"Commentary: Abort the takeoff on new airline mergers"

Sunday, October 21, 2007

WRONG TICKET
Abort the takeoff on new airline mergers
They would lessen competition, are not in travelers' best interests
By DARREN BUSH
The Houston (TX) Chronicle 


Once again, the airline industry is all a-chatter about the prospects of
more mergers and consolidations. But before anyone starts repainting the
tail sections of the Delta or United fleets, one question deserves to be
addressed: Are airline mergers good for the traveling public?

You don't have to be an economist to divine the answer: Airline
consolidations could easily lead to higher fares and reduced service by
killing competition. Consumers would be hurt by fewer carrier options and
narrower times of travel, and flights would probably be eliminated in the
name of reducing repetitive services and "cost savings." If any savings were
achieved, they would benefit the merged carrier and fail to trickle down to
the consumer. In fact, any "savings" could be properly attributed to
anticompetitive effects of the merger rather than efficiencies achieved in
operations.

When federal regulators look at a proposed merger, they carefully weigh
whether "true" cost savings (i.e., those achieved by eliminating deadwood in
the combined carrier's operations) will outweigh the anticompetitive effects
of the merger. Regulators who police the airlines know that carriers that
wield their market power to reduce output and increase fares beyond
competitive levels are not being efficient and any projected "savings" that
come from wielding market power should not count as a consumer benefit.

It is ironic that major airlines, which are only now becoming profitable and
are still wary of losses, would even consider increasing the size of their
operations. Historically, mergers in the airline industry have not produced
the cost savings that helped justify the consolidation. To the contrary, the
more efficient airline operations belong not to the majors but to the
low-cost carriers - the regional airlines - that are dwarfed by their
nationwide competitors.

These low-cost carriers, or LCCs, scrap for everything they earn, given how
they battle against the sheer size and scale of their competitors. They want
to grow, but three primary forces conspire to prevent LCCs from expanding
their operations and gaining new gates at the nation's primary hubs. These
factors include: congestion at the airports (where most of the planes belong
to major carriers); retaliatory responses by the majors flying routes
threatened by LCCs (everything from negative advertising campaigns to fare
wars that border on predatory pricing); and in some instances, such as at
Dallas Love Field, protectionist legislation that clearly favors entrenched
and dominant carriers.

Even with the majors fighting them at every turn, LCCs remain the darlings
of consumers because of the low fares they offer. Studies document how LCCs
actually work to reduce fares and increase service options on the routes
they serve.

While the smaller LCCs work overtime to benefit consumers, the major
airlines are content to throttle back on innovation and simply taxi along
with their federal subsidies. When the majors pursue consolidations, it's
not because of the inherently unprofitable nature of the airline industry;
rather, it's because they have no idea how to create efficiencies and
provide service at the lowest possible cost.

Fares, of course, are not the only way to measure the pro-consumer effects
of competition among major carriers. In-flight meal service tends to be
better, and consumers typically benefit from more options when major
competitors form alliances to offer broader international service. Mergers
can quickly quash these alliance arrangements when the carriers involved fly
combined routes. Similarly, carriers that share "code" on their passengers
and offer cooperative frequent-flier rewards may cancel these arrangements
following a merger.

In a perfect world, I'd like to broadcast a few announcements over concourse
speakers. "Attention. Airlines must now fly or fail based upon their
competitive performance in the marketplace. All federal subsidies are hereby
canceled, as well as any planned mergers. Major carriers are no longer
allowed to entrench their positions and deny customers low-cost options.
Thank you. Have a nice day."

The day we hear these announcements is the day we see the rarest of all
sights at our airports: lots of smiling passengers happy with their range of
options and low-cost alternatives.

Bush is an associate professor at the University of Houston Law Center. A
former trial attorney at the U.S. Department of Justice's Antitrust Division
in the transportation, energy and agriculture section, he holds a Ph.D. in
economics.

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