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TheStreet Open House

Reed: DOJ Is Wrong on American-US Airways Merger

Stocks in this article: AAMRQ.PKDALLCCUAL

CHARLOTTE ( TheStreet) -- Justice Department regulators have chosen to ignore history and to seek to block the ability of American (AAMRQ.PK) and US Airways (LCC) to compete.

US Airways was tumbling 12% to $16.53 as the DOJ, joined by attorneys general from five states and the District of Columbia, filed in US District Court to block the merger, saying it was bad for consumers to have a healthy, investment-worthy airline industry.

Yes, the historically cyclical airline industry is doing fine now -- filling airplanes, garnering revenues that compensate for high fuel prices, avoiding the temptation to ramp up aircraft orders and facing down international carriers like Emirates that have lower costs and more government support. So it is a good time in the airline industry's history.

Too bad government lawyers cannot see a way to allow that to continue. Anyone who has seen what one weak carrier -- the name "Eastern Airlines" comes to mind -- can do to pricing in the airline industry must now shudder at the thought that our government wants to prevent a merger that would have created a third major global U.S. competitor.

Instead, in the name of "competition," DOJ prefers a situation that will inevitably weaken one of the carriers to the point that it will begin a downward spiral, just as Eastern and Pan Am did three decades ago.

I dont know which carrier will be weakened, but the industry is so competitive, the operating conditions are so difficult and the exogenenous factors are so influential ithat it seems clear that at some point, something bad will happen. It always has.

A quick look at the history of American and US Airways shows that regulatory miscalculation and the vagarcies of history have severely hindered both carriers in the past.

In the case of US Airways, it has always been a disadvantaged airline because it got started in Pittsburgh while competitors had the historic good fortune to start in bigger places that would one day become huge global hubs like Atlanta and Chicago and Dallas.

Eventually, US Airways added Charlotte, through a merger with Piedmont, and built up Philadelphia. But any one with the remotest knowledge of the airline industry can see that the US Airways hubs are secondary hubs. CEO Doug Parker has said regularly that because of its smaller hubs, US Airways collects lower revenue premiums and compensates by paying its employees less money.

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