This basic insight of economics is at the heart of what the Justice Department's investigation of th

Consumer Union consultant William J. McGee spoke to the Senate Judiciary subcommittee on antitrust, competition policy, and consumer rights to express arthur frommers budget travel concern about the pending merger of American Airlines and US Airways.
Chairwoman Klobuchar, Ranking Member Lee, and Members of the Subcommittee: Consumers Union, the policy and advocacy arm of Consumer Reports, commends the Subcommittee for holding this important hearing, and we appreciate the opportunity to present our views.
We are well aware that the airline industry has been under considerable financial stress in recent years, leading to a number of reorganizations under the bankruptcy laws. And we know that the urge to merge can be powerfully seductive even under the best of circumstances.
But we have seen growing consolidation in the airline arthur frommers budget travel industry in recent years bring substantial harm to consumers, arthur frommers budget travel communities, and the economy. We are concerned that the proposed merger between American Airlines and US Airways has the potential to further deprive air travelers of healthy, robust competition, arthur frommers budget travel and to further deprive communities of being part of a vibrant air transportation network. We believe the proposed merger arthur frommers budget travel warrants arthur frommers budget travel a careful and thorough investigation by the Justice Department’s Antitrust Division.
This merger was formally announced just a month ago, on Valentine’s Day, and a full review of its implications is still underway. But the potential harms to the public that could result arthur frommers budget travel from allowing this corporate courtship to be consummated are clear enough already.
These two airlines are singing a song we’ve heard sung many times before. For the fifth time in the past decade, executives from one legacy network airline are attempting to acquire the assets of a second. Each time, the airlines promise that air travelers will benefit from a stronger airline with a wider reach, more determined and able than ever to compete vigorously.
That’s what American and US Airways are saying now. And that’s arthur frommers budget travel what we heard from United and Continental when they merged, from Delta and Northwest arthur frommers budget travel when they merged, from US Airways and America arthur frommers budget travel West when they merged, and from American and TWA when they merged – or technically, when American acquired TWA’s assets in bankruptcy.
That’s what we always hear. But what we have found, once the merger goes through and the dust settles, is not greater choice arthur frommers budget travel and better value for consumers. Instead we find fewer flights and routes, and hubs downgraded or abandoned, as the new combined airline sees less need to provide those greater arthur frommers budget travel choices in flights and routes once they have less competition to worry about. Similarly, we find that airfares rise on routes where the merged airlines previously competed head-to-head.
The bottom line changes for the merged airline, and not necessarily in ways that translate into good news for the rest of us. Consumers lose choices, workers lose jobs, and communities lose business arthur frommers budget travel activity and the associated tax base and job opportunities. The interests of consumers and communities get overlooked arthur frommers budget travel in favor of the interests of the senior executives and major investors of the two airlines.
Two decades ago, there were 11 legacy network airlines in the United States. If this pending arthur frommers budget travel merger is approved, the country will be served by only three full-service airlines – four if you add in Southwest – along with Alaska Airlines, and a handful arthur frommers budget travel of smaller low-cost and regional airlines who have themselves been merging.
One industry analyst estimates that American, United, and Delta, plus Southwest, would comprise 87% of the domestic market, a concentration never before seen in the modern era of U.S. commercial aviation. The dramatic consolidation that has occurred over the last 25 years is best illustrated by another analyst who notes that in 1985 ten separate airlines controlled the same amount of market share that soon could be controlled by just American, Delta, and United.2
Moreover, as the legacy network airlines continue to consolidate, they are abandoning domestic routes, or outsourcing them to regional code-sharing partners. We are concerned that they are looking at the domestic market as a “mature arthur frommers budget travel market” that is not worth the effort trying to expand, and are focusing their energies on the more lucrative long-haul arthur frommers budget travel coast-to-coast arthur frommers budget travel routes and the international routes.
And so we must ask what the end game truly is for U.S. commercial aviation. With each mega-merger we’ve been told that profitability will return, competition will be enhanced, and consumers will be served, and each time this has not happened. Will domestic airline consolidation now end with the merger of American and US Airways? Or will we be told in short order that the Big Three must become the Big Two, or the Big One? Will the industry double down on its efforts to get Congress to amend foreign arthur frommers budget travel ownership rules, so that the next round of domestic acquisitions comes from Lufthansa, arthur frommers budget travel British Airways, and Air France-KLM?
