GAO: Department of Justice review key in American, US Airways merger

By Caroline Salls

Pittsburgh, June 20 - The U.S. Government Accountability Office said a Department of Justice antitrust review will be a critical step in the proposed merger between American Airlines and US Airways, according to a document entitled "Issues Raised by the Proposed Merger of American Airlines and US Airways."

GAO's report outlined its testimony before the subcommittee on aviation operations, safety and security, committee on commerce, science and transportation, U.S. Senate.

GAO said the DOJ uses an integrated analytical framework to determine whether the merger poses any antitrust concerns.

Factors considered

GAO said the DOJ considers five factors in evaluating a proposed merger, including:

• The relevant product and geographic markets in which the companies operate and whether the merger is likely to significantly increase concentration in those markets, which, in the case of airlines, mostly applies to city-pair markets;

• The extent of potential adverse competitive effects of the merger, including whether the merged entity will be able to charge higher prices or restrict output for the product or service it sells;

• Whether other competitors are likely to enter the affected markets and whether they would counteract any potential anticompetitive effects that the merger might have posed;

• The verified "merger specific" efficiencies or other competitive benefits that may be generated by the merger and that cannot be obtained through any other means; and

• Whether, absent the merger or acquisition, one of the firms is likely to fail, causing its assets to exit the market.

GAO said a proposed merger of United and US Airways in 2000 was opposed by the DOJ, which found that the merger would violate antitrust laws by reducing competition, increasing air fares and harming consumers on airline routes throughout the United States.

In 2006, the proposed merger of US Airways and Delta fell apart because of opposition from Delta's pilots and some of its creditors, as well as its senior management, GAO said.

Potential issues

According to the report, US Airways and American estimate that a merger would yield $1.4 billion in annual benefits from increased revenues and reduced costs.

If not challenged by the DOJ, GAO said the merged American would surpass United to become the largest U.S. passenger airline by several measures.

In addition, GAO said airline executives estimate that the merger will allow $640 million in cost savings from reducing overlapping facilities at airports and in combining purchasing, technology and corporate activities.

Despite these benefits, GAO said there are several potential barriers to successfully completing a merger, potentially reducing the benefits and increasing the costs.

GAO said the most significant operational challenges involve the integration of workforces, organizational cultures, aircraft fleets and information technology systems and processes.

In the case of the proposed American-US Airways merger, with unions supporting the merger, GAO said pilots' and others' pay will increase by $360 million annually if the merger is completed.

However, GAO said merging workforces can take time. For example, GAO said US Airways' pilot seniority lists have not been resolved following their merger with America West in 2005.

Integrating technology, especially reservation systems, can also be difficult and costly, GAO said.

US Airways is an airline operator based in Tempe, Ariz.

AMR Corp., the Fort Worth, Texas-based parent of American Airlines, filed for bankruptcy on Nov. 29, 2011 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 11-15463.

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