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Published on Sunday, January 14, 2001 in the Boston Globe
Another Kind of Piracy in the Skies
by Robert Kuttner
JUST WHAT WE NEED, another airline merger. Last summer United Airlines proposed buying US Airways. United's biggest rival, American, immediately looked for a way to bulk up. Last week American announced it would acquire failing TWA and buy some of US Airways itself.

How can American buy US Airways if United got there first? Because antitrust authorities will likely ask United, as a condition of buying US Airways, to disgorge some of the latter's routes.

On Wednesday, heads of both United and American issued statements praising each other's deals as great for consumers. Right. What we have here is the sweetheart deal to end all sweetheart deals. United and American will even operate the US Airways shuttle jointly. As if the existing shuttle, which charges America's most exorbitant fares, did not have enough market power to frustrate competition already.

If the authorities approve, United and American will control about half the domestic air travel market. The remaining large carriers - Northwest, Delta, and Continental - will quickly organize themselves into a third mega-airline.

Why are the airlines doing this? To reduce competition, of course. Economists have a name for this. It's called a cartel. The era of airline deregulation has brought deteriorating service, congested skies, flight delays, and occasional real bargains offset by opportunistic price gouging. For every lucky flier who gets to Fort Myers, Fla., for $98 on some flying junkbox, some other poor guy pays $1,600 for a last-minute urgent trip to Chicago.

For a few years deregulation actually introduced some price competition by allowing new carriers to contest routes and fares. Then the big boys got wise. First they bought out or drove out most of the upstarts while the Reagan antitrust authorities cast a blind eye. Then nominal competitors made sure to charge to charge identical fares while the Bush antitrust police looked away. Clinton's appointees were only slightly better.

You want to fly Boston to Washington? There's competition! You can pay $587.50 on US Airways, or if that seems exorbitant you can try Delta, which charges, gosh, $587.50. But, wait, a third airline has just entered this lucrative market, American. Maybe they're offering some bargains. Let's see. Their fare is ... $587.50. Exactly one new airline with a degree of staying power has survived the deregulation experiment - Southwest. They really do offer bargains, but mostly in Western and medium-sized cities where airports have spare capacity.

The big guys are rushing to merge in order to make sure that Southwest never happens again. The CEOs of United and American are depicting a new era in which consumers will benefit from competition between two or three large and well-run enterprises. But what is more likely is the carving up of routes and the rationalization of capacity so there are few seats to spare and the traveler who needs to get somewhere has to pay whatever the airline has the nerve to charge.

One other dubious aspect of the proposed American-TWA deal is worth noting. As part of the takeover, TWA agreed to declare bankruptcy just before being bought by American. TWA currently has assets valued at about $2.1 billion and debts of $2.4 billion.

Normally, when one company buys another, the buyer assumes the obligations of the seller. The stockholders get shares in the acquiring company and the creditors get paid. But by declaring bankruptcy, TWA stiffs its creditors, who will get maybe 30 cents on the dollar, and its shareholders, who will get little or nothing.

This is bankruptcy law for the business elite. It contrasts instructively with bankruptcy for the common American. A few months ago Congress passed a bankruptcy reform bill written by the credit card industry. The friendly folks at Visa and Mastercard, who shovel out credit at rates once considered usurious, want to make it easier to seize all your assets if you get in over your head. President Clinton pocket-vetoed the bill, but it will be back.

If the leaders of TWA and American were ordinary consumers and tried to pull a comparable scam at the expense of creditors, they'd likely be prosecuted.

In airlines as in electric power, deregulation has failed. Competing airlines that charge identical fares and provide essentially the skimpy service need to be regulated. We also need to invest more public funds in airport and rail infrastructure to relieve congestion.

Ironically, the free-market gang is about to take back the White House, just as the private market solutions are gouging the public. But, hey, it's no problem on the ultimate monopoly luxury liner, Air Force One.

Robert Kuttner is co-editor of The American Prospect. His column appears regularly in the Globe.

© Copyright 2001 Globe Newspaper Company


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