April 8, 2014 on 2:00 am | In Airline Service, Deregulation, Trivia | No Comments
It might come as a surprise that you really can’t sue an airline in a state court. For just about anything.
Instead, you have to file your lawsuit in Federal court which means you have to have a basis of your lawsuit that is founded on Federal law. Since Federal law generally doesn’t address nuances (that’s generally left to states) and sets a high bar (because a lower bar is what States are for), lawsuits against airlines generally lose.
Oh, it’s quite possible to do a personal injury suit against an airline in Federal court when there is a crash. But that has as much to do with the bad publicity as it does the law.
You see, airlines managed to have most issues against them (for all practical purposes, all issues) moved to Federal court by an act of Congress back when Deregulation was occurring.
This sets the bar very, very high for winning a lawsuit against an airline. It is a very protected place to sit as an industry.
And unfair. You can sue Exxon wherever you want but you can’t sue American Airlines wherever you want.
As a result, airlines are able to write egregious contract terms and abuse passengers on a daily basis with the clear knowledge that virtually all passengers can’t sue them. Imagine the change in attitude and service an airline might experience when it has to face a jury of its peers in East Texas after losing luggage, holding people hostage in an airplane and then arbitrarily cancelling their flight.
I honestly struggle to find the justification for airlines to have such a protected status in 2014. Virtually all other service oriented industries manage to do just fine without such protections.
We shouldn’t forget the purpose of a civil lawsuit: It’s to correct a wrong *and* take punitive action against an entity when it intentionally does that harm. By design, this is to give incentive to companies (and individuals) to Be Nice and Behave.
Wouldn’t that be a near revolution in the airline industry?
November 13, 2013 on 1:01 pm | In Airline News, Mergers and Bankruptcy | No Comments
I smell a small mouse in this mix. That mouse, hardly a rat, is Virgin America.
From the Department of Justice announcement on the settlement of the lawsuit with US Airways and American Airlines:
“Rights and interests to two airport gates and associated ground facilities at each of Boston Logan, Chicago O’Hare, Dallas Love Field, Los Angeles International and Miami International.”
I think that someone wants Virgin America to get access at the airports it has openly spoken of. Virgin America is a service darling in that offers a superior inflight service experience combined with an LCC pricing scheme.
I think that some or all of these cities will find Virgin America getting the use of these at a pre-arranged price. The DoJ will come off looking like a prince for getting Virgin America, arguably the smallest of LCCs right now, a place at the table.
But the airline, American Airlines, could care less. Virgin America isn’t big enough to introduce pricing power into those markets the way a larger, more established national airline could. It’s a deal that, if it works out that way, does nothing to impact American Airlines and which does nothing to substantially introduce competition.
I think Virgin America will acquire the gates and facilities in Los Angeles, Miami and Chicago. Maybe Boston as well.
Virgin America already has a proper footprint at DFW airport. So I do wonder who might be interested in those gates at Dallas Love Field. It would be egregiously bad to award those to Southwest although I’m sure that Southwest would love to have them.
I actually believe that Southwest is constrained from getting those gates but readers are free to correct me.
November 11, 2013 on 4:52 pm | In Airline News, Mergers and Bankruptcy | No Comments
After thinking about Southwest filing an amicus brief in the AA/US/DoJ lawsuit all day, it has occurred to me that Southwest plans to argue how:
- Southwest is the pre-eminent low cost carrier in the country
- It needs slots in Washington D.C and New York to wield such an influence in those markets
- Only Southwest can deliver competition against these massive giants
And then to complete the bizarre moment, I would imagine that American Airlines and US Airways will then have to argue that Southwest is not a low cost carrier and doesn’t offer nearly as much competition as people think.
At which point, the judge’s head will explode, I imagine.
November 11, 2013 on 9:15 am | In Airline News | 2 Comments
The AA/US v DoJ settlement came more quickly than I expected and I am busier than usual at this time.
However, a few top level comments until I can sit down and do an analysis.
- I so far see the airlines giving up really nothing that they weren’t already prepared to give up for this deal.
- The gates they have to give up in the key airports does (potentially) remove barriers to entry for new airlines in those markets.
- Delta doesn’t surprise me in their loud, vocal expression that they would like to get those Washington D.C. slots. (This was suggested to me by two sources as being an end game of Delta for weeks)
- I think it’s great that the Republican candidate for governor, Greg Abbott thinks this deal is a win for American Airlines. Sadly, he didn’t originally and did very real damage as a result. Blowing with the wind doesn’t impress me unless it’s an airliner.
More to come.
