Airline Industry Mega-Mergers: How Would Consumers Fare?

By JAMES F. PELTZ

Sept. 3, 2000 12 AM PT

TIMES STAFF WRITER

The mere thought that a merger wave among the big airlines could slash their number to just three or four mega-carriers sends chills down the spines of many consumers, lawmakers, travel agencies and passenger advocacy groups.

They maintain that with so few airlines dominating the nation’s airports, fares would go up, service would go down, a job protest by workers at one of the surviving airlines could cripple U.S. travel, and the ability of start-up airlines to succeed would further be eroded.

But if the mergers happen anyway--and some expect they might if the pending combination of UAL Corp.’s United Airlines and US Airways Group Inc. is approved by U.S. regulators--would it really be so bad? A group of securities analysts and other airline specialists say no.

“We’ve long been proponents of consolidation in the U.S. airline industry based on economic grounds, [and] further we do not believe that consolidation is anti-consumer,” said Brian Harris, a veteran airline analyst at Salomon Smith Barney Inc. in New York.

Darryl Jenkins, director of the Aviation Institute at George Washington University in Washington, likewise said in a new report that “doom-and-gloom predictions about the future of the industry are almost certainly wrong,” and there are “few scenarios that would result in less competition for passengers over the next five to 10 years.”

In a nutshell, they contend that the critics’ arguments about higher fares and poorer service don’t hold water if the Big Six carriers--United, AMR Corp.’s American, Delta Air Lines, Northwest, Continental and US Airways--merge to become three carriers. Rather, merger proponents contend that fewer airlines not only would mean lower costs for the remaining airlines, which would keep a lid on ticket prices, but also that travelers would have more destinations available to them, not fewer.

“Actually, the likely outcome of an industry consolidation would be intense price wars,” Jenkins said in an interview.

Why? Take United as an example. If United bought US Airways, it would have a major foothold at US Airways’ hub in Charlotte, N.C., that would challenge Delta’s Atlanta hub in the South, he said. That scenario would be repeated in many other parts of the country if the Big Six carriers merge. “And how do you compete for passengers in the same region? You lower your price,” he said.

But the critics of airline mergers aren’t buying it. Pointing to the delays and cancellations among the existing airlines that created havoc at U.S. airports and infuriated passengers this summer, many industry trackers say the airlines haven’t proved themselves worthy of being even larger.

“If we reduce competition and we do not see fares increase, then that’s going to be the first time in the history of the free-enterprise system that that’s happened,” said Terry Trippler, an analyst at OneTravel.com, an Internet site that focuses on airlines and fares. “Any time competition decreases, we see prices go up.”

He also noted that when the big carriers have tried to hike fares in recent years, Northwest Airlines has repeatedly not followed the trend at least for several months, which prompts the other airlines to retract their higher fares until they’re matched, if ever, by Northwest.

Now, with Northwest rumored to be a takeover target of American Airlines, that benefit could be erased, Trippler said. And overall, “we would be eliminating half of the airlines that could be involved in blocking fare increases” if the six big airlines become three, he said.

None of this means the merger wave is imminent. The effort by United, the world’s biggest airline, to buy US Airways could be stopped cold by the Justice Department on antitrust grounds. If so, that could prompt American, Delta and the others to shelve their own plans to seek a partner.

And the regulators might not be willing to allow the mergers until there are changes in the laws that currently block or restrict foreign airlines from buying control of U.S. carriers or from flying a significant number of U.S. routes. If those laws are scaled back, then there might be enough competition in the airline industry to satisfy the trustbusters’ concerns about mergers.

Indeed, “we believe that because of industry and global forces, that consolidation of the industry will occur, but that the UAL proposal to acquire US Airways may be a couple of years early,” said Raymond Neidl, an analyst at investment firm ING Barings in New York.

“We may need a few more years of globalization and a change in some cabotage and foreign-ownership laws . . . before big mergers, and ultimately trans-border mergers, are permitted,” he said.

In the meantime, plenty of passengers, travel agents and lawmakers are annoyed that the six big airlines have “fortress hubs,” or airports that they dominate throughout the country. (Los Angeles, in fact, is among the most diversified of the big-city airports, though United claims it as a “hub” because it has more than 20% of the airport’s traffic.)

