aside AIRLINE MERGER MANIA IS TAKING ITS TOLL ON THE CONSUMER, PART II

Reagan airport Terminal
Reagan airport Terminal

In my last blog, I discussed how over the years, 12 airlines have been cut down to four due to mergers. It is my hypothesis that these mergers resulting in four remaining major airlines are having a negative impact on the consumer in regards to increase in fares and fees in excess of the rate of inflation; competition to where there is dominance by one or two airline at at the most trafficked airports; routing to less populated areas; purchase of newer planes; quality maintenance; baggage handling; and concern for their clients. The reduction of competition is a factor contributing to an increase in negative consumer experiences.

There is an AP study regarding this subject which was released to the press around July 2015 which verifies these contentions. The Economist published this study on 7/14/15, titled, “AIRLINES IN AMERICA- NO CHOICE,” by B.R. and the following is their report.

“Some flyers are suing the four big American carriers—American, United, Delta and Southwest—arguing that they colluded to keep ticket prices high.”

Ronald Reagan Airport
Ronald Reagan Airport

“The Department of Justice was already looking for evidence that the same airlines were tacitly agreeing not to compete with one another on certain routes, thus giving them much higher pricing power. As he posted at the time, Gulliver’s hunch is that there is no shady agreement between the carriers. The more likely reason for the lack of competition is, well, the lack of competition—the result of the wave of airline mergers approved by regulators over the past few years that has halved the number of big players.”

“A recent study by the Associated Press (AP), a media outfit, seems to back this hunch up. It found that the dwindling roster of large carriers has had a significant effect on choice at American airports. At 40 of the country’s 100 biggest hubs, AP reports that a single carrier now controls over 50% of the market, as measured by the number of seats for sale. This compares with 34 a decade ago. At 93 of the 100 either one or two airlines account for the majority of seats, up from 78 previously.”(according to AP’s analysis of data from Diio, an airline-schedule tracking service)

At Denver International Airport
At Denver International Airport

“AP quotes Doug Parker, boss of American Airlines, rejecting the notion that consolidation has hurt travelers, saying: “We have increased flying out of each of our hubs. We want to expand. That’s good for consumers, not bad.” That seems to be willfully missing the point. The reason that American Airlines can expand at its hubs is because of all those slots freed up by former competitors that have been swallowed up. Contrary to Mr Parker’s claim, allowing a dominant carrier more control at an airport is worse for consumers, not better.”

“It is only fair to point out that the fat profits America’s airlines are currently making—a combined $19.7 billion in the past two years—must be put into the context of some equally corpulent recent losses. And while AP found that prices have risen by 5% above inflation over the past decade, as the economy has improved there has also been more demand for air travel, so it is not particularly surprising. But against this, fuel costs have also plummeted. What is more, the small increases in the headline fares do not take into account the fact that airlines are pulling in a lot more from ancillary revenue. The top three American carriers reaped $13.8 billion in add-on charges in 2014. Across the world, it says, carriers’ ancillary revenue grew by 21% in the space of a year to $38.1 billion.

San Francisco Airport
San Francisco Airport

To break this all down, it is interesting to see the effect that consolidation has had at individual airports. AP found that:

The mergers have altered the competitive landscape at airports big and small.

  • • In Indianapolis, the two leading airlines controlled just 37 percent of the seats a decade ago, and domestic fares were 9 percent below the national average. Then the city’s main airline, ATA, went bankrupt and was bought by Southwest, and its No. 2 carrier, Northwest, was absorbed by Delta. Now two airlines control 56 percent of the seats, and airfares are 6 percent above the national average.
  • • The Dayton, Ohio, airport was served by 10 airlines in 2005, and fares were 5 percent below average. Today, just four airlines fly there and prices are almost 10 percent above average.
  • • Big hub airports aren’t immune. In 2005, US Airways controlled nearly 66 percent of the seats in Philadelphia. Now that US Airways has merged with American, the combined airline has 77 percent of the seats. Airfare has gone from 4 percent below average to 10 percent above it.
  • • Delta’s hold on Atlanta, the world’s busiest airport, increased during that same period from 78 percent of seats to just over 80 percent. At the same time, low-cost AirTran merged into Southwest and reduced flights there. Domestic airfares at the airport went from nearly 6 percent below average to 11 percent above.
  • • Some cities are actually seeing lower fares than they did a decade ago. Prices in Denver were once 5.6 percent higher than the national average. Now that United’s market share there has dropped to 41 percent from 56 percent, fares are almost 15 percent lower than the rest of the country.
Alaska Airlines Boeing 737-900 Spirit
Alaska Airlines Boeing 737-900 Spirit #1 Major Carrier as per 2015 J D Power ratings

 

On 7/18/15 Jacksonville.com published their report on this AP study by David Koenig and Scott Maverowitz, titled: “AP study: Consumers pay for airline mergers. Here are some of their comments:

“Airlines aren’t going at each other like they used to,” said Mike Boyd, an aviation consultant frequently hired by airports. “They have their turf, and they rarely go to the mattresses with one another.”

