The American/US Airways Case Highlights The Absurdity Of Antitrust Regulation
“If the airlines have a history of anti-competitive behavior, they are the least able practitioners of the art in the history of mankind.” This was former American Airlines Chairman and CEO Robert L. Crandall’s response to a reporter who asked him about the merits of the Department of Justice’s lawsuit against the merger between American Airlines and US Airways.
Crandall is right; last week’s announced settlement between the airlines and Justice Department and several states notwithstanding. Average U.S. airline profits are anything but indicative of a cabal of greedy robber barons colluding to raise prices on helpless consumers. The industry’s profit margin was 2.1 percent for the first half of 2013, up from 1.6 percent the same period a year earlier. That’s less than half that of the transportation and logistics industry as a whole.
Following their partial deregulation more than 30 years ago, U.S. air carriers slowly have adapted to a competitive global airline industry. This has meant consolidating to develop more efficient networks and operations. The American-US Airways merger is just another feature of this market evolution.
The Justice Department didn’t see it this way, claiming the merger threatened consumer choice and travelers’ pocketbooks. Yet DOJ could produce no evidence of consumer harm. Unfortunately, this isn’t an isolated case of overzealous enforcement. Antitrust regulators have a long history of attempting to block mergers and acquisitions when competitive market forces later prove such actions to be pointless, from Staples-Office Depot to EchoStar-DirecTV to AT&T-T-Mobile.
American Airlines, despite modest recent profits, is underwater by more than $8 billion and is struggling to modernize its aging aircraft fleet. Now in bankruptcy, it saw a merger with US Airways as perhaps its last shot at rationalizing its operations and avoiding the financial death spiral that brought down Pan Am, TWA, Eastern Air Lines, and other once-mighty industry titans.
In its complaint against the merger, the Department of Justice argued the separated airlines would do just fine, based largely on statements by the carriers’ executives. Yet the complaint also attacked the veracity of airline executives’ claims as “saying what they believe needs to be said to pass antitrust scrutiny.” So when can we believe airline executives and when not? DOJ doesn’t say.
As the settlement agreement reveals, the Justice Department’s real aim was not to protect consumers, but to boost the fortunes of “low-cost” competitors Southwest and JetBlue by forcing American and US Airways to divest gates and takeoff and landing slots at a handful of airports—including New York’s LaGuardia Airport, where neither American nor US Airways were dominant. The likely result of the divestitures will be lost service from Ronald Reagan Washington National Airport to minor airports because the new American Airlines’ reduced market share will render these low-traffic routes unprofitable.
The fundamental problem with antitrust regulators is that their job, in effect, is predicting the future. Like most people, they tend to fail. Consider the tale of Blockbuster, which recently announced plans to shutter its remaining U.S. video rental stores. In 1999 and 2005, Blockbuster raised the ire of antitrust regulators when it sought to buy Hollywood Video. The antitrust regulators won out at the time, but their paranoia of Blockbuster cornering the video rental market now looks ridiculous in an age of online streaming services such as Netflix, Amazon, and Hulu.
It’s a similar story with airlines. Travelers have fared quite well in recent years, despite the government’s schizophrenic approach to airline consolidation. Today, inflation-adjusted average airfares are down more than 15 percent since 2000, even as the price of fuel paid by domestic airlines rose over 300 percent during the same period. Considering the dozen airline mergers occurring since then—including Delta-Northwest (2009), United-Continental (2010), and Southwest-AirTran (2011)—the Justice Department’s aborted assault on the American-US Airways merger appears inexplicable.
Voluntary transactions in a free market shouldn’t require government consecration—especially from regulators who try to predict the future and fail at it time and again. The settlement between the airlines and Justice Department is, on net, good news for consumers, but there is no indication the Obama administration’s antitrust attack dogs have learned any lessons from this experience.
Many antitrust lawyers tend to view our complex, dynamic world as static and simple. This poor understanding of reality motivates their efforts to mold commerce into their utopian vision of a free and just society, leading to absurd results. This state of affairs was best summarized by the late Nobel laureate economist Ronald Coase, who was known to say, “If a firm lowers its price, it’s predatory pricing. If it keeps the price at the same level, it’s collusion. And if it raises the price, it’s monopoly.” Unfortunately, with reform not yet on the horizon, the private sector will continue to find itself in this antitrust catch-22.