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Expert: What's at Stake if US Airways and American Airlines Merge

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Hundreds of jobs would be lost, though consumer prices would only be minimally affected, says one industry consultant.

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Culminating a process begun in January 2012, US Airways Group (NYSE:LCC), the parent company of US Airways, and AMR Corporation (OTCMKTS:AAMRQ), the parent company of American Airlines, announced in February 2013 their plans to merge. In March, Judge Sean Lane of the Southern District of New York approved the merger, which would create the world's largest airline.

Now, the US Department of Justice is seeking to block the unification of the two companies, arguing that the new $11 billion airline would seriously reduce competition for commercial air travel and increase prices for consumers. On Tuesday, attorney generals from six states and DC filed a civil antitrust lawsuit against the merger. The challenge is likely to delay AMR Corp.'s bankruptcy exit plan, which is part of the merger and was scheduled for today.

In the Department of Justice's press release from Tuesday, Bill Baer, the Assistant Attorney General who leads the DoJ's Antitrust Division, stated, "If this merger goes forward, even a small increase in the price of airline tickets, checked bags, or flight change fees would result in hundreds of millions of dollars of harm to American consumers."

Additionally, Baer made the case that the merger is simply not necessary, as he said, "Both airlines have stated they can succeed on standalone basis, and consumers deserve the benefit of that continuing competitive dynamic."

The merger is also likely to cost hundreds of people their jobs. In discussing the proposed deal, US Airways said it would close its $32 million operations control center in Pittsburgh, which was built only five years ago, and was partially funded by $3.75 million in Pennsylvania grants and tax credits. The facility employs more than 1,600 people. The company would move its operations to the Dallas-Fort Worth International Airport, where American Airlines has its headquarters. The Attorney General of Pennsylvania, Kathleen Kane, has said that, "If US Airways were to close the operations center, [at] least 700 jobs [would] be lost." US Airways would have little to no reason to close the center without the merger.

Yesterday, news broke that the airlines would be fighting the lawsuit with a team of high-powered lawyers. Representing American Airlines, Joe Sims, a lawyer from the firm Jones Day, said of the DoJ's claims, "If they are going to convince the court that the sky is falling, which essentially is what they are trying to do here, they are going to have to have more meat then they've shown us so far." Sims was the lead counsel in the $13 billion 2008 merger of Sirius and XM that created Sirius XM Radio Inc (NASDAQ:SIRI).

The airlines claim that their merger would actually allow them to compete with the two currently dominant carriers, Delta (NYSE:DAL) (which merged with Northwest in 2010) and the world's current largest airline, United Continental (NYSE:UAL) (the product of the merger between United and Continental in 2012). Sims believes that the two airlines, without the merger, will have trouble competing with even the small airlines, like Southwest (NYSE:LUV). "They will neither individually be as effective a competitor to United, Delta, and Southwest [nor to] the other smaller low-cost carriers."

For expert insight into the contention between the companies and the government, Minyanville spoke with Wayne Plucker, the Industry Manager of Aerospace & Defense for the market research and consultant firm Frost & Sullivan.

Plucker disagrees that the merger will increase costs substantially, but his views on the deregulation of the airlines in the late 1970s may lend support to the case against the merger. As he told us, "Deregulation gave the airlines the opportunity to grow beyond their wildest dreams and be incredibly stupid at the same time." Without any major lawsuits against airline mergers before this, the DoJ has allowed the major airlines to grow very large, and now it's trying to make up for lost time.

Minyanville: Why is the US DoJ challenging this merger?

Wayne Plucker: To put it simply, it answers some key Congressional concerns and shows that the administration is "protecting the consumer." To [satisfy] the European Union's concerns, the American/US Airways team allowed greater competition on the Philadelphia to London route. Now, the Congress is concerned about the willingness of the merged airline to keep hubs and therefore jobs at key airports. While they have stated that operations will be largely unchanged, every merging airline says that. The reality is that without those economies, there is little reason to merge.

MV: Does your firm have an estimate for how many jobs will be lost if the merger goes through?

WP: If past airline history is any judge, several types of jobs will be lost in succession. The first loses are typically some ticket agents and administrative jobs at most airports where they both operate. Then headquarters jobs as soon as duplicate operating and training systems are cut. Next some of the less profitable routes will be restructured where both airlines are currently operating aircraft at less than capacity. The jobs loss there would be the manpower to support those flights. For the American / US Airways merger, they need to cut maintenance jobs, especially in the AA MRO environment [the commercial arm of the American Airlines maintenance and engineering division]. Tulsa would take a hit [the company's largest maintenance facility is in Tulsa]. Thereafter, it would be route-picking for best capacity versus revenue, which would impact the number of hubs. Hubs that are also major enplanement locations are likely to survive. Those that were convenience hubs, used because they were available, are unlikely to survive as hubs and become only destination airports. This makes for a sizable loss of personnel, due to reduced required support.

MV: How much would the merger increase costs?

WP: The merger would be unlikely to make much difference in cost for consumers. Assistant Attorney General Bill Baer claims that past mergers have resulted in higher costs. However, those cost increases were more often normalization of industry wages after bankruptcies and fuel cost increases. It is hard to find any substantive evidence of direct cost effect from mergers.

MV: Is there precedence for this?

WP: DoJ has pressed for information on previous airline mergers, but has not taken it to this point. They have opposed T-Mobile (NYSE:TMUS) / AT&T (NYSE:T) and several others, but this looks like piling on with the states' attorneys general.

MV: How can the airline industry be made more efficient and more cost effective?

WP: Actually, the industry is fairly efficient and effective. Most of the cost was in personnel in the past. Now the biggest cost factor is
fuel. Between the two costs, our cost as consumers has risen. Even flying with virtually every aircraft full, the airlines profit per flight
is marginal. As [Richard] Branson said, "How do you become a millionaire? Start as a billionaire and buy an airline."

MV: Did the government's deregulation of the industry in 1978 help or harm it?

WP: The regulation and control before deregulation protected the consumer, smaller airports, and the airlines. Deregulation gave the airlines the opportunity to grow beyond their wildest dreams and be incredibly stupid at the same time. When fuel was pennies a gallon, that was survivable. Now, it is not. As to the consumer and localities, it has been a mixed bag. Ticket prices are lower than they should be on a cost basis, but we are being charged for everything but the cabin air, and that may be coming. The localities have been the biggest losers. Only the big airports have survived. Was that in the best interests of either the localities or the consumers?

Follow me on Twitter: @JoshWolonick and @Minyanville
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