Airline Mergers: Issues Raised by the Proposed Merger of American Airlines and US Airways
Published: 2013-06-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the potential implications of the  merger proposal recently announced by American Airlines (American)  and US Airways. In February 2013, these two airlines announced plans  for American to merge with US Airways through a stock swap the airlines  valued at $11 billion. This follows the acquisition of Northwest Airlines  (Northwest) by Delta Air Lines (Delta) in 2008, the merger of United  Airlines (United) and Continental Airlines (Continental) in 2010, and  Southwest Airlines’ (Southwest) acquisition of Air Tran Airways (AirTran),  in 2011. If approved by the Department of Justice (DOJ), the American- US Airways merger would surpass United’s in terms of number of  employees, seat capacity, and operating revenues to create the largest  passenger airline in the United States. However, as with any merger of  this magnitude, this proposal is being examined by DOJ with assistance  from the Department of Transportation (DOT) to determine if the potential  benefits for consumers outweigh the potential negative effects.
Extensive research and the experience of millions of Americans  underscore the benefits that have flowed to most consumers from the  1978 deregulation of the airline industry, including dramatic reductions in  fares and expansion of service. These benefits are largely attributable to  increased competition from the entry of new airlines into the industry and  established airlines into new markets. At the same time, however, airline  deregulation has not benefited everyone; some communities—especially  smaller communities—have suffered from relatively high airfares and a  loss of service. We have been analyzing aviation competition issues since  enactment of the Airline Deregulation Act of 1978. Our work since 2000  has focused on airline competition and industry performance, including  the financial health of the passenger airline industry, the growth of low  cost airlines, changing business models of airlines, and prior mergers. In  the airline context, DOJ has the primary responsibility to evaluate most  mergers in order to carry out its antitrust responsibilities. In addition,  American remains under Chapter 11 bankruptcy protection, however the  bankruptcy court approved the merger with US Airways in May 2013.
My statement today presents the (1) role of federal authorities in  reviewing merger proposals, (2) key factors motivating airline mergers in  recent years, and (3) implications of merging American and US Airways.  My testimony is based on several reports we previously prepared for this  Committee—our 2008 report on the potential effects of the proposed  merger between Delta and Northwest and our 2009 report on the financial  condition of the airline industry and the various effects of the industry’s  contraction on passengers and communities—as well as our 2010  Statement for this Committee on the United-Continental merger and  other past work on aviation issues since 2000. In addition, we conducted  analysis of the proposed American and US Airways merger, including  some analysis of the airlines’ financial, labor, fleet, and market conditions.  To describe the role of federal authorities, in particular DOJ and DOT, in  reviewing airline merger proposals we relied on information developed for  our 2008 report and updated it as necessary. For example, we reviewed  new merger guidelines issued in 2010 and recent merger decisions. To  provide an overview of the factors motivating airline mergers in recent  years, we relied on information developed from past reports on the airline  industry and updated it as necessary. For example, we reviewed  American Airlines bankruptcy and merger documents. To identify the  implications of the proposed merger of American and US Airways, we  reviewed airline documents about the merger, financial analyst reports,  and analyzed data submitted by the airlines to DOT since 2002 (BTS  Form 41 financial data, origin and destination ticket sample, and  operations). We also analyzed airline schedule data. We assessed the  reliability of these data by (1) performing electronic testing of required  data elements, (2) reviewing existing information about the data and the  system that produced them, and (3) interviewing agency officials  knowledgeable about the data. We determined that the data were  sufficiently reliable for the purposes of this testimony.
