What airline mergers mean for consumers

 
Published5/3/2008 8:40 PM

Well, it's finally happened. We will soon have the world's largest airline -- that is, until Continental Airlines, US Airways and United Airlines merge with each other or with smaller partners, or American Airlines buys up JetBlue Airways, Alaska Airlines, Frontier Airlines and Midwest Airlines.

The new airline will be called Delta (a far less geographically restrictive branding than "Northwest," although we always think of Mississippi when we think of "Delta").

 

What does this mean for airfares? A couple of weeks ago, we would have said not much. But with the demise of several low-cost airlines recently, we think we will see far fewer domestic fare wars. Gone are the days when Northwest can lower fares out of Delta's hubs and Delta retaliate by lowering fares out of Northwest's. Maybe, just maybe, we'll see some competition on international routes thanks to Open Skies agreements, which allow foreign and U.S. airlines to fly new routes between the U.S. and foreign airports, but that remains to be seen.

Yes, we will still have Southwest and JetBlue, and maybe AirTran Airways, to keep the mega-mergers on their toes. But once the other legacy carriers merge with each other, we don't expect to see any new low-cost carriers emerging anytime soon, at least not in this credit environment.

Even so, the airline business has never been rational when it comes to pricing (not since the days of airline regulation, some would argue), so it's really impossible to say that we'll never see a fare war again.

Besides which, airfares, even if they go up 50 percent, will still be absurdly low adjusted for inflation. Thirty years ago, a trans-Atlantic on British Airways ran around $198 round trip. We still sometimes see fares that low across the Atlantic, at least in the dead of winter. Adjusted for inflation, it's like paying $29 each way -- probably less.

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The only good news out of all this is that if you have 20,000 miles in Northwest's frequent-flier program and 10,000 in Delta's, you will have 30,000 in Delta's.

Of course, the Northwest/Delta deal could still fall through, and some analysts think that the days of the hub-and-spoke legacy carriers are numbered anyway, mergers or no, because their cost structures are too expensive compared to those of newer low-cost carriers, such as Southwest, JetBlue, Allegiant and AirTran.

With the proposed merger of Delta and Northwest, what's in the cards for airfares?

Many consumers are worried that consolidation will bring higher fares, especially if Continental, American, USAir and United also hear wedding bells.

But that isn't necessarily so, because several factors could keep fares low.

First off, there's always some misguided soul who will want to start a new airline. This is especially true after periods of airline consolidation. When Pan Am disappeared and after American bought TWA, fares increased for a while on certain routes, but then we saw the creation and expansion of discount carriers, some sadly no longer with us or on the danger list, such as AirTran, Skybus, ATA, JetBlue, Spirit, Allegiant, Sun Country, USA3000, Frontier, Virgin America and Southwest. The same thing probably will happen again.

                                                                                                                                                                                                                       
 

So if consolidation leaves us with three or four major airlines and a handful of surviving low-cost carriers, another David Neeleman will emerge to launch another JetBlue (who, incidentally, has left JetBlue and is building a new South American discount carrier).

The fact is that the airline industry, from the first scheduled flight on Jan. 1, 1914, to the present has never been particularly rational when it comes to the bottom line. Ask anyone who's been foolish enough to buy airline stocks.

Another factor to consider is that consolidation of the major airlines might not, in the end, ensure their survival. They all have higher cost structures (aging fleets, expensive labor) than the low-cost carriers. If we end up with Delta-Northwest, United-Continental and American-US Air as the remaining "Big Three," these airlines might become aviation dinosaurs, prey to existing and new low-cost carriers. This Darwinian survival of the fittest scenario could keep airfares reasonably low.

Additionally, the new "Open Skies" agreements might help to keep international fares affordable.

And then there's the oil factor. Some industry analysts believe that $112 oil is a fluke, and that prices will eventually plummet, as they have in the past. That would encourage (or enable, if you're into psychotherapy) the next generation of discount airline entrepreneurs.

Even so, chances are we won't see many more of those crazy retaliatory, tit-for-tat, unadvertised hub-airport fare wars.

What we will see, however, is all those maddening extra fees going up and up: pet-in-cabin fees, redeposit-frequent-flier-mile fees, advance-seat-assignment fees and all the others.

And in any event, let's face it: Even if airfares increase moderately, they'll still be an amazing bargain.


Reach George Hobica at hobica@gmail.com, Kim Liang Tan at KimLiangTan@aol.com
or log on to www.airfarewatchdog.com.

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