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What Airline Mergers Mean For Us

It's mating season in the airline world. Following some long courtships and a few broken engagements, America's major carriers are seeking to pair up in ways that could cause the most drastic changes since the deregulation of the industry more than 20 years ago. The companies claim that the proposed mergers will enhance competition and streamline service, but their plans have been less than enthusiastically received. Critics insist that these corporate marriages are bad for the industry, bad for the country, and bad for the consumer. No one is expecting any honeymoons.

Last year the world's largest airline, United, announced that it would invest $11.6 billion to merge with US Airways and become United Airways. Then, on January 10, the second-largest U.S. carrier, American, struck a $3.5 billion deal to buy ailing Trans World Airlines. As part of the deal, TWA agreed to declare bankruptcy. "American felt it couldn't allow United to gain a competitive advantage by taking over US Airways," says John Hotard, a spokesman for American. "In the industry, you've got to be competitive in size."

Feeling the need to appease government regulators worried about United's post-merger dominance of the East Coast, American and United announced an arrangement to divvy up some regional services: United would give or lease 86 US Airways planes to American and hand over gates and landing slots at New York's La Guardia airport, plus more gates at airports in Washington, Boston, Philadelphia, and Atlanta. The two carriers would provide joint service on the New York—Washington—Boston shuttle routes, operating alternating hourly flights, and American would buy half of DC Air, a new company created to take over routes that US Airways will give up.

THESE DEALS FACE GOVERNMENTAL SCRUTINY, and rival bidders may try to enter the fray. But if plans proceed as expected, they could prompt the remaining big players—Delta, Northwest, and Continental—to form their own alliances. At press time, Continental was reportedly in talks to acquire Delta, the nation's third-largest carrier. This means the skies over the country may soon be dominated by a duo or trio of super-airlines, with American-TWA carrying 25 percent of all passengers and United—US Airways carrying 26 percent.

"We think there are very strong consumer benefits to our merger," says United spokeswoman Susana Leyva. "First of all, the combination of two frequent-flier programs. United is also going to introduce eighty-nine new nonstop services. We're going to give worldwide access to people living in cities small and large all over the U.S." American's Hotard agrees. "It's good news for travelers," he says. "American, with its partners, will be able to take you anywhere you want to go, seamlessly."

But there's strong opposition to the mergers. Minnesota Congressman James Oberstar, the ranking Democrat on the House Transportation and Infrastructure Committee, is one of the most vocal critics. "If you create bigness, then the only way to compete with that is more bigness, and the world will quickly collapse into three globe-straddling mega-carriers who will have little regard for consumer interest," he says. "Service, pricing, frequency, and competition will have been dealt a fatal blow."

INDUSTRY EXPERTS ALSO QUESTION THE IMPACT OF THE MERGERS. "There's a Yalta-like aspect to it as American and United carve up the Northeast," says Sam Buttrick, an airline analyst at the investment firm UBS Warburg. "There are some side benefits: great mile-earning opportunities; increased connections, particularly from smaller communities. But fewer competing airlines will produce fewer total seats and higher average pricing."

"What we're witnessing is the most significant asset transfer and consolidation in aviation history," says Edward Faberman, executive director of the Air Carrier Association of America, which lobbies on behalf of smaller carriers and communities. "I think it's time for the government to step up to the plate and ensure that there will be full competition at every airport in the country."

What no one knows yet is how the government will react. American Airlines, based in Fort Worth, Texas, reportedly enjoys good relations with George W. Bush. The company contributed more than $1 million to politicians in the most recent election cycle, mostly Republicans, and provided the president-elect with a plane for his flight from Austin to D.C. On the other hand, former presidential candidate and Republican senator John McCain is a fierce critic of the plans. "Maybe I'm mistaken, but I thought it was competition that's good for the consumer," he said at a February 1 hearing on the American—TWA merger. "It's the business of Congress to see that the consumer is not left out and that the consumer is able to enjoy the benefits of the promise of airline deregulation, which was less regulation, more entrants into the markets, and, consequently, lower prices."

