USAirways Merger with American Hits Turbulence

USAirways Merger with American Hits Turbulence

The Federal Department of Justice has been joined by the attorneys general from six states (including Pennsylvania) and Washington DC to stop the proposed merger between USAirways and American Airlines.  They have filed suit in Federal court claiming that the merger would create the world’s largest airline resulting in higher fares and less service and competition.  This is an unexpected turn of events.  Since the two companies had announced their merger plans earlier this year, things had been moving along without turbulence as the plan was approved by each company’s shareholders along with American’s creditors as that airline departs bankruptcy. 

 

 

So what does this mean for Pittsburgh?

 

As we had written in a Policy Brief earlier this spring (Volume 13, Number 17), the burning question for local officials is the fate of USAirways’ flight operations center which was partially funded by taxpayers.  If the merger goes through it will certainly mean that facility would be closed in favor of American’s center in Dallas.  Shuttering the facility will mean the loss of 600 Pittsburgh jobs. And those would be in addition to the thousands of employees at the airport who have lost jobs since the USAirways bankruptcies and tremendous downsizing and the de-hubbing of Pittsburgh International (PIT).  Clearly, there are many workers who will be hoping for the merger to be blocked by the courts.

 

The suit to stop the merger has come at nearly the last minute as the bankruptcy court was set to hear final arguments for the plan to exit bankruptcy, a plan supported by the unions and creditors. 

 

The Justice Department, in moving to block the merger, asserts the merger would be strongly anti-competitive.  And there is some reason to agree with that.   Although it is interesting to note that the Justice Department in recent years approved the mergers of Delta/Northwest, United/Continental and Southwest with Airtran.  If this merger is allowed, it would leave the country with four airlines controlling 80 percent of the market. On the one hand, American argues that United and Delta are already hogging the markets in several cities. But would any of the smaller point-to-point discount carriers, such as JetBlue Airways step up and enter more markets if the merger is not allowed and American is forced to shed routes?  Profits are a strong motive for new entrants in any industry.  As USAirways’ CEO once said, the airline industry is “far too hard to predict”. 

 

But there is a broader question. If the merger is denied what happens to American’s effort to get out of bankruptcy?  Will its creditors and employees be at substantial risk of loss? Will American have to cut service?  Lots of questions for the bankruptcy court to ponder.   If the merger is denied by the courts through the lawsuit and American fails to come out of bankruptcy, then there would still be less competition. 

 

If the Justice Department prevails, the traffic control center in Moon will almost certainly get a reprieve and many workers can breathe a sigh of relief.  And a diminished American presence at the airport could provide an opening for USAirways to offer more flights to take up the slack.  Of course other carriers might go after good routes.

 

But as we have written before, PIT is now an origination and destination (O/D) airport that needs to concentrate on lowering fees to entice more airlines, be they the major players or smaller flyers, to start offering more flights thus drawing more O/D passengers.  With the advent of drilling money from future Marcellus Shale wells entering the picture and gaming money being used to lower terminal related debt, PIT has already taken a step in that direction.  A growing economy that generates both increased business and pleasure travelers will be key to helping O/D demand to rise and possibly induce more carriers offering more seats to more destinations.

 

Nonetheless for the time being the holdup in the merger has added to the uncertainty about will happen at the Pittsburgh airport.