November 8, 2013 on 1:00 am | In Airline History, Airline News, Mergers and Bankruptcy | No Comments
Southwest Airlines and Delta Airlines and others have been running around playing politics with the US Airways / American Airlines merger in ways that leave a person wondering what, exactly the agenda is.
The truth is that the airline industry has never been good at acting in its own interests. To the contrary, the US airline industry is expert at just one thing: shooting itself in its own foot.
And they have a tradition of doing this that stretches back 60 years or more. This isn’t just a deregulation thing.
Airlines cannot resist interfering in things that may result in some benefit to them. And the worst part is that they always do it in a very clumsy manner which finds them not only not getting what they wanted but losing too.
Both Southwest and Delta benefited a great deal from mergers. Both did not have to enjoy friends such as American Airlines or US Airways interfering in the arranged marriages. (Yes, I’m well aware of US Airways hostile bid for Delta and that is quite different.)
These airlines run the very real risk of impacting their entire industry in a way that would prohibit further consolidation and even invite investigation into divestiture by the very largest airlines. It’s no small thing that both Delta and Southwest are a part of that club of large airlines.
November 7, 2013 on 1:00 am | In Airline News | 2 Comments
Southwest Airlines wants to offers its unique perspective on competition in markets affecting the US Airways / American Airlines merger and particularly wants to talk about New York La Guardia and Washington DC Reagan National airports.
Southwest wants to offer that it doesn’t have competitive influence in those markets because it has too few slots. This, of course, is to angle for an advantage in accessing slots at those airports that will almost certainly be given up in such a merger.
I like Southwest Airlines, I really do. But this strikes me as a particularly craven move on their part. The airline has not been willing to pay the market rate for such slots and it has lost opportunities to expand in those markets as a result.
Everyone senses a win coming up for these two airlines and most likely via a negotiated settlement between the Department of Justice and US Airways and American Airlines. Now everyone wants a piece of the action. One wonders just how many airline executives at Southwest, Delta and other airlines have been sticking their oars in to gain advantage.
Absolutely slots should be given up. And those slots should go to high bidders. If we’re not going to treat slots as a public commodity to be managed, then those who own them should at least get the greatest economic benefit from them.
If Southwest wants more slots, it needs to do a much better job analyzing the value and pony up the money. It really is that simple.
November 5, 2013 on 1:00 am | In Deregulation, Mergers and Bankruptcy | 1 Comment
I have a friend who bought American Airlines stock at 50 cents per share. That friend asked me what on earth was going on that the stock rose to just over $10 per share.
These are strange days when an airline stock is actually worth quite a bit while in bankruptcy, on hold with a merger because of a lawsuit. Strange days indeed.
The answer is that there are settlement discussions going on with the Florida Attorney General and with the Department of Justice.
The talks with the Florida AG are to build momentum and whether or not a settlement is reached there is really immaterial.
The talks with the DoJ are serious and Attorney General Holder has come out with bluster stating that the airlines would have to sell assets to get a settlement. The airlines wisely declined to make a comment.
In the world of lawsuits, he who is quiet is usually the one who is winning.
American Airlines and US Airways are very quiet on this.
November 4, 2013 on 1:00 am | In Mergers and Bankruptcy | No Comments
American Airlines and US Airways have so many different parties clamoring to be their friends in court, I’m reminded of my daughter who has over 700 Facebook friends.
People writing supporting briefs doesn’t mean that American Airlines and US Airways wins by the volume of support. The law is the law is the law. And the law in this case is somewhat tightly constrained. Decisions in this case must be made on what market conditions are today, not what they were 5 years ago.
So, if it feels like the argument is won, it is not.
The win in the Department of Justice lawsuit against these two airlines comes from making an argument that centers on what today’s conditions are and, at best, supporting it with comparisons to market conditions that existed in the past.
In other words, you can’t argue that just because the DoJ didn’t file a lawsuit over the last 3 mergers, they shouldn’t now. That isn’t even an argument.
But you can argue that market conditions and competition isn’t materially different from what it was 5 years ago and when those mergers were allowed, outcomes favored more competition rather than less.
Likewise, the DoJ can’t just say “less airlines, more costs”. And arguing that air fares are up isn’t valid either. In fact, arguing that air fares are up and airlines are earning profits this year would be stupid argument. The industry will point out the tens of billions of dollars lost over the last 35 years in aggregate.
One good year does not make for a turnaround.
The DoJ must be able to prove that competition will be reduced AND as a result, the consumer will be harmed. Consumers are not harmed automatically from higher prices. In fact, over the last 5 years, since the start of the Great Recession, lots of items rose dramatically in price. Gasoline is one item that comes to mind. So did milk.