A problem faced by all airlines, whether long-established or just launched, is the difficulty of entering new markets—without taking over existing companies. The airlines fiercely guard their landing slots and gates, and with little spare capacity in the business, it's tough for prospective entrants to gain a foothold. "We don't have a sufficient air traffic system," says Democratic Congresswoman Louise Slaughter, of Rochester, New York, an opponent of the mergers who is planning legislation that will impose a moratorium. "If we're going to be able to have good flights at reasonable costs, being the prisoner of basically one airline that will cover a whole section of the country won't help. Picture what would happen if United, which under these plans pretty much controls the East Coast, went on strike."

The airlines counter such concerns by pointing out that the proposed deals wouldn't create a monopoly at any airport. American, for instance, would gain just under 1 percent of the passengers at Dallas, where it already has almost a 70 percent share, and just over 1 percent at Chicago O'Hare, where it now carries 38 percent of the passengers. The impact at other airports would be significant, however, particularly for United (see "The Airport Effect").

Complicating matters, there's a political difference between the two mergers. United's intended, US Airways, is a profitable business, but American wants to take over a failing carrier, TWA. One of the country's most legendary airlines—and the first to offer fresh-brewed coffee (1957), in-flight movies (1961), and no-smoking seats (1970)—TWA is indeed foundering. The company once known as the Lindbergh Line, and the one that Howard Hughes ran for 25 years, could collapse without American's rescue. "If the government says no to AA—TWA, it could put twenty thousand people out onto the street," says Michael J. Linenberg, airline analyst with Merrill Lynch (which is advising United on the US Airways merger). "I'm not sure they want to see the demise of TWA under their watch," he says.

One thing is certain: As the big fish get bigger, travelers hope the little fish will continue to provide competition—and cheaper tickets. Southwest Airlines, the nation's largest low-cost carrier, is adopting a business-as-usual approach. "We don't know exactly what the field will look like if and when all these mergers take place," says spokesperson Beth Harbin. "We'll continue to do what we do, no matter what the airplanes around us look like."

MEANWHILE, JETBLUE, A LOW-COST CARRIER THAT launched in February 2000 and flies out of JFK, is surprised to find itself being hailed as a savior of competition. "The irony is not lost on us that the major carriers are pointing to us, saying, 'Look, things are fine; new carriers are thriving,'" says spokesman Gareth Edmondson-Jones. "In general, though, when you merge, prices go up and service comes down. It's only the ability of a JetBlue or a Southwest to enter a market and bring fares down that is keeping anything in check. If you lose the potential for new entrants like us, you've reached endgame."

And the treatment meted out to those attempting to compete can be bruising. The Department of Justice is currently pursuing an antitrust case against American, accusing the company of forcing smaller competitors out of Dallas—Fort Worth, where American is the dominant carrier. The DOJ complaint states, "When small airlines try to compete against American . . . [it] typically responds by increasing its capacity and reducing its fares. . . . Once the new entrant is forced out, American promptly raises its fares and usually reduces its service."

In the 1970's, economist Alfred Kahn was the chief architect of deregulation. Since then he has watched a rapidly changing aviation market and thinks that on the whole, competition has benefited the flying public. He dismisses any talk of the industry reaching an endgame as overly dramatic, but he is concerned nonetheless.

"We have cause to worry that the new administration may be insufficiently assiduous in moving against these mergers," he says. "I think it's extremely important that we protect small carriers, even at the risk of people saying that we're preventing real competition. Preserving the opportunities for small carriers becomes a very important discipline—maybe one of the few remaining."

THE AIRPORT EFFECT
Although the American-TWA and United—US Airways mergers would leave considerable competition at some airports, at others there would be near-monopolies. Here, the scenarios at six hubs.

Washington Dulles
American 7% + TWA 2% = 9%
United 54% + US Airways 17% = 71%
All other carriers = 20%
San Juan
American 59% + TWA 12% = 71%
United 2% + US Airways 5% = 7%
All other carriers = 22%
New York JFK
American 32% + TWA 17% = 49%
United 10% + US Airways 0% = 10%
All other carriers = 41%
Los Angeles
American 15% + TWA 0% = 15%
United 30% + US Airways 3% = 33%
All other carriers = 52%
Charlotte
American 2% + TWA 1% = 3%
United 1% + US Airways 90% = 91%
All other carriers = 6%
St. Louis
American 2% + TWA 72% = 74%
United 2% + US Airways 1% = 3%
All other carriers = 23%
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