to sell overlapping routes before approving a merger. They consider potential price increases, efficiencies and whether higher prices would inspire new companies to enter the market.Asked about barriers to entering the market, which might include difficulty in getting access to airport gates or in raising capital to buy airlines, Parker said: "The reality is there are no barriers to entry in this business."Instead, he argued, few companies have jumped into the space because it is so competitive that it is hard to make any money.The airline industry has seen five years of rapid consolidation. Delta acquired Northwest in 2008, United merged with Continental in 2010 and Southwest Airlines bought discount rival AirTran in 2011.With fewer big carriers competing, ticket prices have risen. The average fare rose about 8 percent to USD$375 in the third quarter of 2012, compared with USD$346 in 2008, according to the US Bureau of Transportation Statistics.Horton also argued that the deal would allow the new company, which would keep the name American Airlines, to create a competitive counterbalance to other big carriers."I think the industry has done a pretty good job of keeping a cap on fares," added Horton.The US trustee overseeing American Airlines' bankruptcy asked the carrier last week to justify its offer of USD$19.9 million in severance pay to Horton, part of compensation linked to the merger.Horton became American chairman and CEO when it filed for Chapter 11 bankruptcy in November 2011 and is due to serve as chairman of the new American Airlines Group until early 2014. US Airways' Parker will be chief executive of the merged company. Source: Reuters
Gravity always wins!