Air fares rose because airlines A) stopped trying to buy market share at any cost B) returned to operating each route as a profitable enterprise and C) consolidated to reduce costs.
A healthy, competitive airline industry that charges a higher air fare may well be in the consumer’s best interest.
Neither side has a sure win here. The airlines have more maneuvering room than the DoJ but the DoJ isn’t without some firepower and it doesn’t have as great a burden of proof as many think it does.
October 29, 2013 on 1:00 am | In Airline News, Mergers and Bankruptcy | 4 Comments
Often the key to getting a deal done is finding a way for one or both parties to save some face.
The worst thing to happen in the Department of Justice lawsuit against American Airlines and US Airways is that the DoJ acted in a manner that immediately backed themselves into a corner.
Since that silly act, roughly 3/4 of the entire world has come out in support of the merger between the two airlines. I’m pretty sure that Sri Lanka will be filing its amicus brief in support of the merger in a day or two (note: that’s *humour* in that last line.)
A mediator has been assigned to this case and it is a way out for the DoJ. With a mediator in place, a deal could be negotiated where the DoJ gets a token concession and is able to exit this lawsuit without appearing to have failed.
It’s failure that people fear the most in these things and lawyers have a big ego that goes against failure. But this latest lawsuit may be one of the most unpopular acts the DoJ could have engaged in for 2013.
The mediator can help facilitate a deal but it also takes on the onus of having put a deal into place. The DoJ can be seen as not giving in (entirely) and the airlines get their merger.
The deal that wins is that slots in Washington D.C. are given up and guarantees of service are made for a certain time period in other areas where competition is slim(er) as a result of the merger.
My personal estimate of probability for a deal prior to the mediator being assigned was about 20%. I would now raise it to 60%.
One item of note: Were the DoJ to lose this lawsuit, it could lose all of the lawsuit. Which means no slot giveups anywhere. That’s a failure that would look very, very bad to any outside looking in at the DoJ. There is some incentive for a deal.
October 21, 2013 on 1:10 pm | In Airline News, Mergers and Bankruptcy | 1 Comment
There is now speculation that there might be talks going on between the Department of Justice and American Airlines and US Airways to settle the lawsuit the DoJ has brought against the two airlines.
The speculation is largely born out of the fact that Texas Attorney General Abbott got a “settlement” deal with the two airlines and was made happy.
The truth is that that settlement was window dressing. The Texas AG got nothing past what AA had already offered in many discussions. The offer was merely put on paper and signed.
I do not think there is a deal to be made with the DoJ and I think those hoping for it are ignoring the fact that the DoJ has backed itself into an ugly corner by even filing the lawsuit. There were other choices they could have made in August. One would have been to enter into negotiations for what the DoJ would think necessary to improve competition. The fact that that was’t the next step speaks loudly to the intent of the DoJ.
Lawyers are people and the leaders of these lawsuits didn’t get where they are by changing their minds. The amount of ego that would have to be swallowed by both DoJ Attorney General Holder and the lead Deputy AG Baer would be very large. It’s hard to imagine either man swallowing such a change and it’s hard to imagine a deal that allows either to save much face in the process.
Look for a trial starting on November 25th. I still think the airlines win this trial and I think that will be even worse for the DoJ. The Department of Justice is free to shock and surprise me with a deal but if one comes about, it won’t substantially change the merger between the two airlines except for in Washington DC at Reagan National airport.
October 9, 2013 on 1:20 pm | In Airline News, Mergers and Bankruptcy | No Comments
The Transport Workers Union represents thousands of employees of American Airlines and US Airways (and several other airlines such as Southwest where they recently had an odd scene go down as well). This union is under new management and they’re just itching to get in the way of themselves.
Most recently, the TWU filed to become a party to the lawsuit the DoJ has filed against the merger of American Airlines and US Airways. The technical term is intervenor and it means that they want to become a part of the lawsuit as the plaintiff or defense. In this case, they wanted to be the defense.
US Airways and American Airlines both filed objections to that stating that, in this case, the TWUs interests were fully aligned with the airlines’ and therefore didn’t need representation. The DoJ objected as well.
The truth is that no one wanted them at the table because who needs a union coming in late to the party on an accelerated court schedule? Who wants an airline union showing up to be involved in such a lawsuit under any terms.
So now the TWU wants to be an amicus to lawsuit so it can file it’s opinion. This is likely to be granted as several other parties are already “interested friends of the court” in this trial.
