DreamHost
Published On: Sun, Aug 18th, 2013

Federal Lawsuit of American Airlines and US Airways Merger Will Hurt Consumers

Once again, the American Airline Industry is under fire. The Justice Department, under the Obama Administration, has filed a lawsuit to block the proposed merger of American Airlines and US Airways (LCC). Judging by the way that they have handled the recent IRS and NSA Incidents, we can expect a high degree of inefficiency and messy red tape.  

US Airways Begins Merger Talks With American Airlines

The Merger should be allowed to take place (Photo by Kevork Djansezian/Getty Images).

The government poorly evaluated the merger and feared that the end result would enable carriers to raise prices on consumers and create a new type of airline monopoly. The case is centered around the idea of a shrinking airline industry with four, possibly fewer, companies controlling more than 80% of the country’s commercial market.

Sorry, Mr. Holder: We’ve already seen this same story play out and, thanks to one of America’s most savvy entrepreneurs, it didn’t end well for your team. It’s 4th down and your only option is to punt.

History shows that when governments try to intervene in the free market and block consumer choice, there is never a positive ending.

Martin Scorsese’s Film, The Aviator, depicted the legendary Howard Hughes and his struggle to block proposed legislation by Senator Owen Brewster from Maine and other liberal-minded individuals who wanted to socialize Trans World Airlines and limit them from conducting international flights. The political coup never worked and, by 1946, Trans World Airlines reached Cairo, Egypt. Hughes understood that government cannot artificially limit a service company and regulate how that service is delivered to customers.

Leonardo DiCaprio as Howard Hughes

Leonardo DiCaprio as Howard Hughes at the 1947 Brewster Senate Hearings.

 

The government further argues that if the two companies come together, it would hand over 69% of the takeoff and landing spots at the key hub of Washington Reagan National Airport.

But this is a reason, a poor excuse, for the Justice Department to intervene and manipulate. In the short-term, they would severely damage the overall efficiency of the industry as a whole, limit consumer choice and encourage people to select foreign airlines.

“Once you have permitted consolidation you’ve got to allow others to consolidate in order to sustain effective competition,” Bob Crandall, former chairman of American Airlines, told FOX Business.

“Airlines are the ultimate mobile capital. If business isn’t good in Milwaukee, they can move their business to Dallas,” says John Mayo, Professor at Georgetown University. “There are going to be ready and willing buyers for those assets because of demand for passenger travel.”

In reality, the government’s desire to regulate the airline industry arises from a widespread misconception that airline companies are not desirable commodities to buyers and investors.

Nothing could be further from the truth.

It can difficult for airline companies to show high profit margins on a per capita basis but they represent a significant technology that America needs in order to be competitive with foreign nations. The same comparison could be made with the automobile industry and other tech companies.

I am not advocating that government should subsidize failing businesses, mind you: However, when evaluating a high-tech industry, it’s essential to look beyond direct profit margins and view indirect investments and long-term profit potential.

For example, time is money. Airlines indirectly bring in billions of revenue in many different ways by allowing citizens to travel faster, spend discretionary income quicker, and the end result is, unquestionably, a growth in GDP.

Howard Hughes

The legendary Howard Hughes.

 

If Howard Hughes were alive today, he would have plenty to say. Some historians think that he had abandoned TWA because it was a, “bad” business but this theory is false and not in line with Hughes’s personality and how he felt about the airline industry.

Peter Harry Brown and Pat H. Broeske, in their book, Howard Hughes: The Untold Story, wrote,

“A one-time stroke of brilliance, however, was not what was required to keep two other business concerns profitable. Both his movie studio, RKO, and his beloved airline, TWA, were suffering from his mental deterioration.”

Hughes never lacked confidence in his ability to run an airline or to manage a fast paced business. He often took gigantic financial risks, such as when he produced the film, Hell’s Angels. Unfortunately, his mental health issues, problems with personal relationships and unethical people surrounding him are what lead to the loss of TWA.

The Justice Department should learn from past mistakes and drop their lawsuit.

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About the Author

Adam Conley

- Adam J. Conley is a graduate of Otterbein University and holds a Bachelor's Degree in Public Relations. He has held several positions with and is currently an active employee at JP Morgan Chase Bank. His favorite writing topics include politics, finance, economics and international relations.

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Adam Conley
Adam J. Conley is a graduate of Otterbein University and holds a Bachelor's Degree in Public Relations. He has held several positions with and is currently an active employee at JP Morgan Chase Bank. His favorite writing topics include politics, ... Read the full profile...