We conducted this work in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The airline industry has experienced considerable merger and acquisition  activity since its early years; especially immediately following deregulation  in 1978. Figure 1 provides a timeline of mergers and acquisitions for the  four largest surviving airlines, assuming an American–US Airways  merger, based on passengers served. A flurry of mergers and  acquisitions occurred during the 1980s, when Delta and Western Airlines  merged, United acquired Pan Am’s Pacific routes, Northwest acquired  Republic Airlines, and American and Air California merged. In 1988,  merger and acquisition review authority was transferred from DOT to  DOJ. Since 2000, American acquired the bankrupt airline TWA in 2001,  America West acquired US Airways in 2005, while the latter was in  bankruptcy; Delta acquired Northwest in 2008; United acquired  Continental in 2010; and Southwest acquired AirTran in 2011. Certain  other attempts at merging since 2000 failed because of opposition from  DOJ or employees and creditors. For example, in 2000, an agreement  was reached that allowed Northwest to acquire a 50 percent stake in  Continental (with limited voting power) to resolve the antitrust suit brought  by DOJ against Northwest’s proposed acquisition of a controlling interest  in Continental. A proposed merger of United and US Airways in 2000  also resulted in opposition from 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. Although DOJ expressed its intent to sue to block the transaction,  the parties abandoned the transaction before a suit was filed. In 2006, the  proposed merger of US Airways and Delta fell apart because of  opposition from Delta’s pilots and some of its creditors, as well as its  senior management.
Since deregulation in 1978, the financial stability of the airline industry  has become a considerable concern for the federal government due, in  part, to the level of financial assistance it has provided to the industry  through assuming terminated pension plans and other forms of  assistance. From 1979 through 2012, there have been at least 194 airline  bankruptcies, according to Airlines for America (A4A), an airline trade  group. While most of these bankruptcies affected small airlines that were  eventually liquidated, 4 of the more recent bankruptcies prior to  American’s (Delta, Northwest, United, and US Airways) are among the  largest corporate bankruptcies ever, excluding financial services firms.  During these bankruptcies, United and US Airways terminated the defined  benefit pension plans for their labor groups and $9.7 billion in claims were  shifted to the Pension Benefit Guarantee Corporation (PGBC). Further,  to respond to the financial shock to the industry from the September 11,  2001, terrorist attacks, the federal government provided airlines with $7.4  billion in direct assistance and authorized $1.6 billion (of $10 billion  available) in loan guarantees to six airlines.
Although the airline industry has experienced numerous mergers and  bankruptcies since deregulation, growth of existing airlines and the entry  of new airlines have contributed to a steady increase in capacity, as  measured by available seat miles. Previously, we reported that although  one airline may reduce capacity or leave the market, capacity returns  relatively quickly through new airline entry and expansion of the  remaining airlines. However, in recent years this dynamic may be  changing. Domestic capacity growth stalled in 2008 owing to the  recession and high fuel prices and has not rebounded despite a  strengthening economy and demand for air travel (see fig. 2).
In recent years, a key factor limiting capacity growth has been high fuel  prices, according to industry analysts. In the early part of the last decade  while network airlines were restructuring their costs through bankruptcy,  low cost airlines like Southwest and JetBlue expanded owing to lower  costs, especially for labor (see fig. 3). As a result, while in 2002, network  airlines offered 67 percent of domestic seat capacity versus 23 percent  for low cost airlines, by October 2012, network airlines share of domestic  seats had fallen to 52 percent and low cost airline’s share had risen to 33  percent. However, the expansion of low cost airlines in recent years may  have slowed owing to higher fuel costs that diminished their relative cost  advantage over network airlines. With fuel costs consuming a greater  proportion of airline operating costs for all airlines, any cost advantage  that low cost airlines had with respect to labor costs over network airlines  is diluted.
Finally, 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. 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. In 1993, DOT published a  report entitled the The Southwest Effect that concluded that low cost  airlines like Southwest lowered fares in markets they entered and that  DOT policy should be to encourage the growth of Southwest and airlines  like it. Congressional action and DOT policy in subsequent years,  especially in the award of operating rights called “slots” at congested  airports like Washington Reagan and New York LaGuardia, favored new  entrant airlines like Southwest. Similarly, DOJ cited the relinquishment of  36 slots by Continental to Southwest at Newark Liberty International  Airport as alleviating its principle concerns in determining not to object to  the United–Continental merger in 2010. A November 2008 paper by  Goolsbee and Syverson, found that even the threat of entry by Southwest  in a market helped to lower fares in that market, but only if Southwest  already operated at one of the market endpoints. More recently though,  a 2013 study suggests that the Southwest Effect may not be as prominent  following a merger. This study found that Southwest raised fares in  markets following the mergers of Delta–Northwest and US Airways– America West more than average fare increases overall, unless another  low cost airline was already in that market. The merger of Southwest  with a key rival in 2011 could further lessen the potential that Southwest  would deter or counteract higher fares in markets following a merger.