The TWU has been under fire from other unions. Most recently, the Teamsters attempted to grab a good portion of their membership away from US Airways and American Airlines and they barely fought them off.
It’s feeling threatened and insecure and its leadership wants to show it can play with the big boys.
The thing is, it can’t. It can’t even keep its membership all that happy despite a very good deal negotiated for them in the merger. The TWU is a hot mess and needs to go get its own house in order instead of interfering in issues it has little grasp of.
October 6, 2013 on 1:00 am | In Airline News, Mergers and Bankruptcy | No Comments
Unions, particularly American Airlines’ APFA, are now putting pressure on other attorneys general in Florida, Virginia and Arizona to also engage in a settlement on the lawsuit filed by the DoJ.
So far, each is resisting.
I think that will change, perhaps. Florida really hasn’t got a big stake in this lawsuit and their attorney general may feel the exceptional voice of APFA out of Miami in a short time. Politically speaking, it’s not wise to go against pay raises for airline employees. They come so infrequently that it is a major hot button.
Virginia is going to hold its position, I think. But mostly because they do have a stake in air fair prices at Washington Reagan National.
Pennsylvania is exacting revenge on US Airways for what happened in Pittsburg, in my opinion. That is a mistake as it could strongly affect how the merged American Airlines will treat Philadelphia in a merger. But I think there is a deal to be had here and I think that this deal is Doug Parker’s to make. The deal is to retain Philadelphia as a hub for a certain number of years with a minimum number of flights to be maintained. Is that a problem? No, that’s a good hub for US Airways and it should remain a good hub for the merged airline. It costs little to make that deal.
Arizona is protecting its stake as well and this time its with an attorney general who has a less than steller reputation. The Arizona AG may well find exceptional political pressure applied here too. Why? Because pilots and flight attendants for US Airways are desperate for a pay increase and there are one hell of a lot of pilots and flight attendants in Phoenix.
Will the merged company retain its hub in Phoenix? I think it will. It has never been practical to operate a hub in Los Angeles or San Francisco. Delta operates a profitable and beneficial hub in Salt Lake City. United has Denver and Dallas is too far from the West Coast to be well positioned. I think Phoenix stays although in a revised configuration. Again, this is Doug Parker’s domain and he and his team should begin applying pressure and working with their unions to achieve a deal here. I actually don’t think that the Arizona AG will mind smiling and reversing his position if he sees his political fortunes dim with pressure.
Tennessee is just mad. It’s mad about Memphis and that AG is actually politically isolated. There is no deal here, in my opinion, but I also think their opinion and participation amount to nothing in the lawsuit.
Time will tell but right now the lawsuit proceeds, deals are being made and the US Department of Justice has little maneuvering room at present. The DoJ will say that the fight is in the courtroom and isn’t a popularity contest. They would be right about that but when your support abandons you over time, few people want to go into a courtroom and be your friend.
October 1, 2013 on 12:39 pm | In Airline News, Mergers and Bankruptcy | 1 Comment
2nd Update: The Judge in this lawsuit has also decided that the Department of Justice won’t get its requested stay and has to litigate the case on time. It’s not a good day for those serving as plaintiffs in this case.
UPDATE: Greg Abbott has announced a “settlement” in which the Great State of Texas will get what it wanted by legal agreement.
In other words: American Airlines put in writing the promises it has already made long prior to the lawsuit nonsense. AA will continue to serve 22 communities in Texas for at least 3 years.
The fact that the press conference was held at American Airlines facilities speaks volumes about this “settlement.” I would imagine that AA just barely let him call it a settlement for face saving purposes.
The Dallas Morning News says: ”Abbott denied that political considerations played a part in either joining the lawsuit when it was filed Aug. 13 or deciding to withdraw now.”
September 11, 2013 on 1:00 am | In Airline News | No Comments
AMR and US Airways each filed their response to the Department of Justice lawsuit and you can find all manner of references to it online yourself. The theme is what is important.
The DoJ and many anti-trust experts say that the law says a merger must be evaluated in the context of “now” rather than on the history of an industry. In other words, while a merger between Delta and Northwest may have been “good” for consumers in 2008, that has no bearing on an American Airlines / US Airways merger in 2013.
The two airlines have indicated they feel otherwise and I’m inclined to agree because it’s those other mergers that have set the stage for the market conditions today. Each airlines’ responses give a hint as to how they will defend themselves in court in the near future.
