August 14, 2013

Airline mergers have already led to higher fares

The Associated Press

NEW YORK — The government is trying to put a stop to rising airfares and fees by blocking the latest airline merger — but for fliers, it's already too late.

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A US Airways, foreground, and an American Airlines plane are seen parked at the terminal at Washington's Ronald Reagan National Airport, Tuesday, Aug. 13, 2013. The Justice Department and a number of U.S. state attorneys general on Tuesday challenged a proposed $11 billion merger between US Airways Group Inc. and American Airlines' parent company, AMR Corp. (AP Photo/Susan Walsh)

The past decade has seen the largest transformation of the airline industry in a generation. Prior to 2005, there were nine major U.S. airlines. Today, just five.

The merger of American Airlines and US Airways would bring that number down to four. But Tuesday, the Department of Justice moved to block the deal, saying it would cost consumers hundreds of millions of dollars a year in higher fares and extra fees.

But even before this, the cost of flying had gone up for consumers as the industry consolidated. The average cost of a roundtrip domestic ticket — including baggage and reservation change fees — grew to $378.62 last year, up from $351.48 in 2008, when adjusted for inflation.

The American-US Airways merger would create the world's biggest airline and help propel American out of bankruptcy court protection. For smaller US Airways, the deal represents a chance to be a significant player in global aviation and to better compete with the larger airlines that now dominate the market.

The airline industry has been searching for stability ever since the government stopped regulating routes and prices in 1978. Companies that once had profitable monopolies suddenly faced startups that undercut their fares. Since deregulation, 195 airlines — small and large — have filed for bankruptcy. Some emerged stronger. Some stopped flying. Others survived only through mergers.

While deregulation created havoc for the airlines' bottom line, it did open up flying to the masses. Air travel used to be only for the rich. In 1979 — the first year after deregulation — a roundtrip domestic ticket cost $590.49, when adjusted for inflation. As new airlines started flying, prices fell dramatically. Mergers have reversed that trend.

The latest round of consolidation started in 2005, when America West bought US Airways out of bankruptcy, taking its name. Then Delta and Northwest merged in 2008, followed by United and Continental, and Southwest and AirTran. All of those easily won the blessing of antitrust regulators — the first two under President George W. Bush, the second pair under President Barack Obama.

Andy Brennan, an analyst with IBISWorld, said the government approved those deals to save the then-struggling industry. Now that the airlines' health has improved, regulators are more concerned about airfares.

"While there's still a bit of turmoil and volatility in the economy, it's much more stable than it was only a few years ago," Brennan said.

The number of players in the European industry has shrunk as well, with the mergers of Air France and KLM, British Airways and Iberia, and Lufthansa with Swiss and Austrian.

Consolidation has made the airlines more stable, provided job security for thousands of employees and rewarded Wall Street investors. Business travelers have benefited from more flight options and easier connections. But families looking to go on vacation face higher fares and fewer airlines to choose from.

"It's too late. It's already a very consolidated industry," said Savanthi Syth, an airline analyst with Raymond James. "I don't know if you want to stop an industry from being profitable."

In seeking to stop the American-US Airways deal, the government contends that airlines already follow each other's moves in setting prices and adding new fees. They even bully each other out of offering sales.

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