section_title: The Department of Justice’s Antitrust Review Is a Critical Step in the Airline Merger and Acquisition Process
paragraphs: 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. In  addition, DOT plays an advisory role for DOJ and, if the combination is  consummated, may conduct financial and safety reviews of the combined  entity under its regulatory authority. Finally, because American has been  under Chapter 11 bankruptcy protection since 2011, the merger also  required federal bankruptcy court approval.
Most proposed airline mergers or acquisitions must be reviewed by DOJ  as required by the Hart-Scott-Rodino Antitrust Improvements Act (Act).  In particular, under the Act, an acquisition of voting securities or assets  above a set monetary amount must be reported to DOJ (or the FTC for  certain industries) so the department can determine whether the merger  or acquisition poses any antitrust concerns. To analyze whether a  proposed merger or acquisition raises antitrust concerns—whether the  proposal will likely create, enhance, or entrench “market power” or  facilitate its exercise—DOJ follows an analytical process set forth in the  Guidelines. The commentary to the Guidelines identifies five factors that  the department considers in reviewing a merger but notes that their  importance varies according to the nature of the industry and the scope of  the merger. 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.
In making the decision whether the proposed merger is likely  anticompetitive, DOJ considers the particular circumstances of the  merger as it relates to the Guidelines’ five-part analysis. The greater the  potential anticompetitive effects, the greater the offsetting verifiable  efficiencies for DOJ to clear a merger must be. However, according to the  Guidelines, efficiencies almost never justify a merger if it would create a  monopoly or near monopoly. If DOJ concludes that a merged airline  threatens to deprive consumers of the benefits of competitive air service,  then it will seek injunctive relief in a court proceeding to block the merger  from being consummated. 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. In some cases, the parties may agree to modify the  proposal to address anticompetitive concerns identified by DOJ—for  example, selling airport assets or giving up slots at congested airports—in  which case DOJ ordinarily files a complaint with the court along with a  consent decree that embodies the agreed-upon changes.
DOT conducts its own analyses of airline mergers and acquisitions. While  DOJ is responsible for upholding antitrust laws, DOT reviews the merits of  any airline merger or acquisition and submits its views and relevant  information in its possession to DOJ. DOT also provides some essential  data—for example, the airlines’ routes and passenger traffic—that DOJ  uses in its review. In addition, presuming the merger moves forward after  DOJ’s review, DOT can undertake several other reviews if the situation  warrants. Before commencing operations, any new, acquired, or merged  airlines must obtain separate authorizations from DOT—“economic”  authority from the Office of the Secretary and “safety” authority from the  Federal Aviation Administration (FAA). The Office of the Secretary is  responsible for deciding whether applicants are fit, willing, and able to  perform the service or provide transportation. To make this decision, the  Secretary assesses whether the applicants have the managerial  competence, disposition to comply with regulations, and financial  resources necessary to operate a new airline. FAA is responsible for  certifying that the aircraft and operations conform to the safety standards  prescribed by the Administrator, for instance, that the applicants’  manuals, aircraft, facilities, and personnel meet federal safety standards.  Also, if a merger or other corporate transaction involves the transfer of  international route authority, DOT is responsible for assessing and  approving all transfers to ensure that they are consistent with the public  interest.
In addition, American has been under federal bankruptcy protection since  November 2011. In May 2013, the federal judge overseeing the  bankruptcy approved American’s merger with US Airways as part of the  reorganization. Shareholders of US Airways must also approve the  merger for it to be consummated.
section_title: Financial Benefits to Shareholders Drive Airline Mergers
paragraphs: On February 13, 2013, American and US Airways announced an  agreement to merge the two airlines. The airlines have also notified DOJ  of their intent to merge. 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.  The proposed merger will be financed exclusively through an all stock  transaction with a combined equity value of $11 billion split roughly with  72 percent ownership to American shareholders and 28 percent to US  Airways shareholders. The airlines have not announced specific plans for  changes in their networks or operations that would occur if the  combination is consummated, but the airlines’ conservatively estimate  that the merger will result in $1.4 billion in annual benefits to shareholders  of the new airline as outlined in table 1.
