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The Sky-High Price You’ll Pay for Airline Mergers
By Bill Saporito @bilsapNov. 09, 201325 Comments
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If you want to understand why the U.S. Department of Justice is playing hardball over the pending American Airlines/US Airways Group merger, consider Detroit. The Motor City once harbored hub dreams and built a new Detroit Metro airport to fulfill that desire. Then, you know, the U.S. auto industry wrecked along with the rest of the economy. And airlines went bust before autos, sending Northwest, Detroit’s home team, into the arms of Delta, another bankrupt. Detroit Metro got downgraded to a spoke rather than a hub and lost a ton of flights, which has made it, paradoxically, a very pleasant place to travel to and from.
Today the city of Detroit may be broke but with the auto industry cranking again Metro is a lot busier—and dominated by dominant, post-consolidation legacy airlines. One result: when I needed to book a trip to Motown with a week’s notice the round trip fares ranged from $1,374 to $2,000 on the legacy carriers. Guess who had the highest price? American. That is, until Delta upped the ante to $2,010, which American promptly matched. The only other nonstop option was plucky Spirit Air, priced at $335, but I couldn’t make either of its two daily flights. The next best option was a one-stop through Washington on American’s betrothed, USAirways, at $329.
That is the kind of oligopolistic pricing that has DOJ’s knickers in a twist: a city pair dominated by the big three collecting economic rent and the best second option is the airline that’s going to disappear in the merger. Why does Detroit have such high prices? Some of it can be explained by the fact that, (no offense Motowners), few people fly to Detroit for a vacation. It’s a business market. Most of the passengers aren’t paying for their own tickets so they are not price sensitive. This price inelasticity translates to more pricing power for the airlines. The Dallas-Detroit market appears to have similar characteristics.
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Still, it’s a little amazing that American would let itself be the high-price leader with the trust-busters bearing down on them, but the airline pricing engines don’t play politics, they just seek maximum yield. The Justice Dept., American and US Airways are negotiating a deal but if DOJ doesn’t get what it wants—including the surrender of precious slots at airports such as LaGuardia in New York City and Washington’s Reagan National—the two sides have a court date later this month. A judge is now allowing Southwest to file a brief demanding that the merged airline give up some of these coveted slots to a low-cost carrier like Southwest. In a market like Detroit-New York, Southwest will make the case that it can provide the competition that antitrust law seeks to preserve.
Detroit’s pricing sticks out when you compare it to other cities. When I priced a trip to Chicago for the same times, the fares were entirely different. American offered a $359 round trip, even though Chicago is a greater distance from New York than Detroit. How do you explain such a variance? First, Chicago is a hub, so there are tons of flights here. Second, JetBlue flies to Chicago from New York. The presence of a high-quality, low-cost carrier such as JetBlue keeps the legacy carriers honest. And Spirit also serves Chicago from New York, offering even more cut-rate fares. Same with Los Angeles, farther still, where the round trip fares are ranged from $606 on Virgin America (a terrific airline) to $650 on United, Delta and JetBlue to $713 on US Airways to a high of $948 on, hmm, American.
In its report to Congress on the proposed merger, the General Accounting Office said that the AA/US merger would mean the loss of one effective competitor in 1,665 airport-pair markets, affecting more than 53 million passengers. More to the point, GAO said that the merger would reduce the number of competitors from 4 to 3 in 749 city pairs. That’s way more than the 454 cases of 4-to-3 reductions that occurred with the United-Continental merger.
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When top competitors merge their combined pricing power improves; heck, it’s the whole point? They can reduce the number of seats available in a market, raise fares—or both— because big airlines today are less interested in price wars. This is DOJ’s point. The AA/US merger doesn’t look bad on paper, given that only 12 of their non-stop routes overlap directly. But in the aftermath of the United/Continental and Delta/Northwest mergers DOJ says the reduction in competition is more pronounced.
There are still a lot of reasons to support the AA/US merger: it will preserve jobs, improve options for the elite cadre of global travelers and ensure a profitable future for the combined entity, which is a good thing. But there’s a price to be paid for it, and that’s what DOJ is trying to figure out. In the meantime, I’m looking at $1,400 to get to Motown midweek. There oughta be a law. Oh wait, there is.
