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"Would air mergers help or hurt fliers?"


Tuesday, December 19, 2006

Would air mergers help or hurt fliers?

US Airways (LCC), the USA's seventh-largest carrier, has an offer pending for No. 3 Delta Air Lines. Glenn Tilton, the CEO at No. 2 United Airlines (UAUA), talks enthusiastically about the benefits of industry consolidation and says his company is looking at merger opportunities. And some smaller players want to get larger. AirTran (AAI) so far has been rebuffed in efforts to take over tiny Midwest Airlines (MEH), but the quest by the Atlanta-based discounter may not be finished yet.

You can get a good argument started over whether airline mergers are good or bad for consumers. But every large airline that was around at the time of the landmark industry deregulation has been through at least one merger or major deal in which it acquired significant assets from another carrier. Even Southwest Airlines (LUV), the discounter that now carries more passengers a month than any other airline, has bought two small rivals, Muse Air and Morris Air.

Three major waves of consolidation have followed passage of the Airline Deregulation Act of 1978: one in the early 1980s, another started in the late 1980s and a third started in the late 1990s.

America West's 2005 acquisition of the old US Airways in bankruptcy, a deal in which the surviving carrier retained the US Airways name, could prove to be the first deal of the fourth such wave.

Whether another merger wave materializes seems to depend in large part on whether US Airways now can overcome resistance from Delta management and acquire the Atlanta-based carrier in bankruptcy.

"Without the catalyst of a US Airways-Delta merger, nothing may happen at all," says airline consultant Darryl Jenkins, a researcher and lecturer at Embry-Riddle Aeronautical University.

Here's the consumer stake in the potential wave of airline industry mergers:

Fares: Could go up, could go down

Even without significant restructuring, the airline industry has been raising average fares at a double-digit annual rate. Fueling the increase: continuing strong demand from travelers and limited growth of flying capacity. The potential effect on fares of industry consolidation is a matter of dispute.

Kevin Mitchell, head of the Business Travel Coalition, an advocacy group that works on behalf of corporate travel departments, worries that fliers, especially business fliers, would have to pay more. Merged airlines could more easily hold down the supply of airline seats, putting upward pressure on fares, he says.

Rolfe Shellenberger, an airline marketing expert and corporate travel cost-control consultant, says such an analysis ignores today's market realities.

"If there's a vacuum left in any market by the super-big carriers reducing capacity, somebody will come in and fill it," he says. "Everybody forgets that airline assets, unlike factories, are portable."

Clifford Winston, an economist and scholar at the Brookings Institution in Washington, D.C., adds to Shellenberger's argument. Consolidation may even deliver lower fares in some markets, he says. As a carrier withdraws or cuts back in a market as a result of a merger, he says, other carriers will fill the void.

"Who you get coming in may be better than what you had before," Winston says.

Service: 'Mergers are messy things'

The new US Airways provides an example of the service problems that can vex the regular customers of an airline involved in a merger.

Before the merger, America West was a top performer in the U.S. Department of Transportation's customer service ratings. But the new US Airways' ratings generally have been closer to those of the old US Airways in mishandled bags, late flights and consumer complaints: among the lowest of the big airlines.

"Mergers are messy things," consultant Jenkins says. "Wall Street usually wins in these deals, at least early on. In some cases, they work out OK for consumers long term. But there's no guarantee of that."

If discount carriers move into or expand in markets where merged megacarriers cut back service, things will change for local travelers. No two low-fare carriers operate exactly the same way, but neither do they behave like the big network carriers.

In some cases, the option of traveling in first class could be lost or reduced. Southwest and JetBlue, for instance, fly one-class cabins.

The size and scope of a newcomer's frequent-flier program would likely be less than the megacarriers' frequent-flier programs.

And access to international destinations could be altered. Those traveling to or from small and midsize cities might have to connect via different U.S. gateways and use different carriers.

Winston, the Brookings economist, says those things may not be as disruptive as they seem. Take the proposed US Airways-Delta deal. Travelers in at least two-dozen Eastern and Southeastern cities — most of them relatively small — would see their air travel options significantly reduced by the merger. But, he says, options in large markets would remain plentiful.

"People lose sight of where the real action is," Winston says. "The top 50 to 75 routes are where all the travelers are."

Stability: Consumers could benefit, or not

The industry's latest move toward consolidation comes as domestic carriers are poised to turn their first collective profit since 2000. A rising economic tide partly explains the newly found profitability. But carriers cut costs deeply over the period, and in doing so, changed the travel experience. Fewer workers are taking reservations and handling bags. Complimentary meals have nearly vanished.

Pro-consolidation airline executives such as US Airways CEO Doug Parker argue that the relative financial stability of merged megacarriers would benefit consumers in a variety of ways, including improved customer service and reliability and smoother connections to any destination on the globe.


But Shellenberger, who a quarter century ago managed the creation of American's loyalty program, says there's no reason to think that merged airlines, with higher-than-average operating costs, would be anymore stable than their predecessor high-cost airlines.

He says their business model "simply does not work well for the consumer."

"Over time, consumers will find alternatives that don't require them to connect through hubs and sit in middle seats while paying too-high prices."

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