If United and US Airways go forward with a merger, it will be the first major test of whether the Obama administration intends to apply more antitrust scrutiny than its recent predecessors. The merged entity, which would be called United Airlines, according to the Wall Street Journal, would become the nation’s second largest and have commanding market share in many parts of the country.
That would give it pricing power to raise fares and cut choices, although in some markets that might be eased by an expansion of Southwest. Might be. Southwest has been reluctant to move against “fortress hubs” such as US Airways in Charlotte, because the dominant carrier can lower fares so much as to make a venture there by Southwest ruinous. Cities such as Phoenix, which have enjoyed wide choice and cheap fares, would no doubt suffer.
More problematic would be the many jobs lost, not only in US Airways’ suburban Phoenix headquarters, but also at hubs such as Phoenix Sky Harbor International Airport, which would probably become redundant. More job cuts would come as other “redundant” routes, facilities, etc. are pared back to make the merger attractive financially. These job losses are no small thing with real unemployment remaining stubbornly high.
If you want to see the damage to communities these deals have caused, check out St. Louis (TWA), Minneapolis (Northwest) and Cincinnati (which lost its huge Delta hub in the downsizing following the Northwest deal.
Mergers usually fail to deliver their promised benefits to shareholders of the surviving company. They do provide big paychecks to CEOs, investment bankers and M&A lawyers, as well as quick payoffs (sometimes) to the shareholders of the acquired outfit. Favorable tax treatment also encourages mergers. This might be defensible as the market’s creative destruction. Unfortunately, the real result has been increasing industry concentration across wide stretches of the economy. The barriers to starting competitors are high, and nowhere more so than in airlines.
US Airways is an result of many mergers, including PSA, Piedmont and America West, and none have made the carrier stronger. Indeed, the structural problems facing most of the airline industry have little to do with lack of size and scale. In many cases, mergers have made the surviving carrier weaker, while distracting management and taking away competition and killing thousands of jobs. United, just out of bankruptcy, is hardly a strong player, either.
Will the Obama administration say no to the cult of bigness, harkening back to the days of Theodore Roosevelt? No. The president is a conciliator. And antitrust has not only become rusty as an essential tool for preserving a healthy competitive market, it hasn’t been updated to address the downsides of consolidation that TR never considered. Then, get ready to say goodbye to Alaska.
Today’s Econ Haiku:
A Belltown high rise
With hopeless structural woes
FUBAR, not rebar