Merging corporations always say their merger will make them more “competitive.” But they mean something quite different than what the antitrust laws mean by preserving competition in the marketplace.
The corporations mean something akin to “strong.” They mean the merger will enable them to profitably expand operations they can charge for, and maybe to also charge more, and to profitably cut costs by trimming overhead and redundancies in service. It is certainly understandable that corporations would pursue those goals, and that merging with another firm in the same line of business might seem an attractive route for pursuing them.
An airline naturally wants to maximize its profits, and the way to do that, simply stated, is to sell as many tickets as possible at as high a fare as possible. There is, of course, a trade-off – at some point, higher fares charged eventually means fewer tickets sold.
One way that trade-off can take hold is that as airfares rise, more consumers will decide they cannot afford arthur frommers budget travel to fly, and will simply have to give up flying arthur frommers budget travel to see family, or to take a vacation, or to expand arthur frommers budget travel their business. They will drive instead, if that is practical. They will give up the special vacation and stay closer to home. They will make do with phone calls instead of personal visits.
But in any event, it won’t be the same – it won’t be as convenient, or as satisfying. Consumers will suffer as fares increase and service decreases. arthur frommers budget travel Those who are not forced to give up flying will pay more for it.
Up to a point, an airline focused on its bottom line may not care so much about the reduced arthur frommers budget travel ticket sales, as long as its higher arthur frommers budget travel fares on the tickets it does sell net higher overall arthur frommers budget travel profits. This is not to suggest that the airlines have ill will against consumers; it is because their first goal is to increase profits. It’s in their corporate DNA.
When there is competition, we never get to that unfortunate point. When there is competition, arthur frommers budget travel consumers have a choice, and if one airline raises its fares too high, consumers will look to other airlines for lower fares. And as long as another airline can sell that ticket at a lower fare and still make a profit, that’s what it will want to do. So when there is competition, the airlines will have a healthy incentive to reduce their fares to increase ticket sales until the point is reached where no additional arthur frommers budget travel profit can be made by reducing fares further.
This basic insight of economics is at the heart of what the Justice Department’s investigation of this merger is and should be all about. Competition makes sure that our free market system brings good deals to consumers, by aligning arthur frommers budget travel the profit-making incentive with providing maximum value to consumers. And the purpose of the investigation is to make sure that competition is preserved and consumers are protected.
Historically, we have not seen a merger among major carriers that has not led to reductions in service. In fact, the primary arthur frommers budget travel business motivation driving an airline merger, aside from the prospect of increased profits from reduced competitive pressure, would seem to be the elimination of what become unprofitable redundancies after the merger, but are competitive niches before the merger, when the two carriers are still competing against each other.
After American acquired TWA’s assets in 2001, for example, the merged airline’s daily departures out of TWA’s former hub in St. Louis plunged from nearly 500 down to just 36 – undoubtedly helping add to the merged airline’s profits, but at the expense of a drastic reduction in flying choices for consumers, and a diminished convenience as a business home or destination of the city once celebrated as the Gateway to the West. This pattern has been repeated at other former hubs downsized by mergers: America West’s former hub in Las Vegas, Delta’s former hub in Cincinnati, and Continental’s former hub in Cleveland.
Similarly, with this merger we could see fewer flights and fewer non-stop routes, as well as more mainline arthur frommers budget travel jet service replaced by outsourced arthur frommers budget travel regional jets. Comparing the route maps of American arthur frommers budget travel and US Airways raises obvious questions: Would the merged carrier sustain present levels of service at the US Airways hub in Phoenix, so close to American’s hubs in Dallas arthur frommers budget travel and Los Angeles? How can the US Airways hub in Philadelphia co-exist at current service levels arthur frommers budget travel adjacent to American’s hub at New York’s JFK? Will it ultimately make business sense to downsize the US Airways hub in Charlotte, when there is an American hub in Miami? Consolidating hubs and routes and flights may make perfect sense from the merged airline’s perspective, but it comes at a high cost to consumers and communities.
We could also expect the merger, where it reduces competition, to result in higher fares, with fewer promotional fare sales, and fewer rebellions against fare increases and new fees. As the Government Accountability Office put it in a July 2008 report on airline mergers, “Mergers and acquisitions can also be used to gener