Read more: The Sky-High Price You’ll Pay for Airline Mergers | TIME.com
Group 2
Concession in Airline Merger Is Criticized
By MATTHEW L. WALD
Published: November 13, 2013
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WASHINGTON — When the Justice Department announced in August that it had filed suit to block the proposed merger of US Airways and American Airlines, it maintained that airline consolidation had gone too far and the proposed merger would lead to higher fares for consumers.
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But on Tuesday, in reaching a settlement with the airlines, the Justice Department had a far different view, saying that surrendering of takeoff and landing slots at airports would foster competition and lead to lower prices.
Analysts and consumer advocates, though, questioned on Wednesday just how much consumers will benefit.
Paul S. Hudson, the executive director of the Aviation Consumer Action Project, said that the effects of consolidation would overwhelm any concessions won by the Justice Department.
“It doesn’t begin to deal with the fact that the industry is now so concentrated that the big four airlines are going to have unprecedented pricing power,” he said, referring to United, Delta, Southwest and the new combined American.
In striking the deal, the airlines agreed to sell 104 slots at Ronald Reagan National Airport in Washington, and 34 slots at La Guardia Airport in New York. They also agreed to sell the rights to two slots at each of five other airports — Chicago O’Hare International, Los Angeles International, Boston Logan International, Dallas Love Field and Miami International.
William J. Baer, assistant attorney general for the antitrust division, said on Tuesday that the settlement “opens up the marketplace as never before.” The arrival of lower-cost carriers, even at that level, would have the ripple effect not only on nonstop flights but also on connecting flights.
But giving up the slots, Mr. Hudson said, is “a slight mitigation, certainly a mitigation of concentration, most particularly at Reagan National.”
Kevin P. Mitchell, the chairman of the Business Travel Coalition, said that giving up the slots “will help somewhat, and it’s certainly better than allowing the merger just to go through.” Forcing the two airlines to sell landing slots, and give up gates at a variety of airports “will enable the JetBlues and the Virgin Americas of the world to expand service,” he said.
Some Wall Street analysts said the concessions would have little effect on the combined airline. Helane Becker and Conor T. Cunningham at Cowen and Company wrote in a research note that the settlement was a positive for the merged airline because, despite being required to shed some slots, the divestitures “would have minimal impact on the merged company.”
The merger, which could be completed next month, is supposed to cut the carrier’s costs. The same claim has been made in many previous mergers, including some involving American and US Airways, but merged airlines have had varied levels of success in meshing their operations and achieving the “synergies” they sought.
From the consumer point of view, though, there is probably no way to preserve the level of competition in place before the latest hookup, advocates say. They note that it comes after the mergers of Delta with Northwest, United with Continental, Southwest with AirTran and even American with TWA.
In an era when carriers seem to be either in bankruptcy or between bankruptcies, many aviation analysts saw the merger as inevitable, and the benefits are not just the “synergies,” they said.
“Much of the whole point of this exercise has been to tighten pricing a little bit, so airlines could stay in business and not go bankrupt frequently,” said Richard L. Aboulafia, an aviation analyst at the Teal Group. And the alternative, he said, was two very strong carriers and two weak ones that could ride roughshod over the weak carriers’ markets. That would be bad for consumers too, he said. “You’ll never get to that consumer paradise, where you had multiple weak zombie carriers offering bankruptcy prices,” Mr. Aboulafia said
An antitrust lawyer who specializes in airlines, Jonathan L. Lewis, said that it was far too early to predict the effect, and even in hindsight, it would be difficult to say how this would have worked without the concessions, or with American emerging from bankruptcy without a merger, but with a lower cost structure.
The Justice Department, said Mr. Lewis, evidently thought that the settlement and divestiture of gates “was an opportunity that did not exist before, to open some of these hubs up and get some of these so called low-cost carriers in there.”
A version of this article appears in print on November 14, 2013, on page B9 of the New York edition with the headline: Concession in Airline Merger Is Criticized.
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September 10, 2013 6:08 pm
Uralkali says it has no plans to rejoin potash cartel
By Courtney Weaver in Moscow
Alexander Voloshin, Uralkali chairman
Potash producer Uralkali has no plans to resume relations with Belarusian partner Belaruskali after a month-long escalation of tensions between Moscow and Minsk.
Alexander Voloshin, Uralkali’s chairman, said the Russian company had made a permanent decision to leave its trade partnership with Belaruskali after the latter began selling potash outside the two groups’ trade cartel, the Belarusian Potash Company.
