However, in recent years this dynamic may be  changing. 3). The Department of Justice’s Antitrust Review Is a Critical Step in the Airline Merger and Acquisition Process

The DOJ’s review of airline mergers and acquisitions is a key step for  airlines hoping to consummate a merger. For airlines, as with other  industries, DOJ uses an analytical framework set forth in the Horizontal  Merger Guidelines (the Guidelines) to evaluate merger proposals. The five factors considered by DOJ are:  the relevant product and geographic markets in which the companies  operate and whether the merger is likely to significantly increase  concentration in those markets, which in the case of airlines  principally applies to city-pair markets;  the extent of potential adverse competitive effects of the merger, such  as whether the merged entity will be able to charge higher prices or  restrict output for the product or service it sells; whether other competitors are likely to enter the affected markets and  whether they would counteract any potential anticompetitive effects  that the merger might have posed;  the verified “merger specific” efficiencies or other competitive benefits  that may be generated by the merger and that cannot be obtained  through any other means; and whether, absent the merger or acquisition, one of the firms is likely to  fail, causing its assets to exit the market. For example, a proposed merger of United  Airlines and US Airways was opposed by DOJ, which found that, in its  view, the merger would violate antitrust laws by reducing competition,  increasing air fares, and harming consumers on airline routes throughout  the United States. Financial Benefits to Shareholders Drive Airline Mergers

On February 13, 2013, American and US Airways announced an  agreement to merge the two airlines. The new airline would retain the American name  and headquarters in Dallas-Fort Worth while the current US Airways Chief  Executive Officer would keep that title with the new airline, and the  current American CEO would become Chairman of the new American. A key financial benefit that airlines consider in a merger is the potential for  increased revenues through additional demand (generated by more  seamless travel to more destinations), increased market share, and  higher fares on some routes. The American–US  Airways merger is estimated by airline executives to generate $1.12  billion in revenue synergies from improved network connectivity,  increased corporate and frequent flier loyalty, and optimization in the use  of their aircraft. In the case of the  American–US Airways merger, airline executives estimate that the  merger will allow $640 million in cost savings from reducing overlapping  facilities at airports and in combining purchasing, technology, and  corporate activities. Passenger Airline

If approved by DOJ, the merged American-US Airways would surpass  United as the largest U.S. passenger airline. Table 2 shows that  combining American and US Airways Airlines would create the largest  U.S. airline based on data for the four quarters ending October 2012, as  measured by capacity (available seat miles) and operating revenues. Based on  2011 and 2012 ticket sample data, for 13,963 airport-pairs with a  minimum level of passenger traffic per year, there would be a loss of one  effective competitor in 1,665 airport pair markets affecting more than 53  million passengers by merging these airlines (see fig. 7). The combination of the two  airlines would also create a new effective competitor with at least a  combined 5 percent market share in 210 airport-pairs affecting 17.5  million passengers. The DOT has authority to approve antitrust immunity applications, but  DOJ may also comment if it has antitrust concerns. Related GAO Products

Airline Mergers: Issues Raised by the Proposed Merger of United and  Continental Airlines. Commercial Aviation: Financial Condition and Industry Responses Affect  Competition.
Why GAO Did This Study

In February 2013, American and US Airways announced plans to merge the two airlines and entered into a merger agreement. Valued at $11 billion, the merged airline would retain the American name and be headquartered in Dallas-Fort Worth. This follows the mergers of United Airlines and Continental Airlines in 2010 and the acquisition of Northwest Airlines by Delta Air Lines (Delta) in 2008. This latest merger, if not challenged by DOJ, would surpass these prior mergers in scope to create the largest passenger airline in the United States. The passenger airline industry has struggled financially over the last decade and these two airlines believe a merger will strengthen them. However, as with any merger of this magnitude, this proposal will be examined by DOJ to determine if its potential benefits for consumers outweigh the potential negative effects.
This testimony focuses on (1) the role of federal authorities in reviewing merger proposals, (2) key factors motivating airline mergers in recent years, and (3) the implications of merging American and US Airways. To address these objectives, GAO drew from its previous reports on the potential effects of prior airline mergers and the financial condition of the airline industry issued from July 2008 through May 2010. GAO also analyzed DOT's airline operating and financial data, airline financial documents, and airline schedule information since 2002.

What GAO Found

The Department of Justice's (DOJ) antitrust review will be a critical step in the proposed merger between American Airlines (American) and US Airways. DOJ uses an integrated analytical framework set forth in the Horizontal Merger Guidelines to determine whether the merger poses any antitrust concerns. Under that process, DOJ assesses, among other things, the extent of likely anticompetitive effects of the proposed merger in the relevant markets, in this case, airline city-pair markets, and the likelihood that other airlines may enter these markets and counteract any anticompetitive effects, such as higher fares. DOJ also considers efficiencies that a merger or acquisition could bring--for example, consumer benefits from an expanded route network. The Department of Transportation (DOT) aids DOJ's analysis.
Airlines seek mergers to reduce costs and improve revenues. GAO has previously reported that mergers can result in increased revenues by offering improved network connections and schedules, but also through higher fares on some routes. Cost savings can be generated by eliminating redundancies and operational efficiencies, including reducing service, but can be muted by problems in combining different aircraft, technologies, and labor forces. In the case of US Airways and American, they estimate that a merger would yield $1.4 billion in annual benefits from increased revenues and reduced costs.
If not challenged by DOJ, the merged American would surpass United to become the largest U.S. passenger airline by several measures. While US Airways and American overlap on only 12 nonstop routes, no other nonstop competitors exist on 7 of those 12. Our analysis of 2011 and 2012 ticket data also showed that combining these airlines would result in a loss of one effective competitor (defined as having at least 5 percent of total airport-pair traffic) in 1,665 airport-pair markets affecting more than 53 million passengers while creating a new effective competitor in 210 airport-pairs affecting 17.5 million passengers. However, the great majority of these markets also have other effective competitors.