Possible America West Sale Sharpens Merger Debate

As a possible bidding war loomed Thursday for low-fare carrier America West Airlines, U.S. regulators and others cited the regional airline’s potential purchase as the latest reason why they’re closely watching the competitive effects of mergers and other airline alliances.

It was only 24 hours after U.S. Sen. John McCain (R-Ariz.) introduced a bill to pump more competition into the airline industry that America West, the ninth-largest U.S. carrier and based in McCain’s backyard of Phoenix, signaled that it might soon be merged out of existence.

That prospect was driving a wedge further between the industry and critics such as McCain, who argue that a lack of airline competition is already harming consumers with higher fares and less service.

“I have real concerns” about a buyout of America West, said McCain, who heads the Senate Commerce, Science and Transportation Committee. Without America West, price competition in its markets “would diminish substantially,” he added.

U.S. regulators also cited the America West development as part of a trend that could lead to less competition, excessively driving up fares and reducing service.

“Fewer large domestic airlines make it more difficult for new entrants to succeed,” Charles Hunnicutt, assistant secretary of the Transportation Department, told an independent panel reviewing airline competition.

The airlines stoutly dispute any claim of anti-competitive behavior. “The U.S. airline industry is one of the most competitive industries in America today” and will remain so “if there are changes in the makeup of the companies,” said David Fuscus, a spokesman for the industry’s trade group, the Air Transport Assn.

Yet even a major rival of America West said a buyout of the carrier, the main unit of America West Holdings Corp., would fan the argument.

“It has to raise a question about competition,” said Gary Kelly, chief financial officer of Southwest Airlines, the other major airline serving Phoenix. “This transaction would only accelerate the debate over whether this is good for consumers.”

America West said it’s been approached by several airlines about a merger or other alliance, and industry leader United Airlines, a unit of UAL Corp., confirmed that it’s one of the potential suitors. Delta Air Lines also is reportedly looking at the carrier, but all of the airlines declined to comment further Thursday.

Southwest is not going to rule out making a bid for America West if the Dallas-based airline decides a buyout by another carrier would hurt its standing, Kelly said. “We would certainly want to be open-minded about what expansion options we have,” he said.

Airline consolidation has been rare over the last decade, and there’s no assurance that America West will be bought. But airline deals have picked up steam lately even though complaints about competition have been escalating.

Two months ago, AMR Corp.’s American Airlines agreed to buy Reno Air to bolster its presence in the West. Also, Northwest Airlines and Continental Airlines recently completed a major route-sharing and investment alliance--what some dubbed a “virtual merger”--even though the Justice Department filed a civil lawsuit against the deal because of antitrust objections.

The Transportation Department also is monitoring the alliances, Hunnicutt told a Transportation Research Board panel asked by Congress to examine airline competition. And after mentioning America West, he said consolidation “is rapidly taking a number of previously independent airlines out of the competition picture at a time when entry by new airlines is not happening.”

The Justice Department’s action in the Northwest-Continental deal “provides some comfort” to people worried about how future mergers might affect travelers, but “those who are concerned need to stay on guard,” said Kevin Mitchell, chairman of the Business Travel Coalition, an advocacy group.

Mitchell and others maintain that even without mergers, the industry has pushed fares--especially business fares--much too high and reduced competition in good part by creating “fortress hubs,” or airports where a single airline dominates service.

United, for instance, is dominant in Denver and San Francisco, and a purchase of America West would give it tremendous strength in Phoenix and Las Vegas as well.

“The airline oligopoly is running amok and, as a result, the consumer is paying the price with the highest fares in the history of the industry,” Joe Galloway, president of the American Society of Travel Agents, said Wednesday as his trade group pushed for congressional help to enhance airline competition.

Recently, though, business fares have leveled off or dropped somewhat, largely because the airlines have seen a slowdown in travel. They’ve also been adding jetliners to their fleets and are trimming fares to fill empty seats.

And one analyst, Darryl Jenkins, said he doubts there will be mergers among the biggest airlines anyway. Why? Because their pilots have considerable power to veto any deal that jeopardizes their seniority, he said.

“I don’t think the industry will consolidate, because it’s not in the pilots’ best interest,” said Jenkins, director of George Washington University’s Aviation Institute.

Reuters was used in compiling this report.