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. As we reported in May 2010, mergers may  generate additional demand by providing consumers more domestic and  international city-pair destinations. Airlines with expansive domestic and  international networks and frequent flier benefits particularly appeal to  business traffic, especially corporate accounts. 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.
At the same time, capacity reductions in certain markets from a merger or  acquisition could also serve to generate additional revenue through  increased fares on some routes. Some studies of airline mergers and  acquisitions during the 1980s showed that prices were higher on some  routes from the airline’s hubs soon after the combination was  completed. Several studies have also shown that increased airline  dominance at an airport results in increased fare premiums, in part,  because that dominance creates competitive barriers to entry. At the  same time, though, even if the combined airline is able to increase prices  in some markets, the increase may be transitory if other airlines enter the  markets with sufficient presence to counteract the price increase. In an  empirical study of airline mergers and acquisitions up to 1992, Winston  and Morrison suggest that being able to raise prices or stifle competition  does not play a large role in airlines’ merger and acquisition decisions.
The other key financial benefit that airlines consider when merging with or  acquiring another airline is the cost reduction that may result from  combining complementary assets, eliminating duplicative activities, and  reducing capacity. As we reported in May 2010, a merger or acquisition  could enable the combined airline to reduce or eliminate duplicative  operating costs, such as duplicative service, labor, and operations  costs—including inefficient (or redundant) hubs or routes—or to achieve  operational efficiencies by integrating computer systems and similar  airline fleets. By increasing the fleet size, airlines can increase their  ability to match the size of aircraft with demand and adjust to seasonal  shifts in demand. Other cost savings may stem from facility consolidation,  procurement savings, and working capital and balance sheet  restructuring, such as renegotiating aircraft leases. Airlines may also  pursue mergers or acquisitions to more efficiently manage capacity—both  to reduce operating costs and to generate revenue—in their networks.  Given recent economic pressures, particularly increased fuel costs, the  opportunity to lower costs by reducing redundant capacity may be  especially appealing to airlines seeking to merge. 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.
Despite these benefits, there are several potential barriers to successfully  consummating a merger, potentially reducing the benefits and increasing  the costs. As we reported in July 2008, the most significant operational  challenges involve the integration of workforces, organizational cultures,  aircraft fleets, and information technology systems and processes,  challenges that can be difficult, disruptive, and costly as the airlines  integrate. For example, in the case of the American–US Airways  merger, with unions supporting the merger, pilots’ and others’ pay will  increase by $360 million annually if the merger is completed. However,  merging workforces can take time–for example, US Airways’ pilot  seniority lists have not been resolved following their merger with America  West in 2005. Integrating technology, especially reservation systems, can  also be difficult and costly. For example, United has struggled to integrate  computer and reservation systems following its merger with Continental in  2010.
section_title: The Proposed American and US Airways Merger Would Create The Largest U.S. Passenger Airline
paragraphs: 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. The  combined airline would also have the largest workforce among U.S.  airlines based on February 2013 employment statistics, with a combined  101,197 full-time equivalent employees (table 3). The airlines’ workforces  are represented by different unions, except dispatchers (table 4). Some of  American’s unions have already signed memorandums of understanding  for future contracts if the airlines are merged. The combined airline would  need to integrate 1,215 aircraft (table 5). American has a predominantly  Boeing fleet, while US Airways has a largely Airbus fleet. In addition, in  July 2011, American placed a $40 billion order for 200 Boeing 737 series  and 260 Airbus A320 series aircraft. Despite its bankruptcy, the  bankruptcy court allowed the order to proceed. American has also been  trying to sell its regional airline, American Eagle, and its fleet of almost  280 aircraft.
