Airlines

Despite DOJ challenge, airline industry will continue to consolidate

Aug. 13, 2013 at 6:08 PM ET

Video: Airline mega-mergers are becoming common, but what does that mean for consumers? Mark Orwoll, international editor for Travel and Leisure magazine explains how the US Airways and American Airlines merger could affect you.

While the Department of Justice’s challenge to the merger of American Airlines and US Airways has tapped the brakes on the proposed $11 billion deal, it’s unlikely to stop it — or slow the ongoing transformation of the U.S. airline industry.

Regardless of the outcome, industry observers suggest that DOJ is trying to close the barn door of competition after the merger horse has bolted.

“It’s too bad previous mergers were approved but they’ve proven to be successful,” said travel industry analyst Henry Harteveldt of Hudson Crossing. “What’s often overlooked is the greater good that (previous) mergers have brought about. Delta/Northwest, United/Continental — they’ve added flights, expanded routes, they’ve ordered new airplanes.”

In other words, with fewer carriers to choose from, travelers will likely pay more to fly but may enjoy better experiences along the way.

Image: American Airlines, US Airways
Susan Walsh / AP
An American Airlines plane is seen between two US Airways planes at Washington's Ronald Reagan National Airport on Tuesday. Despite the Justice Department's challenge of the two airlines' proposed merger, industry watchers think the consolidation trend will continue, which is good for consumers.

While government and airline lawyers plan their respective cases, here's what fliers can expect in the years to come: 

Higher fares
While many fliers have experienced sticker-shock when shopping for airfares in recent years, mergers probably aren’t to blame. The real issue is what consultant Robert Mann of R.W. Mann & Co. calls the physics problem.

“Airplanes don’t fly without jet fuel and when jet fuel goes from less than a dollar to roughly $3.05–$3.10 as it is now, you’d expect the cost of getting any seat from Point A to Point B to go up significantly,” he said.

Likewise, even if a merged American/US Air were to close smaller hubs, other carriers will likely move in, helping to keep pressure on future fare increases. In April, for example, Southwest began flying out of Charlotte Douglas International Airport (taking over from AirTran), maintaining competition in a US Air-controlled market.

More fees
The DOJ’s challenge aside, it’s almost certain that the American/US Air merger will eventually be approved, most likely after the airlines agree to additional concessions. That will leave three legacy carriers, all of which have shown a propensity to act in lockstep when it comes to raising existing fees and finding new ones.

“There will be fewer places to run and hide,” said George Hobica of AirfareWatchdog.com, who advises travelers to take the initiative to avoid paying them. “You don’t have to check a bag — let’s all learn how to pack light.”

New routes
Even as the legacy carriers cut overlapping services, other carriers are stepping up. In recent months, Southwest has launched service to Grand Rapids and Wichita; JetBlue has begun flying from Boston to Houston and Philadelphia, and Spirit has announced it will start flying from Phoenix to Chicago, Dallas and Denver this fall.

“There’s nothing that stops an airline from entering a market where it can get access to gates and slots,” said Harteveldt.

Better experiences
Having learned the hard way that unrestrained expansion is a ticket to a rising tide of red ink and serial bankruptcies, the industry has discovered that there’s profitability in a more rational approach, which has allowed carriers to make long-overdue investments in their planes, terminals and services.

Last month, for example, American took the first delivery of a planned 460-plane order that will provide travelers with leather seats, in-seat power outlets and improved in-flight entertainment options. Delta, meanwhile, is in the middle of a $3 billion makeover that’s seen the opening of new terminals at JFK and Atlanta-Hartsfield. And just last week, JetBlue announced plans to offer business-class-style lie-flat seats on flights between New York and California.

A stable industry
While the fare wars of the past were good for travelers, they wreaked havoc on the airlines’ ability to invest in infrastructure, treat their employees fairly and stay out of the cellar of customer satisfaction surveys. And while some mergers have caused major disruptions, the end result is an industry that will likely be spared the upheavals of the past.

“We tried regulating the airlines and that didn’t work; we tried deregulating them and that didn’t work; now we’re trying consolidation and that seems to be working,” said Hobica. “Personally, I’d rather fly on an airline system that’s making money than one that’s losing money.”

Given the above, it’s not surprising that most observers view the DOJ challenge as a means to force more concessions from American and US Air rather than as an effort to block the merger entirely. Both carriers have issued statements saying they’ll fight the suit and expressing hope that the merger, which was expected to close during the third quarter of 2013, will do so before the end of the year.

Assuming it does, the next step will be the integration of the two carriers’ operations, which, as previous mergers have proven, can be at least as tough to navigate as the legal system.

“Delta and Northwest did a good job when they merged; United didn’t do as well as they intended to, and the US Air/America West merger was awful,” said Harteveldt. “In airline mergers, execution is everything.”

Rob Lovitt is a longtime travel writer who still believes the journey is as important as the destination. Follow him on Twitter.

Video: The Justice Department says a merger between U.S. Airways and American Airlines would cut competition and raise ticket fares. NBC’s Tom Costello reports.


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