Airline merger hinges on hubs, official says

Wednesday, June 14th 2000, 12:00 am
By: News On 6

WASHINGTON – Federal regulators will carefully examine service and air fares in key business markets before deciding whether to approve UAL Corp.'s proposed acquisition of US Airways Group Inc., an official with the Justice Department told Congress on Tuesday.

By focusing more than ever on major hub cities, federal officials said they would try to determine if the merger would substantially reduce competition among the major carriers.

"Hub economics are powerful. Without substantial actual competition, hub carriers charge higher fares to local passengers than they do in more competitive markets," said John Nannes, deputy assistant attorney general in Justice's antitrust division.

Mr. Nannes made his comments as lawmakers on Capitol Hill kicked off a round of hearings, posing the same questions to airline executives and industry experts that will be asked by federal regulators.

Executives from UAL, the parent of United Airlines, and US Airways defended the proposed deal, saying it would enhance service without eliminating competition.

United and US Airways announced last month that they would merge in an $11.6 billion deal. Anticipating questions about market concentration, the companies proposed to spin off much of US Airways' service from Reagan National Airport in Washington, D.C. The spinoff would create DC Air, the nation's only airline controlled by an African-American investor.

A chill on mergers?

Federal evaluation of key hub-to-hub business travel, analysts said, could have far-reaching consequences for other big carriers contemplating mergers and play a major role in shaping the future of the airline industry.

"Whether we are on the verge of another wave of consolidation that will substantially change the industry is clearly a question that has to be asked," said Sam Peltzman, an economics professor at the University of Chicago's Graduate School of Business.

Mr. Peltzman and other analysts said average industry air fares have remained low despite a wave of mergers after airline deregulation in 1978. But, they added, a new series of combinations could significantly reduce competition and result in higher fares and erosion of service.

"The more important question," Mr. Peltzman said, "is what would another round of consolidation do to competition?"

The UAL-US Airways announcement sparked speculative reports that other major airlines might also merge. Among those were reports that American Airlines Inc. of Fort Worth was eyeing possible marriages with either Northwest Airlines Inc. of Minneapolis or Delta Air Lines Inc. of Atlanta.

"You could easily end up with a major concentration in the airline industry with a loss of consumer choice," said Thomas Hurst, a professor of law and an antitrust expert at the University of Florida.

Members of the House Transportation Committee had similar concerns.

"As soon as the United-US Airways merger was proposed, other major carriers began their own merger discussions," said Rep. James Oberstar of Minnesota, the ranking Democrat on the committee. "Don't take those talks lightly. This industry knows that a major carrier's market power depends on the size of the carrier's network."

The chairmen of UAL and US Airways attempted to relieve the anxiety of lawmakers. They argued that their proposed deal would benefit consumers and was unique enough that it would not serve as a model or catalyst for other industry combinations.

"There may not be another combination in the country that will look like this one," said James Goodwin, UAL's chairman and chief executive officer. He noted that US Airways would bolster United's weak presence on the East Coast.

Stephen Wolf, chairman of US Airways, told the House panel that his carrier was the sole survivor among the older midsize airlines. Without a merger partner, he added, US Airways could not build the route system it needs to survive.

"To expand into the global market and to realize our full potential, we have to join with a partner that has more extensive scope, breadth and reach," he said.

'Real horror stories'

Some committee members and industry analysts questioned what would happen to service and fares if multiple hub cities were controlled by a single airline.

"The flying public is in for some real, real horror stories, worse than they have ever experienced," said Rep. Ray LaHood, R-Ill. "If there was a vote by Congress, this probably would not go through, because all of us are concerned for our constituents about the service."

In recent years, experts said, airlines have continued to compete on fares because passengers have had a choice of hubs they could use to get to their final destinations.

"Previous consolidation did not bring about any substantial increase in fares because it really left intact the hub-to-hub competition," Mr. Peltzman said.

For instance, customers traveling from Dallas to Atlanta can fly nonstop on American or Delta. But if they are willing to forgo nonstop service, they can find competing service by connecting in Memphis on Northwest.

Similarly, travelers in the Midwest can choose between several competing hubs. American and United offer connections in Chicago, Continental in Cleveland, Delta in Cincinnati and US Airways in Pittsburgh.

Analysts noted those consumer choices would diminish significantly if the industry ended up with as few as three major carriers.

And Mr. Nannes, the Justice Department official, said it was questionable whether new airlines would enter those routes and renew competition.

"It is unrealistic to expect that the prospect of potential competition can fully address the competitive problems of concern," he said.

Existing data

Some analysts use air fare data collected by the Department of Transportation to argue that prices already are higher on routes dominated by one or two major airlines. Antitrust regulators will use the same data in evaluating the UAL-US Airways merger.

For instance, between Charlotte, N.C., and Chicago, where United and US Airways already control 90 percent of the market, the average one-way air fare is $275, according to a report from the department in the third quarter of 1999.

But fares are less on routes of similar distance where Southwest Airlines Co. flies. For instance, the average one-way fare between Baltimore and Nashville is $93.

Similarly, American and Delta control about 92 percent of the Dallas-Cincinnati market, where the average one-way airfare is $310. By comparison, the average fare between Houston and Indianapolis, which is served by Dallas-based Southwest, is $151.

American spokesman Chris Chiames noted that other industries, such as the telecommunications industry, have overcome similar questions during periods of industry consolidation.

"There is a school of thought that disputes this notion that big is necessarily bad," he said.

Analysts said Justice already has revealed skepticism about more consolidation by going to court to block Northwest's plans to acquire a controlling interest in Houston-based Continental Airlines Inc.

"Our complaint alleges that the acquisition would lead to higher ticket prices and diminished service for millions of passengers, especially those traveling on routes dominated by the two airlines," Mr. Nannes said.

"Northwest and Continental are each other's most significant competitors, and sometimes the only competitors, for nonstop airline service between cities where they operate their hubs."