The Real Reason Pols and Bureaucrats Oppose Airline Mergers

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When the federal government moved last week to block the merger of American Airlines and US Airways on antitrust grounds, officials in several states joined the federal suit. Not surprisingly, states that opted to try and block the merger included cities where the airlines now operate airport hubs.

Local regulators may claim they oppose these mergers on the grounds that they'll reduce competition and boost fares. But what really worries officials in many hub cities is that they've made huge investments in airports and continue to see their traffic disappear as the industry consolidates. Some cities and states have spent hundreds of millions of dollars building or retooling airports to be hubs, where most traffic is not local but involves transfers, only to see that business evaporate quickest. As jobs disappear and revenues to support airport debt shrinks, these huge municipal infrastructure outlays, often sold to voters as can't-miss investments, look increasingly unwise, leaving officials to explain to taxpayers how the whole thing turned out so badly.

Pittsburgh is a case in point. After the federal government deregulated the airline industry in 1978, US Airways expanded aggressively. It used Pittsburgh as one of its hub airports into which it flew passengers from around the country in order to transfer them to their final destinations. By the mid-1980s local Pittsburgh officials began pressuring US Airways to agree to occupy a massive new terminal they wanted to build. Though the airlines initially balked, eventually it agreed to a deal in which the airport's public authority would finance the terminal with public debt and US Airways would be the principal tenant, paying some $50 million in rent, or five times its former occupancy costs. The Pittsburgh strategy seemed to work at first. By 1997, the airport was handling 21 million passengers annually, and officials claimed that number would one day rise to 32 million. But only about 4 million of those fliers originated locally.

When airline traffic slid in the 2001 recession and then tanked after the Sept. 11 terrorists attacks, US Airways was sent reeling. It entered bankruptcy in 2002, then again two years later. In a desperate bid to survive it eliminated much of its hub traffic and cut costs in Pittsburgh.

Traffic shrunk to just 8 million passengers a year, leaving half of the airport's gates empty. To save money, the airport tore down one whole new concourse. But the airport still owes hundreds of millions of dollars on the original construction, and officials have been using tax money from Pennsylvania's new legalized casino gambling to make up for the shortfall in airline revenues. Meanwhile, local officials blame US Airways for having ‘betrayed' the city by reneging in bankruptcy on its original deal.

Airport overbuilding is often a result of easy money that comes with low-cost municipal debt and federal subsidies from Washington. Officials at Lambert-St. Louis International Airport, for instance, spent their money on a massive upgrade and expansion even after traffic had started to decline there thanks to failing TWA's merger with American, which subsequently wound up in bankruptcy itself. The airport, which originally designed the expansion amid talk in the mid-1990s that passenger traffic would grow from 30 million to 42 million annually, went ahead with the plans even as TWA ran into trouble and its hub operations evaporated. Officials reasoned that the upgrades, costing more than $1 billion including about $165 million in money from Washington, were necessary to attract new business. To accomplish the expansion the airport used eminent domain to seize several thousand homes and dozens of businesses, and then constructed a massive new runway, now underused, on the land formerly occupied by the community.

Traffic in St. Louis has slumped anyway to less than 13 million passengers annually last year. Since the expansion project, officials have tried without much success a number of different proposals to revive the airport, including trying to turn it into a cargo hub for Chinese goods.

One of the biggest ironies of this spending is that it often raises airline fares, something that the government says it is trying to stop now by forbidding the two struggling airlines from merging. Passengers often wind up paying higher fees to subsidize airport debt, and in places where airports have spent hundreds of millions of dollars building additional capacity for a hub, fares have risen rapidly because the local hub-airline often dominates the airport.

In the greater Cincinnati area, for instance, officials and local commerce groups touted the capacity of Cincinnati/Northern Kentucky International Airport, a Delta hub, as a key component in attracting new business to the area. But fares rose so high at the airport (dubbed the nation's top ‘rip-off airport' by Forbes in 2009), that a survey several years ago found that 75 percent of local businesses were actually sending their workers to Dayton airport, an hour away, to get cheaper fares.

Still, the rationalization for these kinds of super-sized publicly financed projects is the notion that big government investment in basic infrastructure is necessary to drive economic grow, and that airport spending is essential in a global economy. Advocates of this approach like to point to investments on airports in places like Dallas-Fort Worth and Atlanta as justification for similar projects elsewhere. But this often confuses cause and effect. Metro areas like Dallas and Atlanta are not growing because of their airports; rather their airports have found it necessary to expand to accommodate economic growth that is already there thanks to myriad other factors.

The Justice Department seems to think that American and US Airways, two airlines that have been in bankruptcy three times in little more than a decade, can survive on their own. Local officials seem to think they can save airport jobs by forcing the two struggling airlines to remain independent and operate facilities that are probably too costly for them in this age of consolidation. This must be what they call Washington anti-trust math.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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