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Competition is Our Lifeblood – So Why is the U.S. Guardian of Competition So Stupid?

November 15, 2013

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For those of us who toil in the new economy – the one where innovation and creativity becomes the driver for growth – we sometimes marvel at the old economy.

So yesterday we had what I can only describe as something incredible. Perhaps I am just not getting how government works or I just am too old to understand how people can do such illogical things.

I am speaking about the US Department of Justice and its bizarre approach to competition. For context allow me to ramble on a bit about the how this came about.

The American Airlines and US Airways merger was never in doubt – just there had to be some jumping up and down by the regulators to complain that perhaps the competition in the US airline market was being eliminated. Here is a great opinion piece from ATW’s editor.

The problem with the merger and any complaint against it was that an objection was the legal equivalent of closing the door long after the horse had bolted. UA+CO, WN+FL, DL+NW all preceded it to create behemoths who will now be in the position to make super profits. In fairness to the DoJ – they were overruled in several of these cases by the DoT who had ultimate jurisdiction. So some resistance was put up by the DoJ in each of the previous mergers but none serious.

Earlier this year the DoT and the DoJ signed off on a massive slot swap between Delta and US Airways between LGA and DCA. This preceded the merger negotiations between AA and US. The end result was a dominant position in NYC (LGA and JFK) by Delta and DCA with US. With the merger between AA and US – the result was a real consolidation of power. only 4 airlines matter really in the USA. These are: The new AA, UA, DL and Southwest. the next tier of airlines is WAY behind – Alaska, JetBlue, Frontier. None of these airline can claim to be truly Low Fare airlines while several claim to be Low Cost.

It’s important to remember that the darling of low fares – Southwest – really isn’t. Another myth. Southwest has some of the highest yielding fares in the marketplace.

And this is a very important and clear distinction. Low Fare airline means that the customer pays less. A Low Cost Carrier is one who has costs below that of the industry norm. The Low Fare airline doesn;t have to be Low Cost and sadly vice versa. Charles Dickens’ Micawber’s famous, and oft-quoted, recipe for happiness: “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” applies to airlines as well as individuals. Actually not as much because clearly airlines seemed to be quite happy for years to go about losing money and carrying passengers.

The trouble is that the DoJ doesn’t seem to know the difference between Low Fare and Low Cost.

So they are determined to continue to allow the airlines to make super money profits at the expense of the poor consumer. To wit – they want to reserve the slots that US and AA have given up for smaller airlines. This is really a bad idea given the structure they have enabled in the market which now favours bulk over consumer benefit.

So here is a chance for the DoJ to do the right thing.

REVERSE COURSE.

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Open the slots to ANYONE who will guarantee that they will (for 5 years) commit to providing service at the airports affected at a rate equal to 10% below the AVERAGE of the past 5 years fares (cents per mile) from that airport. This will effectively cap the prices of the new entrants into these markets and at the same time force the big incumbents to match that price.

This would open up the market for competition and lowering the prices paid probably across the whole industry as it would ripple out to external markets.

Lawmakers would love it because it would make sure that they had fares that were low enough for them to get to and from Washington.

Will it happen? NEVER!

And why not you ask? Because the DoJ team is looking for its next job since they have done such a piss poor effort of ensuring fairness in the marketplace.

 

 

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