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Baruch Caplan
Acc 9110 Blog
Free market competition enables consumers and producers to meet and let the market determine the appropriate price for goods and services. Throughout history, there have been many cases of monopolies or cartels manipulating prices and taking advantage of consumers. To combat this, the United States has passed legislation to promote competition and limit the formation of monopolies. The Sherman Anti – Trust act of 1890 was a historic legislative act granting the Federal Government the authority to oversee competition in industry and gave it power in fighting against monopolies.
In 1978, the government deregulated the airline industry. This caused the airlines to compete against each other, bringing with it better prices for consumers, but lower profits for the airlines. Over the last thirty plus years, the airline industry has been plagued by low profits or losses and many bankruptcies.
In the mid 2000’s Delta Airline entered bankruptcy. In April of 2008 Delta merged with Northwest. This merger formed the current largest airline in the world. In 2010 United Airlines acquired Continental Airlines creating what is currently the second largest airline in the world. In 2011 Southwest Airlines announced it would acquire Airtrans Airlines creating what is now the third biggest airline in the world.
In November 2011, AMR the parent company of American Airlines (4th biggest in the world) filed for chapter 11 bankruptcy protection. It emerged from bankruptcy with a federal judge ordering it in Feb. 2013 to merge with US Airways (6th biggest in the world) as part of its reorganization plan, subject to approval from the justice department. This merger would create the largest airline in the world. The merger was approved by both the creditors of AMR as well as by its three biggest labor unions.
In august of 2013, the Justice department, in conjunction with six state attorney generals, filed an anti-trust suit against the proposed merger claiming it would drive up prices off flights, cause the level of service provided by the airline to decline, and create an unfair monopoly where four airlines would control 80% of all flights. The trial is set to begin November 25, 2013, with briefs due late December, and closing arguments set for Jan 6, 2014.
The airlines feel that the government’s claim does not have merit. They believe the merger will offer more choices to consumers, increase route networks, and cite the three mergers of the other airlines which have occurred recently.
The airlines are attempting to mediate and hope to avoid trial. They are willing to offer certain concessions to appease the Federal Government, including giving up certain slots at Reagan Airport, where these two airlines control two thirds of the slots, as well as other concessions.
Recently, the Attorney general of Texas has dropped its anti-trust suit, and it appears that the Florida Attorney general will be dropping charges as well. Many industry and legal experts also believe that the government has a very weak case.
This past week, the Justice Department has begun talks with the Airlines regarding concessions. This indicates that there is a good chance the trial can be avoided and a compromise can be worked out. AMR stock was up 25% Monday November 4, 2013 on the speculation that the merger will now go through.
It is my humble opinion that the merger should be allowed. The combined airline will create cost savings for these two airlines that may get passed on to consumers. As the industry already has a few huge airlines, another large airline will make the industry a four company game instead of a three company industry. This will help competition. They will all keep each other in check. As we have seen in the accounting industry there needs to be a few large companies competing with each other. As long as there are numerous large competitors, competition will create the best market for customers. Additionally, there is always a risk that one of the current three airlines will go bankrupt or have some other crisis hurt its competitive abilities. Should that occur there would only be two airlines left. The allowance of the current proposed merger would remove such a risk from occurring.
Furthermore, there is a school of thought (Chicago University is a big proponent) that by the government attempting to stop monopolies from occurring it is only helping the consumer, but not the competitor. If there would be a monopoly created, the conditions would attract new entrants creating a more efficient market. The intent of the government could be counterproductive. It could be better to leave things alone.
Sources:
1) Wall Street Journal, Thursday Oct 31.,2013 “Airlines Seek Settlement”, by Jack Nicas and Susan Carey, page B3
2) New York Time, Tuesday November 5, 2013, B1, “US in talks to settle suit over merger of 2 airlines”
3) Wickipedia
4) Baruch Caplan