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Airline mergers won't help passengers

While a new wave of consolidation could be good for the airline industry’s bottom line, passengers will likely continue to see air fares rise and planes booked solid – even if the mergers don’t happen.  By John W. Schoen.
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After years of flying too many planes with too many empty seats — and losing way too much money — the U.S. airline industry is in the throes of merger mania. And while a new wave of consolidation could be good for the industry’s bottom line, passengers will likely continue to see airfares rise and planes booked solid — even if the mergers don’t happen.

Airline stocks soared Wednesday on news that United Airlines and Continental Airlines are talking about a possible merger. Separately, AirTran Holdings said it has made a $290 million cash and stock bid for Midwest Air Group — even though Midwest’s board has already said it wasn’t interested. The news follows a recent hostile $8.67 billion bid by US Airways for bankrupt Delta Air Lines.

Though it’s far from certain that any of these deals will go through, such mergers would likely give the remaining carriers more clout in raising fares, according to Jerome Chandler, a contributing editor to Frequent Flyer magazine.

“Its really Economics 101,” he said. “If you have fewer players in the industry, you are going to have higher fares. It’s almost inevitable. Mergers are about what’s  good for the airlines — not necessarly what’s good for the consumers.”

Any such deals would require approval from the Department of Transportation and the Department of Justice, which is far from assured, according to airline industry analyst Ray Neidl at Calyon Securities.

“A lot depends on what happens with the US Air-Delta situation,” Neidl said. “Everyone is waiting to see what the DOJ and DOT are going to do. If it looks like they’re going to reject it or put a lot of ‘what-ifs’ on it and require a lot of divestitures, that could slow down the merger trend.”

Discount carrier AirTran may get a better reception from regulators because it makes up a much smaller share of the overall market. Though the company has yet to get approval for the deal from Midwest’s board, AirTran CEO Joe Leonard said he was confident of getting approval from Washington.

“There is very little overlap; it matches up perfectly,” he told CNBC. “We don't see hurdles at DOT or DOJ.” 

Mergers aren't popular with the carriers’ unions, which face layoffs as duplicate routes are combined. On Wednesday, nearly 3,000 Delta pilots, their families and other supporters rallied outside Atlanta to support keeping the airline independent.

"That message is as clear as we can put it: Do not mess with our company," said Delta pilot  Tom Winecoff.

The pilots were joined by Georgia’s two Republican Senators, Saxby Chambliss and Johnny Isakson, along with U.S. Rep. David Scott, a Democrat whose district includes part of Atlant’a airport, and Republican Rep. Tom Price — all of whom oppose the merger.

But even before any merger gets off the ground, airlines are already cutting capacity, raising fares and packing planes tighter than ever.

“We've had about 15 percent of the industry's capacity come out of the market" from the peak in 2001 to the trough this year, said airline analyst Helane Becker. “And there's still another 5 or 6 percent that could come out.”

One result is a dramatic improvement in the industry’s bottom line. On Tuesday, the International Air Transport Association said the global airline industry is close to breaking even after six years of losses. The group is forecasting industrywide profits of $2.5 billion next year — after a cumulative loss of $41 billion since 2001.

Falling jet fuel prices have helped. But much of the turnaround has come from a series of fare increases as demand for air travel remains strong.

“I’m looking for price increases next year,” said Neidl. "The airlines, in my opinion, have been negligent in getting their prices up in a strong demand environment over the past two years.”

As fares have risen, airlines also have succeeded in packing their flights with passengers, all but eliminating empty seats on many flights — boosting their so-called load factor above 90 percent.

“Regardless of mergers we're going to see load factors remain as high as they are,” said Terry Trippler, who follows the airline industry at “The days of getting your own row — that’s long gone.”

But Trippler said fears of skyrocketing fares from mergers may be overblown.

"Eventually a merger can streamline an entire operation,” he said. “So even though maybe you have fewer seats that you’re offering, you can lower your prices because your seat cost per mile has dropped.”

Efforts to raise fares will also continue to face pressure from low-cost carriers like Southwest and JetBlue. A merger of discount carriers AirTran and Midwest could give the combined company more clout to expand into new markets, bringing more competition and helping to slow fare increases, said Neidl.