If approved by DOJ, the airlines would combine two distinct networks  supported by different hubs, where the airlines connect traffic feeding  from smaller airports. American’s major hubs are in Chicago O’Hare  (ORD), Dallas (DFW), New York (JFK), Los Angeles (LAX), and Miami  (MIA), and US Airways has hubs in Charlotte (CLT), Philadelphia (PHL),  Phoenix (PHX), and Washington D.C. (DCA), as shown in figures 4 and  5.
A key concern for DOJ in reviewing an airline merger is the loss of a  competitor on nonstop routes. The loss of a competitor that serves a  market on a nonstop basis is significant from a competitive perspective  because nonstop service is typically preferred by most passengers and  routes that only have nonstop service do not benefit from the availability  of alternative, albeit lower valued, connecting service. Based on October  2012 traffic data, the two airlines overlap on 12 nonstop airport-pair  routes, which are listed in figure 6. For 7 of these 12 nonstop  overlapping airport-pairs (generally between an American hub and a US  Airways hub) there are currently no other competitors on a nonstop basis  and in only one instance is a low cost airline (Southwest) present. And  unlike the United—Continental merger, where most of the endpoint cities  had other airports in the region, fewer of these airport pairs have  significant other airports in the region. This is especially true for the  Charlotte (CLT)—Dallas (DFW) and Phoenix (PHX)—DFW pairs where  few alternate options are available at either endpoint.
The amount of overlap in airport-pair combinations is far more when  considering all connecting traffic; however, on most of the overlapping  airport-pair markets, there is at least one other competitor. 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). As the figure  shows, compared to the last major airline merger in 2010 between United  and Continental, there would be 530 more airport pairs losing an effective  competitor. This would affect 18 million more passengers compared to  the merger between United and Continental. In addition, any effect on  fares may be dampened by the presence of a low cost airline in 473 of  the 1,665 airport pairs losing a competitor. 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.
If approved by DOJ, the combined airline could be expected to rationalize  its network over time, including where it maintains hubs. The two airlines  do not share any airport hubs; therefore, the amount of airport market  share overlap that currently exists at these hubs is relatively small but  could grow at some hubs while contracting at others under a merger (see  table 6). For example, New York could serve as a better hub and  international gateway than Philadelphia in the Northeast, while Miami  could be a better hub than Charlotte in the Southeast. In addition, 59 out  of 116 domestic airports served by US Airways from Charlotte are also  served by American from Miami (MIA). Closing hubs is not  unprecedented, following the American acquisition of TWA in 2001, St  Louis ceased to be an American hub and following the Delta–Northwest  merger, service at Delta’s hub in Cincinnati and Northwest’s hub in  Memphis has been greatly reduced.
Three of the airports noted in table 6 are slot-controlled airports with  restricted access for new entrants or expanded service. As we reported  last year, slot-controlled airports have more limited competition and tend  to have higher fares compared to other hub airports. Based on February  2012 slot holdings, a combined American and US Airways would control  one-third of the slots at LaGuardia and two-thirds of the slots at  Washington Reagan as noted in Table 7.
Both American and US Airways have worldwide networks and serve  many international destinations. Between the two airlines, they serve 107  international cities from airports in the United States, 37 of them in  common, according to published February 2013 schedules. However, the  two airlines do not directly compete on any of the same international city  pair markets, though both serve slot-controlled London Heathrow airport  with more than 830,000 passengers over the last year. For international  routes, U.S. airlines aggregate traffic from many domestic locations at a  hub airport where passengers transfer onto international flights. In other  words, at Philadelphia, where US Airways has a large hub, passengers  traveling from many locations across the U.S. transfer onto US Airways’  international flights. Likewise, American aggregates domestic traffic at  New York’s JFK for many of its international flights to some of the same  destinations. As such, a passenger traveling from, for example Nashville,  may view these alternative routes to a location in Europe as substitutable.
