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Have Gov't Antitrust Actions Made Airlines' Woes Worse?

863 words
3 September 2002
Investor's Business Daily
(c) 2002 Investor's Business Daily

What hurts consumers more, a merger or a bankruptcy? That's what some are asking after financial woes at US Airways and United Airlines.

The two carriers scrapped a merger last summer after the Justice Department threatened to sue. It's hard to imagine now, but at the time Washington fretted the combined carrier would be too dominant.

Dozens of lawmakers complained that deal would hurt constituents. Sen. Charles Schumer, D-N.Y., for one, said it would mean a cutback in flights to New York, especially daily service from Washington's Dulles International to upstate cities.

But times have changed. US Airways is bankrupt. It's cut more than 30% of its schedule. United, veering toward Chapter 11, has slashed flights by 20% and laid off thousands.

And flights between Dulles and upstate New York? United has cut daily departures to Albany from nine to four, to Syracuse from nine to three, and to Rochester from 11 to four. More cuts may be coming.

Should Have Merged

That has some asking if Justice was wrong to block the deal.

"While the effects of Sept. 11 on airline travel cannot be underestimated. much of (United's and US Airways') financial turmoil could have been averted had the Bush administration allowed the two airlines to merge," said Jason Thomas, economist at Citizens for a Sound Economy.

Few dispute that. But there's no consensus the Justice Department erred in opposing the deal.

"The merger would have saved US Airways from the bankruptcy courts," said Richard Gritta, an industry expert at the University of Portland. "But it certainly would have done so at a price to the consumer." Experts may disagree whether Justice made the right decision. But they do agree the decision is important, because airlines are talking partnerships again. So President Bush's trustbusters must again decide whether to allow the deals or squelch them.

And this time around, the airlines' finances clearly are worse, while the partnerships are more vague.

Instead of merging, US Airways recently said it will "code share" with United. That will let passengers book a flight on one airline but connect to a flight on the other, all through one ticket. Northwest, Continental and Delta announced a similar pact last week.

Financial Necessity

The Transportation Department is reviewing both code-sharing plans. And the Justice Department may conduct its own review. In the meantime, neither agency has much to say on the subject.

While the decisions await, some speculate the financial upheaval in the airline industry may mean a smoother ride through the review process than the US Airways-United deal got last year.

"It is accepted by all sides, including the Department of Justice, that when a company is in financial trouble, exceptions (to antitrust rules) are made," said Nicholas Economides, an antitrust expert at New York University.

The exceptions fall into a couple of categories. Both the "failing firm" and "existing assets" theories of antitrust law let otherwise anti-competitive deals proceed if one of the parties may go out of business.

No one is sure whether those theories would apply to the code-sharing deals, though, since none involves actual mergers. Even if they do, the exceptions might not help.

To qualify as a "failing firm," a company has to be in real danger of disappearing from the marketplace. And airlines have a long history of surviving after declaring Chapter 11. Continental has done that twice.

Plus, some think the Justice Department may not consider concepts like "failing firm." Rather, it may limit a review to specific parts of the code-sharing deals that may be anti-competitive. That might mean looking at where one carrier's flights overlap with another's to see if code sharing on that route will reduce competition and boost prices.

"Justice has a very narrow focus," said Luke Froeb, an economist at Vanderbilt University and an antitrust official under President Reagan. "Broader concerns. rarely enter into their analysis. They take it one case at a time." Still, that can mean problems. When the US Airways-United decision was made, well before Sept. 11, the airline industry already was slumping. At the time, some analysts said a United-US Airways merger was the only way out of bankruptcy. But the contraction of the industry was not key for Bush's trustbusters at the time, many say.

Creative Destruction

Even if it had been, some experts argue, it's better to let firms fail even if that means short-term harm to consumers - like the service reductions and price spikes that can happen after an airline goes broke.

Economists call that "creative destruction." That idea, from Austrian economist Joseph Schumpeter, suggests markets must cycle through failure to achieve "perfect competition." Sick, dying firms are replaced by healthy, vibrant ones.

By those terms, Justice arguably made the right choice in nixing the United-US Airways deal.

"There are definitely short-run ramifications if an airline fails," Gritta said. "But ultimately the free market works. The airlines wanted deregulation. They got it. In a deregulated market, if you fail, you fail."

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