Both airlines make the case that the DoJ context for evaluating the merger was wrong in that by evaluating airport pairs and doing so on a connecting basis runs contrary to reality. I agree. In fact, time and again we have seen that the airlines with hierarchical superiority on a route (non-stop flights, one-stop flights, two-stop flights, etc) are the ones who tend to dominate on a route. For example, on a route such as DFW to LGA (Dallas to New York City), the airlines with non-stops will carry most of the traffic whereas the airlines with just one-stops and two-stops will simply follow the prices set by the non-stop airlines.
Put another way, comparing one-stop conditions to non-stop conditions doesn’t yield a rational picture of the market. These two airlines really want that to be the prevailing view because when it comes to where they directly compete on non-stop routes, there is a very tiny amount of overlap. I think the airlines have a good chance of causing this to be the relevant view in this trial. It passes the “sniff” test.
The second theme is that the airline industry spent approximately 30 years in a condition that prompted serial bankruptcies, mergers and conditions that found the airlines unable to deliver a consistent financial performance no matter who the airline was. The question asked is why would the DoJ wish to perpetuate conditions that might financially advantage individual consumers but which is unsustainable as an industry?
They aren’t wrong. I myself wondered if the airlines would ever be able to find some steady state in which to not only operate in but earn reliable profits in. They have managed this admirably since 2009 or so and it has gotten a bit better. Airlines earn profits despite a very weak economy and continuing oil shocks. This is what we want.
And let me point out that no airline is running around and earning egregious profits at anyone’s expense even today. Not a single one of them is ExxonMobil earning billions of dollars in profits each year.
I think that to make the argument that mergers continue to be needed to ensure a healthy industry is going to be more of a struggle. Presumably attorneys and experts who are far above my pay grade will find a convincing way to do so. I am skeptical not because I think it is an unworthy argument. I am skeptical because I think it is an argument that doesn’t address anti-trust law very well. It’s not a “consumer” argument in the eyes of most although I would argue that a healthy and competitive airline industry *is* best for the consumer even if prices are higher than they were in 2005.
Finally, they are clearly going to talk about markets in both domestic and international terms. Here is where the arguments get very strong. When they break down the market shares domestically, they rightly point out that the combination of these two airlines hardly ripples the market shares. Southwest is the biggest airline domestically and has been for years. The merged US Airways and American Airlines won’t challenge them for dominance.
While you are chewing that over, let’s go to the international side of things and consider that not only do the airlines have to compete against each other on routes but that they also have to compete against other international airlines who, fairly frequently, enjoy lower costs than those same US airlines.
I like the domestic and international market arguments a lot because they embody clear, relatively easy to understand facts. They are truthful and pass a lot of sniff tests. This is where the DoJ made its biggest mistakes because it decided to “create” a picture of where the consumer was impacted that was based on carefully chosen criteria which ignored other, substantially mitigating facts.
This is where the lawsuit is won, in my opinion. These are the facts that one should hang one’s hat on and they have the additional benefit of being very true.
September 3, 2013 on 7:00 am | In Airline News | 2 Comments
US Airways and American Airlines have gotten what they have asked for and will be going to court quickly over their lawsuit filed by the Department of Justice to “kill” the merger.
The trial will start on November 25 and likely last about 2 weeks. There is a massive amount of discovery that must take place between now and then. The quick trial makes this the airlines’ trial to lose at this point. They must have all their ducks in a row to make this work for them.
There is a key maxim to go by in trials: He who is prepared most often wins.
Believe it or not, even when the stakes are this high people sometimes show up unprepared.
I think the merger chances went up with this trial date but let’s understand somethings here:
- This is a very high stakes poker game in which a settlement would be extraordinary.
- The government’s case is weak based on all modern historical standards by which anyone would testify.
- If the government loses this case, consumers are actually kind of harmed but it will have not achieved any givebacks from the airlines for Reagan National
- Political pressure in this case will be enormous.
- Factual data will rule here, not emotional arguments.
The airlines need to be very sure to show up over-prepared at this point. This is their case to lose now and acting as if the argument in their favor is self-evident will result in the Department of Justice walking away with a win.
You cannot possibly be over-prepared for this case.
It’s time for the airlines to stop the bluster and outrage and get to work.
And will someone remind Doug Parker that the fat lady hasn’t sung yet?
September 1, 2013 on 1:00 am | In Airline Service, Airports | No Comments
A big part of the Department of Justice’s complaint about mergers is the concentration of airlines at major hubs and, most particularly, at slot controlled airports.
Well, even more specifically, they don’t want to see US Airways stranglehold on Reagan National Airport to change.
Wait. What’s that you say? DoJ wants them to give up slots? Well, no, not exactly.
The DoJ approved US Airways getting their stranglehold. The DoJ likes the stranglehold that US Airways provides. It just doesn’t want that stranglehold changing.
