Merger of United Airlines and US airways
In the case study, the Department of Justice failed to approve the merger between United Airlines and the US airways on grounds that it would reduce competition and affect service delivery. The two airlines are the major airlines operating in many markets along the East Coast and allowing their merger would reduce competition along the East Coast. Competition spurs innovation and improvement in service delivery to the benefit of consumers. Merging the two airlines would encourage a monopoly that would affect the consumers. The decision by the Department of Justice was based on the concerns that the merger would have significant implications on competition, which would subsequently lead to higher prices for the consumers. Also, there were public concerns that service delivery would decline if the merger succeeded.
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The introduction of more players into the East Coast market including Southwest Airlines would increase competition that leads to improved services at low prices (Weston, Mitchel & Muhorn, 2004, p.58). The decision of the Department of Justice (DOJ) to block the planned merger of the two airlines was intended to promote competition even with the introduction of a third airline into the East Coast market. Merging United Airlines and US Airways would mean that the planes would land in the same airports leading to overcrowding in the airports and flight delays. This would result in a decline in service delivery and reduce competition. This would attract new players into the market to provide improved services and compete with the current players. The DOJ decision, therefore, was in light of the potential competition from other airlines that would arise due to a decline in competition and service delivery occasioned by the merger.
US Airways promotions
From the case study, the performance of the US Airways stocks was low before the start of the merger process. The US airways stock price rose sharply from $26.31 to $49 following the speculations over the possible merger with United Airlines. However, delays in the preliminary processing of the merger led to a decline in its stock prices. Mergers and acquisitions are important in avoiding bankruptcy and in preventing the impact of the bankruptcy on the failing firm’s stock performance.
In the case study, after the DOJ decides to block the merger between the two airlines, the US airways stocks declined sharply causing the company to seek federal bankruptcy protection. Mergers involving a failing firm usually aim at promoting its recovery from possible financial bankruptcy and cushion investors. Therefore, the failing firm is not expected to gain from such mergers. In the case study, the DOJ’s decision to block the merger even after the US Airways’ defense of a failing firm was due to the financial gains that the firm would have made had the merger been successful. Its shares were showing signs of recovery with the start of the merger process.
The antitrust agencies should recognize the ‘failing firm defense’ and allow mergers involving a better performing firm and a firm on the verge of bankruptcy (Gray, & McDermott, 1989, p.167). However, the failing firm should not get any significant gains from the merger as compared to the other partner firm. Also, the effects of the merger on competition service delivery and customer welfare must be considered before allowing a merger between a failing firm and a well-performing firm. In the case study, DOJ’s decision to block the merger was due to the prospected financial gain by US Airways from the merger and the effect the merger would have on competition.
Gray, J., & McDermott, C. (1989). Mega-Merger Mayhem. London: Paul Chapman Publishing Ltd.
Weston, F., Mitchel, M., & Muhorn, H. (2004). Takeovers, Restructuring, and Corporate Governance. New Jersey: Prentice-Hall Publishing Company.