ANALYSIS: How would US-AMR merger affect LCCs?

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The US Department of Justice (DOJ) says a merged US Airways-American Airlines would diminish competitive pressure from some low-cost carriers, but others say further industry consolidation could benefit US discount airlines.

In a lawsuit filed 13 August to block the proposed US-AMR tie up, the agency insists a merger would "substantially enhance" the ability of the three remaining legacy carriers to coordinate fares, ancillary fees and service reductions.

It would also reduce the competitive heft of the two largest US low-cost carriers, New York-based JetBlue Airways and Dallas-based Southwest Airlines.

"That enhanced cooperation is unlikely to be significantly disrupted by Southwest and JetBlue, which, while offering important competition on the routes they fly, have less extensive domestic and international route networks than the legacy airlines," says DOJ's lawsuit, filed with the United States District Court for the District of Columbia.

US Airways and American have since announced their intention to fight the lawsuit. Southwest and JetBlue did not respond to requests for comment.

The suit says JetBlue and Southwest have "significantly different" business models than legacy carriers - notably, they do not have hub-and-spoke networks.

In addition, Southwest and other airlines have traditionally been less likely to coordinate pricing or follow other airlines in cutting services, DOJ adds.

For instance, Southwest's bucks the industry by not charging change fees, DOJ notes. And neither Southwest or JetBlue charge for a first checked bag.

"In many relevant markets, these airlines do not offer any service at all, and in other markets, many passengers view them as a less preferred alternative to the legacy carriers. Therefore, competition from Southwest, JetBlue, or other airlines would not be sufficient to prevent the anticompetitive consequences of the merger," DOJ says.

Mergers mean opportunity for LLCs

Some analysts do not agree with the DOJ's rationale.

Michael Boyd, chairman of aviation consulting firm Boyd Group International, thinks DOJ is wrong that a merger will lead to fewer routes and higher prices. He says legacy carriers have already cut capacity to the bone and are not likely to make more cuts.

The industry largely is not growing, he adds, noting that even Southwest is not expanding.

True, fares have risen in recent years, but that is due to higher fuel costs and over-reliance on smaller, less-efficient 50-seat jets, says Boyd.

Therefore, he says a merger - or lack of a merger - will have little effect on Southwest or JetBlue.

Savanthi Syth, an analyst in New York with Raymond James & Associates, says a merger would benefit the entire industry, low-cost carriers included.

If a combined US-AMR did cut service, as DOJ predicts, smaller, nimble carriers like Las Vegas-based Allegiant Air and Miramar, Florida-based Spirit Airlines would fill the void.

"That's the flaw in DOJ's argument. The low cost carriers will come in and fill those gaps. I think the merger ... is beneficial to everybody," Syth says.

Executives at Spirit and Allegiant have in recent months called consolidation a business advantage.

"Consolidation ... has created a lot of new opportunities for us," Allegiant president Andrew Levy told Flightglobal in July. "As these larger, network guys ... reduce frequency to their remaining hubs and, in some cases, reduce service from small city airports, we come in and we can fill that void. "

"The same consolidation that has stabilised the industry has also created more growth opportunity for Spirit," that airline's chief executive Ben Baldanza said during a 20 May analyst call. "[Consolidation] gives us the ability to come in underneath [and] price more and more markets at a lower rate."

JetBlue at National

DOJ's lawsuit particularly expresses concern about the merger's impact at slot-controlled Ronald Reagan Washington National airport near Washington, DC.

The agency notes that JetBlue received slots at National airport from American after the two carriers signed a slot swap agreement in March 2010.

In addition, prior to the merger announcement American had been in talks to sell an additional 10 National slots to JetBlue.

But a merged US-AMR would have the ability to terminate JetBlue's slot leases at National, which could diminish JetBlue's ability to compete there, DOJ says.

The result could be higher fares at National.

DOJ notes that JetBlue's entry into National airport in 2010 led to substantially lower fares on four routes.

For instance, last-minute fares to Boston dropped $700 after JetBlue entered the market.

In recent months, JetBlue has urged regulators to support a US-AMR merger only if the combined carrier divests National slots.

In a March letter to lawmakers, the airline said the combined carrier would control 67% of National's slots, allowing it to raise fares or cut service to smaller cities like Rochester and Buffalo, New York.

In response, US Airways told Flightglobal that it needs all its slots in order to maintain service to smaller cities.