Aug 092012

US Airways says that only a merger (with itself) can save American Airlines. Is this true?

In the real world, the fewer the number of participants in a market, the less competitive it becomes.

In this sort of world, a situation where a country’s six major airlines – let’s just call them, hypothetically, American Airlines, Continental, Delta, Northwest, United and US Airways, merge and become instead three airlines (AA/US, CO/UA, and DL/NW), would see a marked reduction of competition in the marketplace, and moves us from a situation that was previously probably an oligopoly to one which is almost a monopoly (a monopoly can have more than one player – monopolies, while typically having a very few players, are marked by how the players ‘behave’ rather than by a simple count of the players in a market).  Our discussion here considers these definitions with regard to airlines.

Okay, so maybe that hypothetical country wouldn’t have noticed much in the past when ten airlines became nine, and so on, and maybe even when the six airlines became five (with DL and NW’s merger).  But then five became four (CO and UA merging), and now US is lobbying hard to be able to make four into three by merging with AA.

Now US Airways isn’t stupid – although it clearly thinks we are.  The airline recognizes that a few people will decry their merger proposals as being uncompetitive and harming us as travelers.  So they’ve launched a counter-attack, claiming – get this – that merging with AA would actually increase and improve competition in the industry.

They’ve a 100% predictable argument to support their claim.  It is an argument that – alas – has worked successfully for airlines before.  The typical approach is the first merger partners say ‘oh, who cares if we drop from six to five major players’, and everyone nods passively without much interest.  Then the next pair manage to slide in their merger, perhaps with some sacrificial lambs being tendered in mock reciprocity.  And then, for the coup de grace, the last pair of airlines say ‘hey, no fair.  You let the other four airlines merge, so now you must let us merge too’.  And all of a sudden, something that was never countenanced when 10 became 9, or 9 became 8, and so on, means we see four becoming three on the basis of past precedent now allowing for an unprecedented step further than anyone ever expected.

In case that’s not enough, US Airways also claims that American Airlines, the nation’s fourth largest airline currently, is not competitive by itself.  Never mind its international tie-ups with the Oneworld alliance, US Airways would have us believe that poor ‘little’ AA is so tiny and puny it couldn’t possibly survive on its own.  Its only salvation would be to combine with US (the country’s fifth largest airline).

But we should mind the implications of AA’s Oneworld alliance.  It is a very relevant and important part of the puzzle.  The impact on AA, and its ability to compete, from its Oneworld partnerships is enormous.  As you’ll know any time you get on an AA flight, one of two things happen.  Either the AA flight number is operated by a different airline entirely, or the flight, actually operated by AA, also claims one or two or three or more other flight numbers from other airlines too.

Rather than being the poor lost soul odd man out at the wedding, AA’s joint operating agreement with BA gives it access to the massive lion’s share of traffic between the US and UK, and a large share of the rest of the European traffic, and its agreement with Qantas again gives it access to the largest share of traffic to the South Pacific.

AA is not a small airline.  It and its Oneworld alliance is already a massive part of the market, both within the US and internationally.

Even if we were to pretend AA is a small airline, there’s another fundamental flaw in the US Airways argument.  Becoming bigger does not create any additional economies of scale for airlines that have already attained a certain size.  Our article ‘Bigger Airlines Are Not Better‘ uses hard financial facts to point out that big airlines tend to be more inefficient and less competitive than smaller ones.

It is true, of course, that AA is in Chapter 11 bankruptcy at present.  But that is because its costs were out of control.  There were no problems with revenue or other aspects of the airline, it was all to do with AA being pretty much the last airline to have retained the earlier high cost paradigm in its relationships with its unions.  The bankruptcy restructuring will solve that, without the need for any merger.

We should all oppose AA’s merger with US.  A merger with a substantially smaller airline might be acceptable, but we don’t want to see the country’s already reduced to four largest international carriers drop down to only three.  It will not boost competition and it will not benefit us as passengers, and more than any of the previous mergers have ever been to our benefit.

  5 Responses to “Will Merging AA and US Make the Industry More Competitive?”

  1. I am a million miler on AA, and they have been doing a rather good job on ther own, I subscribe to the old adage- If it isn’t broken, don’t try to fix it. I fear that if US gets in, AA and us passengers will be far worse off.

  2. I have been flying AA quite a bit in the last few months and they have been doing a great job, across the board!

  3. I can’t believe the stupidity of American’s pilots, wanting to combine with US Air, who haven’t been able to come to agreement with the old American West pilots in a contract after so many years. They think three pilots unions in the same airline without a contract is going to be better? Despite disagreements, American is a far better company, with a much better domestic and international route structure, far better customer lounges, personnel and service than U.S. Air. American’s pilots and flight attendants better wake up, before they find themselves in the shape of the village idiot.

  4. I do not know at what point mergers become non competitive. But why leave otr Southwest / Air Tran, one of the major carriers for US flights – and often cited as being a price leader. Also, with todays various fees, benefits, etc. it is hard to judge prices. ie. having 2 checked bags on Southwest may make it $50 cheaper than flying United with the same price. But not having lounges may make it undesireable for business travelers.

    • Hi, Mike

      Good point about Southwest and Airtran. I omitted them out of either laziness or a concentration on the major combined domestic/international serving carriers.

      But Southwest is undeniably a major player domestically – indeed, by some measures, it is the largest domestic carrier of all, and its absorption of/merger with Airtran further concentrated its own market share and measurably reduced the availability of other low-priced type competitors.

      The bottom line is whether we consider ‘only’ domestic carriers, or combined domestic/international carriers, we are getting fewer and fewer choices. And that’s not good.

Leave a Reply