Reed: DOJ Is Wrong on American-US Airways Merger

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.

Onetime CEO Stephen Wolf and then Parker sought to overcome US Airways' historic disadvantages by pursuing mergers with airlines that have better hubs. Wolf's plan for a merger with United ( UAL) fell through. The Justice Department opposed that one too, although the merger's failure resulted primarily from United's loss of interest in the high price Wolf had initially secured.

Apparently, DOJ wants US Airways to continue in the never-never land that Wolf often described as being neither a global airline with a vast international route system nor a low-cost airline.

In the case of American, European regulators for years denied it the ability to pal up with its European partner British Airways. Those regulators let Delta ( DAL) and United form trans-Atlantic joint ventures with European partners, immunized against anti-trust violations. They would not let AMR do the same thing. AMR was not approved until 2010, long after Delta and United.

Joint ventures can add hundreds of millions of dollars in annual revenue, but it takes years to make them work, because partner airlines start out less as partners and more as turf-protectors.

It is, of course, too early to say whether the DOJ will win this battle. When the airlines take this case into court, as they have said they will do, the department will have to defend itself against the reality that it enabled two other very similar airline mergers, which have made the airline industry healthier, and now won't allow this one.

One thing pleased me. I saw that five states joined with the Justice Department in the ruling, but North Carolina did not. Perhaps Governor Pat McCrory, the former mayor of Charlotte, saw the reality that Charlotte Douglas International Airport as well as US Airways employees and Charlotte passengers would benefit from the merger.

North Carolina has become a very silly state over the past several months, with state legislators who have consistently embarrassed many of its residents.

Finally our state did something right. It stayed away from this ridiculous lawsuit.

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

More from Opinion

Qualcomm's Latest Notebook Chip Could Be a Sign of Things to Come from Apple

Qualcomm's Latest Notebook Chip Could Be a Sign of Things to Come from Apple

Broadcom Gains on Solid Results and Guidance: 5 Key Takeaways

Broadcom Gains on Solid Results and Guidance: 5 Key Takeaways

Huawei CFO's Arrest Shows How Unpredictable the Trade War Has Become

Huawei CFO's Arrest Shows How Unpredictable the Trade War Has Become

Waymo's Service Launch Highlights Its Lead -- and How Much Farther It Has to Go

Waymo's Service Launch Highlights Its Lead -- and How Much Farther It Has to Go

Tuesday Turnaround: If the Market Ain't Happy, Ain't Nobody Happy

Tuesday Turnaround: If the Market Ain't Happy, Ain't Nobody Happy