Whether service to international destinations from different domestic hubs  will be viewed as a competitive concern will likely depend on a host of  factors, such as the two airlines’ market share of traffic to that destination  and whether there are any barriers to new airlines entering or existing  airlines expanding service at the international destination airports. US  Airways is part of the larger Star Alliance, and American is a member of  the smaller oneworld alliance.  US Airways has announced it will leave  the Star Alliance and join American in oneworld as part of the merger.  The DOT has authority to approve antitrust immunity applications, but  DOJ may also comment if it has antitrust concerns. According to a 2011  paper prepared by DOJ economists, “Over the past 17 years, DOT  granted immunity to over 20 international alliance agreements, permitting  participants in these alliances to collude on prices, schedules, and  marketing.” They found that in granting immunity to larger groups of  airlines in the three major international alliances, the number of  independent competitors over the North Atlantic was significantly reduced  adversely affecting consumers through higher fares. Because both  airlines are already part of immunized alliances it is unclear what effect, if  any, this merger might have on competition in international service.  According to DOT officials responsible for reviewing and approving the  immunity requests, the agency has analyzed and documented the impact  of immunized alliances in its many public orders and has concluded that  in its experience, integrated airline alliances enable a number of valuable  consumer benefits, including lower prices for many travelers.
Chairman Cantwell, Ranking Member Ayotte, and Members of the  Subcommittee, this concludes my prepared statement. I would be happy  to answer any questions that you may have at this time.
section_title: Contact and Acknowledgments
paragraphs: For further information on this testimony, please contact Gerald L.  Dillingham, Ph.D. at (202) 512-2834 or by email at dillinghamg@gao.gov.  In addition, contact points for our Offices of Congressional Relations and  Public Affairs may be found on the last page of this statement. Individuals  making key contributions include Paul Aussendorf (Assistant Director);  Amy Abramowitz; Susan Fleming; Dave Hooper; Delwen Jones; Brooke  Leary; Dominic Nadarski; Josh Ormond; Gretchen Snoey; and Carrie  Wilks.
section_title: Related GAO Products
paragraphs: Airline Mergers: Issues Raised by the Proposed Merger of United and  Continental Airlines. GAO-10-778T. Washington, D.C.: May 27, 2010.
April 21, 2009. Commercial Aviation: Airline Industry Contraction Due to  Volatile Fuel Prices and Falling Demand Affects Airports, Passengers,  and Federal Government Revenues. GAO-09-393. Washington, D.C.:  April 21, 2009.
Airline Industry: Potential Mergers and Acquisitions Driven by Financial  Competitive Pressures. GAO-08-845. Washington, D.C.: July 31, 2008.
Airline Deregulation: Reregulating the Airline Industry Would Likely  Reverse Consumer Benefits and Not Save Airline Pensions.  GAO-06-630. Washington, D.C.: June 9, 2005.
Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms  of Underlying Structural Issues. GAO-05-945. Washington, D.C.: Sept.  30, 2005.
Commercial Aviation: Preliminary Observations on Legacy Airlines’  Financial Condition, Bankruptcy, and Pension Issues. GAO-05-835T.  Washington, D.C.: June 22, 2005.
Private Pensions: Airline Plans’ Underfunding Illustrates Broader  Problems with the Defined Benefit Pension System. GAO-05-108T.  Washington, D.C.: Oct. 7, 2004.
Transatlantic Aviation: Effects of Easing Restrictions on U.S.-European  Markets. GAO-04-835. Washington, D.C.: Jul. 21, 2004.
Commercial Aviation: Despite Industry Turmoil, Low-Cost Airlines Are  Growing and Profitable. GAO-04-837T. Washington, D.C.: June 3, 2004.
Commercial Aviation: Legacy Airlines Must Further Reduce Costs to  Restore Profitability. GAO-04-836. Washington, D.C.: August 11, 2004.
Commercial Aviation: Financial Condition and Industry Responses Affect  Competition. GAO-03-171T. Washington, D.C.: Oct. 2, 2002.
Commercial Aviation: Air Service Trends at Small Communities since  October 2000. GAO-02-432. Washington, D.C.: March 29, 2002.
Proposed Alliance Between American Airlines and British Airways Raises  Competition Concerns and Public Interest Issues. GAO-02-293R.  Washington, D.C: Dec. 21, 2001.
Aviation Competition: Issues Related to the Proposed United Airlines-US  Airways Merger. GAO-01-212. Washington, D.C: Dec. 15, 2000.
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