Airfare Reality Check: Are Five Major Airlines Really Better than Four?
After years of approving mergers between major airlines the Department of Justice has nixed the latest proposal for one—the merger of bankrupt AMR, parent of American Airlines, and US Airways (LCC).
The DOJ has filed an antitrust lawsuit challenging the merger because it would “put consumers at risk of higher prices and reduced service,” in the words of Bill Baer, assistant attorney general in charge of the department’s antitrust division.
But would it?
“I’m not convinced it’s better for me to have five airlines than four,” says The Daily Ticker’s Henry Blodget.
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Breakout’s Jeff Macke says even if the DOJ is right and airfares rise as a result of an AMR-US Airways merger the market will correct for that. “If the airlines gouge you, the free market suggests someone else can come in.“ Case in point, says Macke: JetBlue. “They made an entire company just on the proposition they would put televisions in front.”
In announcing its lawsuit, the DOJ cited a statement by US Airways president Scott Kirby that industry consolidation allows for higher airfares and an internal American Airlines analysis that said a merger with U.S. Airways would end U.S. Airways low-cost Advantage Fares program.
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In addition, said the DOJ's Baer, “If the merger goes forward, consumers can also expect to pay higher fees for things like checked bags, flight changes, more legroom and frequent flyer benefits.”
Airline fares have been rising but not necessarily because of past mergers including Delta (DAL) and Northwest in 2008 and United (UAL)) and Continental in 2010—both approved by the DOJ.
As Yahoo Finance's Rick Newman points out, airfares are up a lot from a low point in 2009, but they’re basically comparable to levels from before the recession, and fares are considerably lower than they were during the early 2000s and late ‘90s.
The revenue generated by each seat per mile, known as yield, averaged $14.35 for American airlines in 20123 compared to $11.31 in 2002. But that 27% increase—roughly 2.2% a year, is “simply catching up with inflation,” says Bijan Vasigh, managing director of the Aviation Consulting Group and a Professor at the Embry-Riddle Aeronautical University in Daytona Beach, FL.
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What has been increasing are the so-called ancillary charges for checked baggage, food, cashing in frequent-flyer miles, flight changes, etc. Those charges cost the average passenger $20-$25 per flight versus nothing or just a few dollars 10 years ago, says Vasigh. And he says the top four U.S. airlines now account for 73% of U.S. market share compared to 59% 10 years ago before the United/Continental and Delta/Northwest mergers.
Despite those figures, Vasigh favors the AMR-U.S. Airways merger because that’s “the only way” American Airlines can survive. And if it doesn’t, that too would increase consolidation in the airline industry, reducing competition and pushing up prices. But higher prices, says Vasigh, are an incentive for new airlines to enter the market, which would increase competition eventually.
That’s why Macke wants the DOJ to approve the AMR-US Airways merger. “The more free the airline industry, the better it works and the lower the prices longer term,” says Macke. Watch the video above to see more about why the Justice Department’s move may not necessarily benefit consumers in the long run.
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