Mergers and Antitrust: American Airlines and US Airways

American Airlines and US Airways have overcome an antitrust lawsuit by the US government, the biggest hurdle preventing their merger into the world’s largest airline. The Justice Department began its lawsuit in August of this year, fearing that the merger would give the new firm too much market power and reduce competition, hurting consumers.

The final arrangement calls for the new firm to give up 57 slots at Ronald Reagan Airport and 34 at LaGuardia Airport.  This prevents the firm from virtually controlling these two airports, which could lead to monopolistic prices and harm to consumers. The new firm is valued at $11 billion. All parties to the arrangement, including Arizona, the District of Columbia, Florida, Michigan, Pennsylvania, Tennessee, Virginia, and the US Justice Department have agreed to the new arrangement, which will open up slots at the two airports for smaller players, encouraging competitive pricing.

Like a previous article regarding Australian grain, this article indicates the important role government plays when dealing with mergers and acquisitions. The antitrust suit, which was set to begin this November, put tremendous pressure on the two firms involved to come to a solution that was acceptable to them as well as the federal government. In the context of Industrial Organizations, it represents another instance of firms merging in spite of the evidence that mergers can be harmful. Whether this theory holds in this case is up for dispute, however the airline owners themselves clearly feel this move to be in the interest of their firms.

http://www.bbc.co.uk/news/business-24918664

2 thoughts on “Mergers and Antitrust: American Airlines and US Airways

  1. In the case of these two airlines, is it also possible that the economies of scale created by the merger could actually allow the larger company to charge lower prices? There still exists many competing airline firms, and thus this larger firm created by the merger does not have the monopoly power to charge higher prices. This merger could actually be beneficial to consumers, by forcing prices to go down in order for other firms to stay competitive.

  2. Is there a chance that this merger will not induce competition? In the end there is one fewer firm in an oligopoly. Shouldn’t this give competing firms more market power and ability to reduce consumer surplus with higher prices?

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