This is the crazy that slots produce. And it’s why I continue to believe that slot controlled airports need to periodically put all the slots up for auction for use for a set period of time. Yes, I want an auction to lease those slots on at least an annual basis.
Why? Because it does improve competition. Airlines who wish to gain access can, at the right price. At the same time, no airline will have an incentive to buy a slot and then use it inefficiently.
Right now, airlines are serving these airports with slots they are considered to “own” and use these slots to serve routes to hold control of an airport instead of, you know, earning an appropriate ROI on the route.
When a commuter flight between Charleston, WV and Reagan National provides 30 fares vs using that same slot for a flight between Reagan National and Dallas which has maybe as much as 130 fares being charged, you start to see the inefficiency.
But for some reason, no one wants smaller communities to lose those flights to the seat of power. I do. Those flights can’t yield enough to be efficient and should be relegated to flying to Washington Dulles airport instead.
It’s the idea of slots being owned by airlines that I object to. I think they have to exist but I also think that the government should be earning money from them and they should be regularly available for re-allocation according to what someone is willing to pay for them.
I don’t wish harm to small communities but it’s time to recognize that there needs to be more cost efficient ways to serve these destinations as well. Providing these cities with high frequency non stop flights each day is inefficient. It’s time to allow the market(s) to find other, better ways to serve these cities.
August 29, 2013 on 1:00 am | In Airline News, Mergers and Bankruptcy | No Comments
As predicted, the US Department of Justice is asking/demanding/pleading for more time to prepare its case against American Airlines and US Airways. In fact, their arguments go against precedent and seem to indicate that they may well suddenly realize that their initial arguments in their complaint are pretty weak at best.
American Airlines and US Airways want an early November court date. The indicate they are prepared and ready to go and want a speedy trial. They well should be in light of all the due diligence and preparation being done for a merger.
They rightly recognize that a delay could result in serious impacts. More and more delay is simply likely to impose an outcome on the two airlines that the US DoJ wants without a trail which is to stop the merger due to untenable costs that result from being in limbo and questioned in the markets.
The US DoJ’s arguments for a March 2014 trial date are . . . not good. We need more time because this is a big merger and, well, we need more time to stop these evil airlines.
I actually think their memo language hurts them, I really do. Emotional arguments don’t play well with judges.
I also think that their strategy was to kill the merger with the filing of a lawsuit. When that didn’t work and, to the contrary, resulted in a big backlash, they went to the delay tactic knowing that it would impose financial burdens that couldn’t be tolerated indefinitely. I think their strategy is transparent, in fact.
The DoJ, in its pleading, says:
“Plaintiffs’ proposed trial-ready date of March 3, 2014, with trial starting thereafter at the Court’s convenience, would leave four months for party and non-party document discovery and fact depositions, a month for expert reports and depositions, and then a month for pretrial motions and briefs.”
The airlines’ response is that the DoJ has already enjoyed free, unfettered access to such discovery, expert reports, etc in investigating the merger in the first place. They aren’t wrong either. When airlines decide to merge, they lift their skirts for all at the DoJ to see.
In light of the 4 previous mergers over the past 10 years, America West/US Air, Delta/Northwest, United/Continental, Southwest/Airtran, I would argue that not only should there be a vast, significant body of research but also a vast significant body of precedent to use in a court case.
Oh, wait. There is. But if you use it, the DoJ loses in the first day of a trial.
That must be why more time is needed. Creating fiction always takes more time than fact.
August 19, 2013 on 1:00 am | In Airports, Mergers and Bankruptcy | No Comments
This very same government, the Obama administration, along with this very same set of Congressmen who all profess great dismay at airlines and who offer that they are there to protect the consumer have ignored their role in what I would describe as a blatant shakedown.
It’s called the ever increasing taxes on airlines and travel.
Taxes have increased so much that they can represent from 15% to 20% of the cost of an airline flight to someplace in the United States. Taxes are focused directly on the consumer and the consumer, the person who is actually flying, is being asked to bear the whole burden of the infrastructure necessary for commercial airlines.
The taxes are so great that they now *do* impact the decision to travel. In fact, the taxes are often so egregious that they represent the highest portion of the increased cost to travel today. They are grossly impacting the ability of airlines to win customers and stabilize their business.
Indeed, our current government’s inability to get its act together on sequestration has materially and substantially affected the airline industry this year in that we are seeing slight negative growth as a result.
