The U.S. Justice Department, currently analyzing the proposed - merger for antitrust concerns, should be wary of relying on the market presence of to hold down post-merger fares, the (GAO) cautions.
The GAO’s warning relies on a study published in the May issue of the Transportation Research Board’s journal, and was delivered to Congress by the GAO in June 19 testimony to the Senate’s aviation subcommittee on how the merger might affect markets.
The Justice Department (DOJ) has relied in the past on the “Southwest effect”—the fare-lowering tendency observed in the past when Southwest entered a market—as part of its reasoning for deciding not to challenge mergers. In 2010, for example, the DOJ cited the relinquishment of 36 slots by Continental Airlines to Southwest at Newark Liberty International Airport as alleviating its concerns about Continental’s proposed merger with.
Decision-making at the Transportation Department () also has been influenced by the low-cost carrier.
“DOJ and DOT’s analysis of merger impacts have relied on an expectation that entry by low-cost airlines, especially Southwest, would check airline fare increases following a merger,” Gerald Dillingham, the GAO’s director, infrastructure issues, said in his June 19 testimony. “However, that practice might erode as Southwest expansion has slowed and it recently merged with a key low-cost rival, reducing the number of low cost airlines that might challenge post-merger fare increases.”
Dillingham cites the recent paper in the Transportation Research Record by Sakib bin Salam, who completed the study as a graduate research fellow at the Transportation Research Board, and B. Starr McMullen, an Oregon State University economics professor who teaches transportation economics.
Their research comparing fares from the third quarters of 2005 and 2010 found that Southwest raised fares more in markets affected by the-Northwest Airlines and US Airways-America West mergers than in other markets—most notably when the market did not include another low-cost carrier competitor.
For example, in the Las Vegas-Philadelphia market, in which America West and US Airways had a combined pre-merger market share of nearly 58%, Southwest fares increased by more than 51%. But in the Las Vegas-Detroit market, where the combined pre-merger share reached 74%, Southwest fares decreased 1.6%, which the study’s authors say could be attributable to’ 17% share.
In instance after instance, they say, “Southwest’s fares either decreased or rose by less when the company was facing direct or adjacent competition from a low-cost carrier.” Absent that, the fare increase over the five-year period ranged from 35%-66% in 10 of the markets studied.
“DOJ’s approval of Southwest’s merger with AirTran, its biggest LCC competitor and strongest deterrent in raising fares in merger-affected markets, raises questions about Southwest’s ability to continue as a suitable deterrent to post-merger fare hikes,” they add.
The GAO’s testimony to Congress also included an analysis of 2011 and 2012 ticket data that showed combining American and US Airways would result in a loss of one “effective competitor” in 1,665 airport-pair markets, when connecting itineraries are considered part of the count. But the GAO added that “the great majority of these markets also have other effective competitors.”
Also, the DOJ often is more focused on loss of competition on non-stop routes; the two carriers overlap on only 12 of those, seven of which have no other competitors.