This week’s hot travel topic is the rumored merger between United and US Airways. The morning after the news broke I had calls from a bunch of reporters, with more likely to come. They’re all asking the same basic question:
“How would another big airline merger, like United with US Airways, affect the traveling public?”
The short answer is, “No effect in the short term, higher fares in the long term, and chaos in the event of a strike.” Here’s how the picture looks from a consumer perspective.
Why the Merger Mania?
When they contemplate a merger, the big airlines typically pronounce all sorts of consumer “benefits.” The party line is that mergers will provide (1) more “seamless” service on worldwide travel, (2) greater “efficiencies” leading to lower costs and lower fares, and (3) enhanced combined frequent flyer programs. All three, of course, are rubbish:
- Airlines already provide seamless service through their alliances and code-sharing agreements; mergers wouldn’t make any appreciable improvements.
- Nobody can actually identify specific efficiencies—the big lines are already so big that they would enjoy no further economies of scale improvements.
- Although a merged airline would almost certainly combine the two frequent flyer programs and nominally provide access to more destinations, the real problem isn’t where the airlines fly, it’s finding seats—and mergers do nothing to improve seat availability.
In sum, the pro-consumer reasons airlines float for mergers such as this one are a pure smoke screen to conceal their real objectives.
What are the Real Reasons?
You don’t have to look far to see the real driving forces behind mergers. Just focus on who will really benefit.
- Surviving lines expect less competition. The primary corporate reason to merge giant airlines is to reduce competition, and therefore to clear the way to higher fares. Currently only six giant lines provide truly nationwide air service systems: American, Continental, Delta, Southwest, United, and US Airways. It takes only one of them to negate an industrywide fare increase or kick off a major fare war, so the fewer big lines, the easier it is for the survivors to hike fares and the less likely it is to start major fare wars. The industry pundits have been screaming for years that financial losses in the domestic system are due to “too much capacity,” and the way they plan to reduce capacity is to reduce competition. It’s that simple.
- They also want to counter the giant foreign-based lines in international travel. These days, the big network airlines look to their international routes as the primary source of profits; the main value in their domestic networks is the “feed” to the so-far still profitable international routes.
- Wall Street will make out big time. Wall Street doesn’t care whether or not its merger creations are viable over the long term; it gets rich up front, with huge fees from orchestrating the merger process plus the expected short-term run-up in the stock prices. Short term, Wall Street says the merger would “create wealth” of several billion dollars. Long term—well, that’s someone else’s problem.
- Mergers are a win-win for top managements. No matter what happens, the ones who control the new company will get even fatter pay increases and bonuses, and the ones displaced will enjoy their rich golden parachutes.
The net result is that consumer issues and improved service potentials have virtually nothing to do with the process or the outcome. Not really surprised, are you?
The Real Traveler Risks
Ordinary travelers not only gain nothing through these real reasons, they also face two substantial risks.
- Fare increases. As noted, the primary objectives of giant mergers are to reduce competition, reduce capacity, and increase prices. Certainly, robust low-fare lines will continue to restrain uncontrolled price hikes by the giant network lines, but beyond Southwest, the others don’t cover enough of the total domestic market to control nationwide pricing. This potential for fare increases has already been widely discussed in various public and trade forums and will achieve due prominence—whether or not it has any real effect.
- Strikes. So far, I haven’t seen any attention to the other big risk to the traveling public: unprecedented disruption of travel and the national economy if one of the giant lines shuts down due to a strike. Today, among the six giant lines, United’s share of their domestic passengers is roughly 13 percent and US Airways’ is about 12 percent. A shutdown of either line, separately, would seriously impact nationwide travel. A shutdown of the combined line, with something like a quarter of the total domestic giant-line passengers, would have a disastrous effect. Those of us with long memories remember the chaos of United’s 1985 strike; a similar strike in a combined line would be far worse.
Industry pundits speculate that United’s real strategy may not be to acquire US Airways at all but instead to pressure its real target, Continental, back to the negotiating table. That would result in an even larger combined line. Moreover, conventional industry wisdom says that if United merges with either US Airways or Continental, American would be under pressure to merge with the other.
The result of the two mergers would be a nationwide domestic market dominated by just four mega-lines: Southwest plus the three network giants, each accounting for about a quarter of the total. If you figure in the other, smaller low-fare and network lines, each of the giants would have something around 18-20 percent of domestic passengers. With load factors already running in the 80s, how would you like to have to find a replacement seat if one of those lines was shut?
In effect, cascading United-US Airways and American-Continental mergers would create two more lines “too big to fail.” Worked out well in the banking sector, didn’t it?
What Can Travelers Do?
Unfortunately, that, too, is easy to answer: “nothing.” The ultimate decisions on this and other mergers will be made by the Departments of Transportation and Justice, Congress, and Wall Street. Ordinary travelers are likely to have no input and therefore no impact. I wish I could be more upbeat, but I can’t.