Those hubs have been criticized for giving travelers too few airlines to choose from, and for giving them too few destinations out of their hub cities.

Sen. John McCain (R-Ariz.), head of the Senate Transportation Committee, recently summed up how many view the prospect of only three mega-airlines when he said, “Everything else being equal, basic economic principles suggest that consumers are better served by having six competitors in a market rather than three.”

Yet Salomon Smith Barney’s Harris disagreed. “Yes, in general, the more competition you have the better. . . . That’s the conventional wisdom.” But in the airline business, “the lower the cost structure the more it should result in lower prices for consumers,” and that’s what more mergers would accomplish, he said.

After the airlines merge, they would remove hundreds of millions of dollars in redundant overhead and other operating costs, which would enable them to keep fares down, he said. “It results in a more efficient industry and lower costs for consumers, yet still provides them with sufficient competition,” Harris said.

He also disputed the hub argument. Because those hub airports already are dominated by a single airline, that won’t change much if that airline merges with another. The airport will still be dominated by one carrier.

However, in that city “you would get the opportunity to fly to all the new destinations” made available by that airline merging with the one in your hub, Harris said. “So actually one of the groups that’s going to make out best in consolidation are consumers in hub markets, which is the reverse of what you’d think,” he said.

David Stempler, president of the Air Travelers Assn., a Washington trade group that represents passengers, takes a mostly neutral stance on mergers. “I can’t say I’m in favor of having a Big Three, but I can’t say I’m frightened by it, either,” he said.

Why? Because many of his members, such as those flying US Airways, say that they’d like to have the added reach to other cities and a better frequent-flier mileage program that United would provide, and that the same benefits hold for other potential airline mergers.

Stempler also discounted the threat of a strike by airline workers. “If we end up with three carriers, no one is ever going to let them go out on strike,” he said. “The president will step in and block that.”

Others aren’t so sure. “The effects of a super-giant strike would be devastating to the economy and certainly to the travel plans of millions of consumers,” Ed Perkins, the consumer advocate for the American Society of Travel Agents, testified this summer to Congress.

Yet merger proponents say there’s another big factor that’s often forgotten by critics of airline marriages: Southwest Airlines.

Southwest, of course, is the king of low-fare airlines that’s not only flourished financially, but also aggressively expanded in recent years and is now one of the biggest carriers of domestic traffic. (It ranks eighth overall among U.S. airlines because the others fly overseas as well.) Wherever Southwest flies, its discount prices help check fare hikes by rival airlines. It also has a long history of labor peace.

That’s why the discussion of only three mega-carriers is wanting, said the Aviation Institute’s Jenkins. “Under any realistic scenario for the future of the airline industry, there will be at least four big carriers of domestic traffic,” because one must include Southwest, he said.

Even so, OneTravel.com’s Trippler said having only three or four big airlines is risky if for no other reason than the possibility of a labor strike.

Job actions against American and Northwest in recent years badly disrupted U.S. air travel, and if that happened to an even bigger airline, chaos could result and there would be no guarantee that the president would step in and order the employees back to work, he said.

“What would happen if it was United after the US Airways merger, and we would be shutting down Washington Dulles, Chicago, Pittsburgh, Philadelphia, Charlotte and Denver?” he said. “I’m just not willing to risk the country’s air transportation system . . . based on the words or the goodwill or the great intentions of anyone, be it management, labor or the government.”

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Possible Partners?

Speculation is rife that the airline industry is poised for a round of mergers, and some analysts disagree with critics who say the mergers would increase fares and erode service. Here is a list of announced and potential deals as seen by industry observers, and the carriers’ hub airports:

Buyer and its U.S. hubs

United (UAL Corp.)

Chicago, Denver, San Francisco, Los Angeles

American (AMR Corp.)

Dallas/Fort Worth, Chicago, Miami

Delta

Atlanta, Salt Lake City, Cincinnati, Dallas/Fort Worth

Acquisition target and its U.S. hubs

US Airways*

Pittsburgh, Philadelphia, Charlotte, N.C.

Northwest

Minneapolis/St. Paul, Detroit, Memphis, Tenn.