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Airline Mergers are Consumer Win, Report Says

<p>A new report says that airline mergers, reduce the number of companies competing for travelers' business, have benefited consumers.</p>
American Airlines and US Airways signs stand next to each others at Denver International Airport in Denver, December 9, 2013.
American Airlines and US Airways signs stand next to each others at Denver International Airport in Denver, December 9, 2013.AFP - Getty Images

Airline mergers: Industry executives love ‘em, consumers hate ‘em and a new report suggests that the overall effect of the industry’s consolidation is more positive than many people think or want to believe.

Published by the auditing and consulting firm PwC, the report states that the mega-mergers of the last several years have led to better on-time performance, fewer lost bags and fewer and smaller fare increases than declining competition would suggest.

“We’d heard over and over again that these mergers are terrible for consumers but it’s not that clear,” said Jonathan Kletzel, PwC’s U.S. transportation and logistics leader. “There’s not a benefit to every market everywhere but they’ve benefited more consumers than they’ve hurt.”

As evidence, Kletzel cites Department of Transportation figures that show U.S. domestic airfares inching up just 2 percent per year between 2004 and 2013 and actually dropping 0.5 percent per year when adjusted for inflation.

Such news, of course, will come as a surprise to fliers in cities that have lost service due to capacity cuts, the closing of secondary hubs and other ancillary effects of a consolidating industry.

It should also be noted that the figures in the report only represent base fares and don’t take into account the proliferation of add-on fees many passengers now face.

“Take a roundtrip ticket between Boston and Washington, D.C., that might cost $150–$200,” said Charlie Leocha, director of the Consumer Travel Alliance. “If you check a bag, that can add $50 to the airfare.”

Apples-to-oranges comparisons aside, a major reason post-merger fares haven’t risen higher, says Kletzel, is that low-cost carriers (LCCs) have historically served as price guardians, forcing network carriers to remain competitive.

As evidence, the report notes that in markets where LCCs have joined the fray, average fares dropped 5 percent between 2008 and 2013. Conversely, markets in which LCCs have pulled out experienced a whopping 28-percent increase in average fares.

“The laws of economics haven’t been repealed here,” said Frank Werner, associate professor of finance and business economics at Fordham University. “When you average it out, it’s true that prices have gone up only marginally but when you dig deeper you get a very different picture.”

And that picture may darken further as the industry continues to evolve. When the merger now in the works between American Airlines and U.S. Airways is completed, four carriers will control 80 percent of the domestic market and they’ll maintain that control, in part, by deciding to essentially cede certain cities to their competitors.

“Everybody’s recognizing everybody else’s fortress hubs, letting them be the king in their domain,” said George Hoffer, adjunct instructor of economics at the Robins Business School at the University of Richmond (Va.).

Case in point: Earlier this month, American Airlines announced it would drop nonstop service from New York’s LaGuardia Airport to Cleveland and Minneapolis (part of an antitrust settlement with the Justice Department), effectively handing those cities over to United and Delta, respectively.

Taken together, the changes suggest that even if the industry’s ongoing consolidation hasn’t led to drastically higher fares, many fliers are still likely to be unhappy with the state of affairs going forward.

“Travelers have fewer choices, they get crummier service and they pay for everything under the sun,” said Mark Cooper, director of research for the Consumer Federation of America. “The problem isn’t the mergers; it’s that the industry doesn’t support sufficient competition to deliver the customer experience we expect from a competitive market.”