Cong. Study Criticizes United-US Air Merger

The proposed United Airlines-US Airways merger would likely be detrimental to far more of America’s flying public than it would benefit, a congressional investigation released today concluded.

The General Accounting Office study also found the $4.3 billion deal, which would allow United, already the world’s largest carrier, to dwarf by far its next-largest competitor, would touch off other airline mergers. That has been a major worry of both congressional critics and federal regulators still considering the proposed pairing.

“If this merger goes forward, customers will have little choice, few options, higher fares and reduced service,” said Rep. Jim Oberstar, D-Minn., ranking member of the House Transportation Committee, who requested the report from Congress’ investigative arm.

The GAO investigation found the merger of the nation’s largest and sixth-largest airlines, first announced seven months ago, would have a far larger impact than Northwest Airlines’ proposal to acquire a controlling stake in Continental Airlines. Northwest agreed to sharply diminish the deal in an out-of-court settlement after the Justice Department challenged it in court.

The United-US Airways combination would control more than 25 percent of the U.S. market and take in close to $9 billion more in revenue than the next-largest carrier, the report concluded.

“The merger of United and US Airways as proposed, even with the divestiture of selected assets to the new DC Air, would create an airline so large and with dominance in so many markets that, according to airline observers, it would spur further industry consolidation,” the GAO said.

‘Pro-Competitive,’ Says Airline

United spokesman Andy Plews said the airlines disagree with the GAO’s conclusions.

“The facts are, from our perspective, the merger is pro-competitive,” Plews said. He cited planned new routes and increased access for small markets.

In a statement, US Airways criticized Oberstar for saying the report supports his opposition to the merger plan.

“Given that the report, on its own terms, failed to take into account US Airways’ financial position — and given that the status quo is not an option — the GAO’s mixed review of the merger … is no surprise,” the statement said.

US Airways contends that because its costs of operation are so large, the highest in the industry, its only hope for survival is a merger.

Eliminating Choice in Many Markets

GAO investigators concluded that the merger has the potential to reduce competition in 290 of the top 5,000 U.S. markets, or city-pairs, in which about 16 million passengers traveled in 1999. For 43 of those, serving 4.1 million people, competition could be eliminated.

The deal also would increase significantly the number of markets in which a single airline operates more than half the flights. The new airline would dominate 1,156 of the top 5,000 pairs, affecting 61.1 million passengers, the GAO said.

Finally, the merger could make “potential entry by new airlines in key markets more difficult,” the study concluded.

The report noted some possible benefits. GAO investigators agreed with United and US Airways executives who have argued it would provide customers with more nonstop and direct service and expand available frequent-flyer destinations.

In addition, the combined airline could increase competition in 65 of the largest city-pairs, which serve 2.9 million passengers, and could add flights on 256 small-market routes that saw 759,000 fliers in 1999, the GAO said.

Federal regulators could be near a decision on the merger proposal.

Justice to Weigh in

The Justice Department, with advice from the Transportation Department, is in the process of determining whether it would violate antitrust law. It also is being reviewed by the European Commission, which recently delayed its decision until Jan. 12, and by state attorneys general. US Airways shareholders approved the deal in October.

The Wall Street Journal, cited unidentified sources, reported today that state and federal antitrust enforcers are prepared to challenge the merger, although a final decision has not been made. The newspaper also said the companies recently entered settlement talks with Justice officials and may offer a wider sale of assets than previously planned.

Neither United spokesman Plews, nor Justice Department spokeswoman Gina Talamona, would comment on the status of the government’s review.

Many analysts and observers have said the airlines’ plan to spin off most of US Airways’ routes and assets at Washington’s Reagan National Airport to create the new regional carrier DC Air may not be enough. It is widely believed that, in order to placate regulators, the two airlines may be required to divest significant additional critical routes and assets.

Some believe the competitive problems cannot be fixed.

“There is no amendment to this proposed merger that would make it better,” Oberstar said.