American Airlines and US Airways merger a sign of market failure?

Philip Greenspun's Weblog 2013-02-15

American Airlines and US Airways propose to merge to top the list of world’s largest airlines. According to this WSJ article on a 2012 J.D. Power survey, American and US Airways  were near the bottom in customer satisfaction among U.S. legacy carriers, all of which as a group were disliked compared to newer carriers such as JetBlue and Southwest. In fact, US Airways, whose management team will be running the combined behemoth, ranked dead last among all U.S. airlines.

In a free market it would be surprising if the folks who delivered the worst customer experience ended up with the largest market share. So to what can we attribute this spectacle?

  • the airline market is not free: (1) carriers such as US Airways and American that are allocated international routes end up with an almost insuperable advantage over carriers that don’t get these handouts from government, (2) efficient foreign carriers such as Ryanair are prohibited by the U.S. government from taking Americans from New York to Chicago, which they could do for 25 percent lower costs than Southwest and JetBlue
  • the airline market works, but sluggishly due to the long lead time for ordering new airplanes (this seems less plausible given how many airliners are leased from big neutral leasing companies such as AIG and GE Capital and could be moved quickly from one carrier to another)
  • customer satisfaction surveys are meaningless; consumers will fold themselves into the cramped coach seats of a hated carrier such as US Airways or American if it is $10 cheaper

[Separately, for those who are concerned about the apparent lack of fairness in the American economic system, Tom Horton, the guy who impoverished American Airlines shareholders while earning a $3.3 million annual salary (source), will receive an additional $20 million in severance pay (source). Plus, since a guy with $20 million in the bank won't be able to afford the new fares that American, United, and Delta are able to collude on, he also gets to fly for free for the rest of his life on American. (The shareholders of AMR, who might have invested hard-earned funds as early as 1930, are getting a 3.5 percent stake in the new merged company, worth about $350 million supposedly; when Tom Horton came back to AMR in 2006 the shareholders had something worth about $6 billion (source).)]