Case Overview, Proposed United Airlines-US Airways Merger


This document provides background information and summarizes the debate over the United Airlines-US Airways merger. The links to the left will lead you to public documents that we have found.

 

Background

          When United Airlines and US Airways announced a plan to merge in 2000, there were six major air carriers in the United States. The others, in addition to United and US Air, are American, Continental, Delta, and Northwest. The merger would not simply reduce that number to five large carriers, but the consolidation of those two into the largest U.S. airline threatens the other major carriers and makes it likely that more mergers will follow. Indeed, at the end of the year American Airlines announced bids to purchase TWA, a smaller but still significant airline, and part of US Airways that was not to be included in the merger with United Airlines.

          The United-US Air merger was controversial because of concerns that it would reduce competition. As one critic of the merger noted, ďWith any airline merger, less competition means higher prices for the consumer.Ē Moreover, there was considerable public antagonism toward airlines because of a widespread belief that thereís been a decline in service. Overcrowded airports, flight delays due to too many planes trying to land at the same airport, and too much lost luggage have angered travelers.

          Government approval in the form of clearance from the antitrust division of the Department of Justice is necessary for the merger to go through. Although no formal approval from Congress is required, many legislators were concerned and hearings were held to review the merger.

 

Participants

          The only organized interests that were highly active are United Airlines and US Airways. Other airlines have a vital interest in the matter but were caught between a rock and a hard place. They were against the merger but if they lobbied against it and the merger went through anyway, their public opposition to it would then compromise their own subsequent merger plans developed in response to the United-US Air combination. The two airlines started a coalition, the Global Aviation Improvement Network, to create the impression of broad, public support for the merger. Additional supporters were individuals and organizations from some of the affected cities and states where the merger promised enhanced service. The Philadelphia Chamber of Commerce and the Governor of North Carolina are members.

          Although there is a huge consumer constituency with an interest in this and any other major change in airline service, air travelers are not effectively organized. A few consumer groups spoke out on the issue, but none devoted to any significant resources to working against the merger. A number of legislators spoke out on the merger and a few became active in trying to stop the issue, notably, John McCain, (R-AZ), chair of the Senate Commerce Committee.

 

Arguments/Impediments

Proponents:

          To United Airlines and US Airways, the issue is clear. Said a spokesman, "First and foremost, this merger is good for service. Itís the merger of an east-west line with a Northeast-centered north-south line... With this merger you can go from Bangor, Maine to Tokyo with one stop in Boston. Seamless travel. You can put your luggage on in Bangor and pick it up in Tokyo." In the minds of the mergersí backers, the combination would make life easier for travelers by improving connections, increasing the reliability of baggage handling, and the broadening the reach of frequent flyer programs.

Opponents:

          The most serious issue raised by opponents was the lessening of competition that would result not simply from the merger of these two airlines but from the other mergers that were sure to follow. United and US Air compete in some of the same markets, particularly along the East Coast. Most dispassionate observers believe that at airports where they both have significant market share, less competition will result. And less competition surely means higher prices. A United spokesman rejected this idea, believing that critics mistakenly assume a static rather than dynamic marketplace. ďNo passenger will be conceded. If thereís [not enough competition] at the Minneapolis airport, someone will come in and there will be more competition.Ē Yet this view conveniently overlooks the fixed number of gates at any one airport. Would-be competitors cannot just come into a market if they want to.

          A second criticism of the merger is that service on airlines is so bad that it is foolish to allow the industry to take steps that can only make it worse. A report issued by the Department of Transportation in January, 2001, concluded that dissatisfaction with the airlines is at an all-time high. Opponents of the deal argued that service issues ought to be taken care of first. Itís not altogether clear, however, why service would get even worse than it is if the merger went into effect. The current level of competition doesnít seem to do much to ensure a high quality of service. One Capitol Hill observer suggested the real motive on the part of congressional critics was not to stop the merger but "to beat up the industry a little."

Impediments:

          The single biggest obstacle to the merger is approval from the Justice Department (which has not ruled at this writing). Without that approval the merger canít go forward. Another impediment is public opinion. The unpopularity of the airlines makes it easier for the Justice Department to rule against them if it desires. Itís unclear whether the change in administrations and the appointment of a new attorney general and new head of the antitrust division, will have any bearing on the eventual decision.

 

Venues

          As noted directly above, the most important venue for this issue is the Department of Justice. There was also a lot of activity in Congress and hearings were held before four different committees. Yet as one congressional aide noted, "Thereís actually little that Congress can do to stop a merger. Youíd have to pass a law. But Congress does want to speak out." Senator McCain and former Senator Slade Gorton (R-WA) introduced a anti-merger resolution into the Senate Commerce Committee and, somewhat surprisingly, it passed. It died a quiet death as it was never brought up on the floor for a vote.

 

Lobbying Activities and Tactics

          United and US Air have actively lobbied to get this merger accepted. The CEOís of both airlines made the rounds on Capitol Hill. Their supporters from the cities and states that would benefit from the combination have communicated with their legislators. Lobbyists from the two airlines worked the Hill as well. The Washington offices of the two companies hired additional help from some Washington law firms.

          Lobbying the Justice Department is not easy to do. The airlines lawyers and their antitrust experts filed documents with Justice to make the case that the merger is justified. When the merger was make known, the two airlines announced that part of US Air was being spun off into a new, independent company to ensure competitiveness on some particular routes. If the merger is eventually approved, itís possible that it will be necessary for the two airlines to make some other concessions. Justice might make them divest themselves of certain routes or airport gates.