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The company has adopted a strategy of prioritising volumes over price and “the new strategy does not apply to reunification”, Mr Voloshin said in a results conference call with analysts on Tuesday. “The developments of the past few weeks certainly didn’t help reunification,” the chairman added.
On August 26, Belarusian authorities unexpectedly arrested Uralkali’s chief executive Vladislav Baumgertner after he had been invited to Minsk by the Belarusian prime minister. Minsk later issued arrest warrants for the oligarch Suleiman Kerimov, Uralkali’s biggest single investor, and Oleg Petrov, the company’s chief of sales and marketing.
Uralkali denies any of its executives or shareholders are guilty of wrongdoing. The company has called the arrest and allegations “politically motivated”.
While Uralkali’s announcement in late July that it would quit the cartel with Belarus sent the shares of it and other listed potash producers plummeting, Uralkali’s share price is now close to where it was before the announcement, on speculation that Mr Kerimov may sell his 20 per cent stake in the company and the conflict with Belarus will be resolved.
Russian media reports have named four potential tycoon buyers for Mr Kerimov’s stake. But Uralkali has declined to comment on the reports. “We don’t have any additional information from our big shareholders concerning potential changes in the shareholder structure,” Viktor Belyakov, Uralkali’s chief financial officer, said during the analyst conference call.
On Tuesday Uralkali reported a 53 per cent fall in net profit for the first half of the year and a 29 per cent decline in net revenue. Its executives insisted that the company would soon start to benefit from its new focus on volumes.
Mr Petrov, chief of sales and marketing, said he only expected prices to fall to about $300 a metric tonne, after peaking at $400 before Uralkali’s announcement. The company said prices would likely be held up by demand from Asia as well as Brazil.
Despite Mr Voloshin’s insistence that Uralkali would not rejoin the cartel, Belarus’s authoritarian president Alexander Lukashenko suggested on Tuesday that the company would soon change its mind.
“For some reason I’m confident [Uralkali] will make the appropriate decision, and the Russian leadership will not leave this strong Russian company without attention,” Mr Lukashenko said, according to Belarusian news services. “Sooner or later, in order to reestablish the status quo and what was earlier, the Russians will come to us.”
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Group 4
04AUG2013
Justice Department Proposes Remedy for Apple’s Antitrust Violations in e-Book Market
By Jeffrey May, Wolters Kluwer Law & Business
The Department of Justice Antitrust Division on Friday filed its proposed remedy with the federal district court in New York City, addressing Apple Inc.’s role in a conspiracy among publishers to fix retail prices for electronic books, or e-books. Following a bench trial, the court last month found Apple liable in an action brought by the Justice Department and 33 states and territories. At that time, the court said it would entertain the plaintiffs’ request for injunctive relief and damages at a later date.
According to the government’s Memorandum of Law in Support of Proposed Injunction, the proposed final judgment “will halt Apple’s anticompetitive conduct, restore lost competition, and prevent recurrences of the same or similar violations of the antitrust laws.” The proposed final judgment incorporates key aspects of the consent decrees entered against the settling publisher defendants—Hachette Book Group (USA), HarperCollins Publishers L.L.C., Simon & Schuster Inc., Holtzbrinck Publishers LLC, which does business as Macmillan, and Penguin Group (USA). However, it also includes other requirements that the government contends are “tied to the Court’s specific findings regarding Apple’s misconduct.”
The government identifies three types of obligations that the proposed final judgment imposes on Apple:
prohibitions on conspiratorial conduct for which Apple was found liable, such as fixing prices, facilitating collective action by publishers, enforcing existing retail price most favored nation (MFN) clauses against publishers or agreeing to any new ones;
affirmative obligations to undo the harm caused by the conspiracy, such as terminating its existing agency agreements with each of the publisher defendants and allowing competing e-bookstores to include hyperlinks to their own e-bookstores within their e-book apps; and
antitrust compliance and oversight requirements, including the hiring of a new full-time internal Antitrust Compliance Officer and the court appointment of an External Compliance Monitor to oversee Apple’s compliance with the proposed final judgment and to oversee Apple’s internal antitrust compliance provisions.
With respect to the conduct restrictions, the government contends that the “provisions largely mirror provisions of the Publisher Defendant consent decrees.” It was noted, however, that there are two “expansions” to restrict Apple’s pricing authority. The MFN restriction on Apple lasts for five years rather than two as with the settling publishers. In addition, there is no carve-out allowing Apple to agree that its gross margins must be at least zero across a Publisher Defendant’s entire catalog.