Have Gov't Antitrust Actions Made Airlines' Woes Worse?
By JOSEPH GUINTO.
3 September 2002Investor'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
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.
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.
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,
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."