On February 13, 2013, US Airways filed a Form 8–K with the Securities and Exchange Commission declaring that AMR Corporation, the parent holding company of American Airlines, would “merge with and into US Airways…with US Airways as the surviving corporation and as a wholly owned subsidiary of AMR.”[1] This agreement would effectively create the largest airline in the world.
Such a turn of events was not entirely unexpected, as consolidation of airlines had been taking place for years. Following Delta Airlines merger with Northwest in 2008, United merged with Continental in May of 2010 and Southwest merged with AirTran in September.[2] Ever since January 2007, when American Airlines’ stock reached a high of 37.05, the share price had plummeted as the company hemorrhaged capital, finally forcing it to file for Chapter 11 bankruptcy in November 2011. Soon after, US Airways tendered an offer to buy the ailing company for $11 billion, which was promptly accepted.
The United States Department of Justice wasted little time in filing an injunction against the action, arguing that “the merger was not key to the survival of either airline, and the resulting loss of competition in the industry would ‘result in passengers paying higher airfares and receiving less service.’”[3] The DOJ had not prevented any of the earlier consolidation, likely because none of the deals were as high profile or as demonstrative of the sea change taking place in the sector.
Despite the uncertainty it precipitated, the DOJ’s antitrust suit survived only three months before it was announced that the deal “would…go ahead but…[involve] far less comprehensive concessions than most observers had expected.”[4] Specifically, a settlement was reached that defined an agreed-upon number of airport “slots” to be relinquished by AMR/US Airways in favor of smaller, lower-cost airlines such as JetBlue, Virgin, and Southwest.
A slot, as defined by the International Air Transport Association (IATA), is “a permission given by a coordinator for a planned operation to use the full range of airport infrastructure necessary to arrive or depart at a Level 3 airport on a specific date and time.”[5] Two slots are required for both takeoff and landing, and these permissions are crucial for the ongoing logistics and coordination of plane traffic, especially at busier airports where unrestricted use of the runways would lead to massive delays. The IATA organizes airports into three main categories by infrastructure adequacy. Level 1 airports are considered to have little enough activity that the facility can easily manage most day-to-day airplane traffic. Level 2 airports represent a medium-traffic complex, and Level 3 airports are considered to have a high level of regular activity and frequent competing interests. For the latter category, “A process of slot allocation is required whereby it is necessary for all airlines and other aircraft operators to have a slot allocated by a coordinator in order to arrive or depart at the airport during the periods when slot allocation occurs.”
Common Type 3 airports in the United States include Washington D.C.’s Reagan National Airport and New York’s LaGuardia Airport, both of which required the acquiring company to surrender slots. At Reagan, it was announced that “JetBlue Airways [would] be offered 16 of those slots, which it currently leases from American. The Federal Aviation Administration [would] distribute the other 88 slots to various airlines.”[6] At LaGuardia, “The two airlines will also give up 34 landing and takeoff slots…. Southwest will be offered 10 of those slots…[and] the rest will be allocated by the FAA.” In addition, the new iteration of American will be stripped of gates at Boston’s Logan Airport, Chicago’s O’Hare Airport, Los Angeles’ International Airport, and other sites.
This purposeful redistribution of what are – in essence – tokens of airline dominance will make some progress toward subduing the “oligopolization” of the airline industry, but it may not go far enough in terms of protecting the consumer. The Airline Deregulation Act of 1978 was enacted with the motive to make air travel more efficient and cost-effective for the consumer by introducing free market economic effects. Over thirty years in, we have witness marginal price declines, but there is little doubt that deregulation has not provided a one-size-fits-all solution to the immanent problems.
In fact, the reorganization and conglomeration of these companies may well lead to an unsustainable imbalance of power that forces the federal government to again step in. The Financial Times reports that “after the [American Airlines and US Airways] merger, the four biggest airlines – Delta, United, the new American and Southwest Airlines – will account for about 80 per cent of US domestic flights.” Due to the barriers to entry and high fixed costs of airlines, it remains to be seen whether the discount airline business model remains lucrative or if the larger national airlines will inevitably push the industry further and further towards monopoly.