Critics of airline mergers launch countermoves

Is bigger better? Apparently, United Airlines and US Airways think so.

But as the US Justice Department intensifies its scrutiny of their proposed merger, the biggest aviation union in US history, a chorus of critics is lining up to warn: Consumers beware - further consolidation could lead to higher prices and poorer service.

And some lawmakers are taking note, proposing for the first time to reregulate key elements of the airline industry, which could include taking back control of coveted gates at the busiest hub airports to increase competition. Others are even talking about setting prices to prevent gouging.

"The government's going to have to get re-involved. The system is verging on failure," says Dean Headley, coauthor of the National Air Quality Rating, an aviation survey. "It's clear to me that the airlines know what should be done, but they will not do it until they are forced to."

The United-US Airways merger, if approved, would come on the heels of the Justice Department's recent nod of American Airlines' takeover of struggling TWA. The two deals would leave two companies, American and United, controlling more than 45 percent of US commercial air travel - an unprecedented situation.

That, in turn, is expected to spark even more consolidation as other carriers look for partners to compete better with the two big kids on the block.

The result, experts warn, could weaken financially the entire aviation industry.

But United contends such concerns are unwarranted. In fact, the company says the merger is "pro-competitive" and will improve service and prices, particularly to small and medium-size cities on the East Coast.

"There is incredibly little overlap between routes, and we've said we're not only going to maintain existing service, we are going to grow - 89 new nonstops will be introduced as a result of this transaction," says Susana Leyva, a United spokeswoman. "If you look at the facts in a dispassionate manner, this merger brings strong new competition into the marketplace."

But coming in an era of high customer frustration with the airline industry's service, including three years of record delays, many critics are doubtful.

"People are really nervous about this," says Rep. Louise Slaughter (D) of New York. "They're already pretty wrought up as it is, and they haven't seen anything yet."

Representative Slaughter has introduced a bill calling for a one-year moratorium on all airline mergers to give the new administration time for a more comprehensive study of their long-term impact. It's part of a slew of legislation introduced recently that would get the government more involved in the nation's airline industry, which was deregulated in 1978. In addition to calls for reregulating the gates at hub airports, proposals include tough passengers' rights bills to improve service.

Even though a strong antiregulatory fervor still reigns on Capitol Hill, and the airline industry gave a record $6.5 million to members last year, more legislators are beginning to listen to dissatisfied passengers and aviation experts like Paul Michael Dempsey.

"If the Justice Department approves the United merger, it will give United such a disproportionate market share vis-a-vis its competitors that they would be at an unfair competitive position if [the competitors] also weren't allowed to merge," says Mr. Dempsey, a professor at the University of Denver. "In a very short period of time, we could be down to four or five major airlines."

Transportation Secretary Norman Mineta opposes such a moratorium, and other additional regulations. But he has said he'd like the department to get more involved in reviewing the antitrust implications of the mergers.

As for the Justice Department, analysts are still unsure what direction the antitrust division will take under its new director, Charles James.

He is a corporate antitrust lawyer, and some analysts believe he'll be less aggressive than his predecessor in the Clinton administration, Joel Klein. During Mr. Klein's tenure, the department blocked Northwest's merger with Continental Airlines and brought a predatory-prices case against American Airlines. That's scheduled to go to court in May.

But some airline analysts say the carriers themselves may want to think twice before merging for their own financial health. United's bottom line is currently not strong, and the merger would require it to take on additional debt. The company has also just signed a record contract with its pilots, and the economy is flirting with a recession.

Add to that the probable response of Delta, Northwest, and Continental, who would become the second-tier airlines.

"Those three will have to become price leaders and do everything they can conceive of in their little minds to [beat] these two other guys," says Darryl Jenkins, director of George Washington University's Aviation Institute. "It's a truism in the airline business that you can't raise the prices unless everyone else does."

The result: They could all compete themselves into the red. "My nightmare of consolidation is that it will leave us with a very unhealthy airline industry, and that seems to me more probable than anything else," says Professor Jenkins.

But United remains upbeat, convinced the merger will be good for consumers and good for United. "This merger brings strong new competition into the marketplace," says Ms. Leyva, "and it also gives customers what they want - the convenience of one strong frequent-flier program and one-ticket and one-carrier access to the world."

(c) Copyright 2001. The Christian Science Monitor