The argument that a user should pay for an airport seems logical to many at first glance but consider the rather dramatic and powerful economic impact a major airport has on an area. Consider what the D/FW area would be if DFW airport did not exist today. Would ExxonMobil be headquartered here? Would we be a major tech center? Would bankers still want to bank here? Would we have not one but 2 major airlines here?
We all benefit from these airports and airlines and the ability to travel. It’s time we all share the burden of that.
So, if we truly are worried about the consumer and the financial impact on them. . .
. . . Could we please redistribute the taxes in place and share the burden more fully all around?
August 17, 2013 on 1:00 am | In Mergers and Bankruptcy | No Comments
If we use the premise put forth by the US Department of Justice that the US Airways / American Airlines merger is bad for the consumer, then we need to take a very hard, long regulatory look at all of the US airlines, many of its busiest airports and taxes as well.
If anyone was truly concerned about competition in the airline industry, the Justice Department should have continued to block mergers as they did with the original United Airlines / US Airways merger (which was vastly smaller than the one being proposed today). Instead, they did not. Rather, a few years later they signaled with US Airways the idea that mergers were necessary in the airline industry landscape.
Quite frankly, I was perfectly happy to see the status quo maintained pre-2005. That landscape saw:
- Delta Airlines
- Northwest Airlines
- United Airlines
- Continental Airlines
- US Airways
- America West
- Southwest Airlines
- AirTran Airways
- American Airlines
- Alaska Airlines
It was a pretty well balanced mix of airlines of both the legacy and LCC flavors and pretty well distributed across the United States. Barriers to entry were, compared to today, fairly low.
Then several bankruptcies occurred which included US Airways, United Airlines, Delta Airlines and Northwest Airlines. One airline (America West) had to get a massive loan after September 11th and essentially reorganize itself to survive as well. Another airline, American Airlines, got Billion Dollar givebacks from its employees to lower costs instead of performing a bankruptcy.
Of the 11 airlines listed above, 6 suffered exceptional financial trauma. Another 2 existed on fine line of financial trouble: AirTran Airways and jetBlue. Only 3 managed their finances appropriately and saw appropriate returns on investment: Southwest, Continental and Alaska Airlines.
So we permitted mergers and this is what happened:
- 2005: America West takes over US Airways and retains the US Airways name.
- 2008: Delta and Northwest merge as equals and retain the Delta Airlines name.
- 2010: United and Continental merge as equals and retain the United Airlines name.
- 2011: Southwest Airlines takes over AirTran Airways and begins the wind down of the AirTran name.
By 2011, the competitive landscape was dramatically different and American Airlines had to throw in the towel (it should have in 2006, in my opinion) in November of 2011 by filing bankruptcy itself. In the 2012 / 2013 period, the new airline landscape looks like this:
- Delta Airlines: Revenues $36.6 Billion (2012)
- United Airlines: Revenues $37.1 Billion (2012)
- American Airlines: Revenues $24.8 Billion (2012)
- Southwest Airlines: Revenues $17.0 Billion (2012)
- US Airways: Revenues $13.8 Billion (2012)
- Alaska Airlines: Revenues $4.6 Billion (2012)
- jetBlue: Revenues $4.9 Billion (2012)
- Virgin America: Revenues $1.3 Billion (2012)
- Frontier Airlines: Revenues $1.4 Billion (2012)
As you can see, the airlines that exist today are hardly equal despite the perception otherwise. For instance, Delta and United Airlines both are roughly equal as airlines but the next biggest by revenue is American Airlines which is a staggering $12.3 Billion behind. If you added US Airways revenues to American Airlines revenues in 2012, you still come in at just $38.8 billion. Put another way, the new American Airlines Group would operate at roughly the level of United and Delta Airlines.
Southwest would be at a disadvantage seemingly but Southwest’s revenues are based entirely on US based operations and therefore see Southwest operating at parity with the other 3 large carriers. So, now we have 4 carriers operating at roughly the same scale in the domestic US market.
The remaining four airlines: jetBlue, Virgin America, Frontier and Alaska Airlines have combined annual revenues of $11.2 Billion or a number that is still less than that of US Airways. It’s notable that those last 4 airlines are nowhere near national airline scale. They are all regional or niche in their marketshares. They can and will survive and at least 2 of them have every opportunity to organically grow much larger.
What my point in all of this? Scale is critical in this industry and while those billions in revenues sounds healthy, airlines often earn zero profits on such revenues. The dollars are large, the profits are tiny, at least until very recently.
If you stop the mergers now, you have two giants and three other airlines that would have to be labled as “at risk” over the next decade. While you allowed that to sort out, the two giants would only become . . . more giant. And the bigger they grow, the more influence they have on airports and route infrastructure.