“Overall, domestic fares climbed 5 percent over the past 10 years, after adjusting for inflation. And that doesn’t include the $25 checked bag fee and other add-on charges that many fliers now pay.”

“To be sure, other factors have contributed to higher fares, among them a stronger economy, longer average flight distances and, for most of the past few years, some of the highest fuel prices in history. However, analysts believe consolidation freed airlines to charge more.”

Chicago O'Hare International Airport
Chicago O’Hare International Airport

IT’S WORKING

“The strategy is paying off: In the past two years, U.S. airlines made a record $19.7 billion in profits, even though air travel is growing only modestly.”

“The airlines’ main trade group, Airlines for America, said the fare increases reflect stronger demand for travel and are not solely a result of the mergers. The group noted that airlines have used their profits to buy new jets and update airport facilities.”

“The Justice Department notified the four largest airlines on June 30 that it is investigating whether they are colluding to drive up fares by limiting the availability of flights and seats (“capacity discipline”). Those four control more than 80 percent of the U.S. market.”

Hartsfield-Jackson-Atlanta International Airport
Hartsfield-Jackson-Atlanta International Airport

“There was a time — before deregulation in 1978 — when fliers had even fewer choices and paid higher fares than they do now. Back then, the U.S. government controlled which airlines flew to which cities and how much they could charge. Competition intensified in the 1980s. As new airlines entered the market, fares dropped precipitously.”

HARD TIMES

“After 9/11 and the recession that hit afterward, major airlines were in financial shambles. Several restructured through bankruptcy, and a wave of deals starting in 2008 led to the combinations of Delta and Northwest, United and Continental, Southwest and Air-Tran, and American and US Airways.”

“Justice Department antitrust regulators let the deals go through but forced airlines in a few cases to give up some of their spots at key airports to try to encourage competition.”

“Still, “the airline industry is less competitive now than it used to be,” said Seth Kaplan, managing partner of industry newsletter Airline Weekly. “Some of us used to have eight or nine airlines to choose from. Now we have maybe four or five, just as we have four or five cellphone companies to choose from.”

“Recent deals indicate the big airlines intend to stick to a strategy of dominating one airport and forgoing marginal service elsewhere.”

Denver
Denver

“For instance, United announced in June that it will abandon Kennedy Airport and move its dwindling number of JFK flights to New Jersey’s Newark airport, where it controls 68 percent of the seats.”

“At the same time, if regulators go along, Delta will further shrink its small presence at Newark and take over United’s share at JFK, where Delta is already top dog.”

“One of the few competitive battles is taking place in Seattle, where Delta is mounting a fierce challenge to longtime No. 1 Alaska Airlines. Delta is building Seattle into a gateway to Asia and adding flights on domestic routes long dominated by Alaska. Seattle-based Alaska has responded by adding service.”

“The average fare at Seattle-Tacoma International Airport was $377 in the third quarter of 2014, $18 below the national average.”

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2 comments

    • I hope you earned tons of miles. During my recent travel on American Airlines, I was disappointed to see how miserly they acted, like not having a blanket or pillow available on flight to alleviate the discomfort of a pregnant woman or how they gave us a glass of water after we waited over an hour on the tarmac in a hot cabin before take off. Then a fellow passenger mentioned that she was also charged by a surprise $25.00 checked baggage fee even though she paid with a CITI card which advertises that this fee would be waived.

      My initial impression was that this airline’s actions was indicative of a business being in serious financial trouble. Then I remembered that they are still in the process of a merger with US Airways.

      This was not a good omen for the airlines. Or it could be that the American Airline’s CEO, Mr. Doug Parker is becoming such an apologist and so defensive about the industry’s practices that he is not receptive to hearing about how angry the consumer is becoming over being taken for granted.

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