Will the Airline Industry Soar After Consolidation?

By Jonathan Spira on 11 February 2013
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If American Airlines does merge with its smaller rival, a move that could be announced this week,DSC_0661 it will mark the end of a decade of consolidation in the airline industry both in the U.S. and abroad.

The $10 billion deal will conclude an era that began with American’s acquisition of TWA in 2001 and deals that include America West-US Air, Delta-Northwest, United-Continental, and Southwest-AirTran.  In Europe, Air France merged with KLM Royal Dutch Airlines, British Airways merged with Iberia, Lufthansa bought Austrian and Swiss, and Air Berlin bought six smaller airlines.  Meanwhile, Etihad bought stakes in Are Lingus, Air Berlin, Air Seychelles, and Virgin Australia.

Ironically, US Airways, which more or less began life as All American Airlines and has been leading the charge to merge with American, has attempted to merge with both Delta and United, both of which later merged with another partner.

To understand what went wrong in the airline industry, one merely has to look back 35 years. In 1978, the Airline Deregulation Act went into effect and removed government control over fares, routes, and market entry.   By phasing out the regulatory powers granted to the Civil Aeronautics Board, the airlines – and passengers – became subject to market forces.

Since then, the industry has literally struggled to stay aloft.  In the period from 1978 to 2001, nine major carrier and hundreds of smaller ones either went bankrupt or were liquidate.  Such names as Pan Am, TWA, Eastern, and Banff disappeared from the skies, as did the many new airlines that were founded in the wake of deregulation.

The appearance of low-fare competitors caused carriers to engage in what turned out to be self-destructive strategies that were compounded by rising fuel and labor costs.

Five years ago, however, things started to change, at least in the U.S., when Delta Air Lines merged with Northwest.  Today that merger is largely regarded as a success and Delta, currently the nation’s second largest airline, is considered to be both well run and profitable with good labor relations.  The 2010 merger of United and Continental, currently the world’s largest airline, is still a work in progress, however.  The aftermath of the merger has been marred by system failures, crippled operations, angry customers, and poor employee relations, although United has made great strides in righting the ship in the past few months.

While many blame deregulation for the airline industry’s near demise, the carriers that didn’t survive were close to being on life support and deregulation merely accelerated the process.

A 1996 study conducted by the Government Accountability Office found that fares dropped on average by 9% from 1979 to 1994 and that the actual fare paid declined roughly 30% between 1976 and 1990 when adjusted for inflation.  Despite predictions to the contrary, deregulation did not cause an erosion in service to smaller markets.

Deregulation also pushed the industry to a more pronounced hub-and-spoke model although the advent of low-cost carriers that provide point-to-point service has further changed that model.

Today, planes fly fuller and the industry is moving towards an era of sustainable profitability and higher credit ratings.  Granted, if the American Airlines-US Airways merger goes through, travelers will have fewer choices – four airlines would then control ca. 83% of all domestic seats – but that industry would presumably be more stable and hopefully provide more reliable service to its passengers.


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