So, if you feel the combination of US Airways and American Airlines is anti-competitive and anti-consumer, then you *must* be ready to “break up” Delta and United Airlines. They don’t have the potential to be dominant. They already are dominant. So much so that they dwarf every other airline in the industry.
More on these subjects tomorrow.
August 17, 2013 on 1:00 am | In Airline News, Mergers and Bankruptcy | No Comments
The Justice Department lawsuit against US Airways and American Airlines and the merger spends a lot of time citing city pair as routes where competition would be impacted.
These city pairs were interesting to me and we’ll see which ones they referenced later but right now, let’s focus in on what constitutes a viable route for an airline.
Non Stop routes are generally routes which the airline has identified that there is enough traffic between two city pairs to justify a one or more daily flight between the two cities where it would yield profit. Airlines fly non-stop routes that are profitable, get it?
Profitable is determined by the distance, the type of aircraft that might be flown and how much the airline can charge for a mix of fares between the cities.
Distance is important because it determines, in part, fuel and labor costs. If you fly farther, it costs you more to employ crew for that flight. It costs more in fuel to fly that route.
The type of aircraft is important because if an airline can only fly low paying passengers and there are only enough passengers to fill a small aircraft, it may not yield enough revenue to cover all the costs associated with that flight. (There are rare times when the airline will fly the route anyway to bring in more people from their network to fill other outbound flights at a hub destination but the number of times an airline will fly an unprofitable route for this purpose are vastly diminished.)
How much the airline can charge for various seats is highly variable. For instance, if it is a city pair like DFW-ORD (Dallas / Fort Worth – Chicago), the airline will assume it can fill its business class seats with full fare business travelers each day. That’s a lot of revenue from a relatively small group of people. Next, the airline might see how many of its Economy Plus seating it can fill with higher incremental revenue (over economy fares). Finally, Economy passengers will be evaluated. Are there enough passengers flying at a base economy fare to provide enough incremental revenue to drive the flight into profitability?
Just because “X” number of people want to travel between City A and City B doesn’t mean there is a profit available to the airline for providing the service.
Because business fares provide a great deal of the profit to an airline, airlines look to fly those routes with non-stops. Business fare consumers want non-stops because they typically are flying a lot and the savings in time and convenience is very valuable. Cities often have a mutual attraction for each other and provide a great deal of travel between the two. This is the case, for instance, between Chicago and DFW and Chicago and Denver. It’s also true between New York City and Chicago and New York City and Los Angeles.
Leisure routes are the hardest to find a profit from. Travel to and from leisure destinations such as Florida or Hawaii is centered around the lowest fares. People traveling for leisure are typically willing to make a connection to get the cheapest fare. However, leisure travelers are often traveling just once a year and that means they are not a reliable passenger for the airline on a week by week basis.
Finally, let’s remember that a route is also attractive for when it occurs. For instance, a route leaving at 7am from Dallas / Fort Worth to Chicago will be very popular and therefore a route where you’ll charge a higher fare for a higher profit. Similarly, you can imagine that a flight between those two same cities leaving at 10pm is not very attractive at all and the airline may charge far less to attract enough passengers to the flight regularly.
Here are some specific city pairs mentioned as being presumptively illegal for a merger
- Charlotte, NC – Durango, CO
- Maui, HI – Tampa, FL
- Hilo, HI – Miami, FL
- Austin, TX – Salinas, CA
- El Paso, TX – Honolulu, HI
- Des Moines, IA – Maui, HI
- Hilo, HI – Orlando, FL
- Indianapolis, IN – St. Croix, VI
Look the list of absurdity goes on and on. Virtually all routes listed as being presumptively illegal for the merger are connections for both airlines. For those routes where they are non-stops (of which US Airways and American Airlines have just 12 non-stop routes where they compete), yes, the competition is reduced. That can be fixed by A) waiting for another airline to enter the market because if there are high fares, another *will* enter the market or B) asking the airline to accommodate a new airline on the route. 12 routes (out of hundreds of routes) and 12 easy accommodations at the worst.
For some reason, the DoJ is very worried about routes to and from Hawaii to absurd locations in the US. How many people think that all 3 people traveling between Tampa and Maui regularly are worried that much about fares?
And I”m not sure we should factor in for concern that husband and wife who travel annually to St. Croix from Indianapolis.
On the routes that *do* count, we already know from historical information over the past 3 years that other airlines will enter non-stop markets where fares are high and the yield for profit is good.
On the routes that do count which comprise at least 90% of the DoJ complaint, I would suggest that we fire AAG Baer for being stupid about the airline industry.