Airlines on Final Approach to Monopoly of the Skies

The Wall Street Journal reported on Thursday, April 29 that United Airlines (UAL) is very likely to soon announce their merger with Continental Airlines, making it the world's largest airline by number of passengers carried. UAL is the nation's third-largest airline while Continental is number four. If actually successful, the single carrier will reportedly keep the Chicago-based United brand name.

This comes partially in competitive reaction to Delta swallowing up Northwest Airlines in 2008, itself becoming, briefly, the world's number-one carrier in both market value and passengers.

All this jockeying is not new. Recently, Southwest tried to purchase Frontier before Republic ultimately took it over and United was actually courting US Airways several weeks ago even as its talks got started with Continental.

When Congress deregulated airlines in 1978, the central premise was to expand competition, to offer consumers more choices and to lower prices. On all accounts, these have been exposed as complete myths and distortions. Today, thirty years after the deregulation of airlines, there is a virtual monopoly in the skies and steadily increasing fares.

The major airlines view mergers, according to a dispassionate January 10, 2008 Reuters dispatch on the eve of the then-impending Delta and Northwest merger, "as a way to stabilize the industry by allowing carriers to cut costs, reduce capacity, and raise fares." Nothing has changed.

There are now only five major US carriers on the world scene with many savvy analysts predicting only three surviving along with a scattering of several domestic low-cost carriers like Southwest. It is much the same internationally.

Whereas there were 50-plus international carriers that competed across the Atlantic in 1980, today there are three non-US carriers expected to be sole survivors on the world scale if the dominant tendency to consolidate holds.

British Air (BA), for example, and Spanish carrier Iberia just announced an $8-billion merger that makes it the world's third-largest airline revenue combination with each retaining its brand name operating under one corporate structure.

Industry analyst Peter Greenberg noted several months ago that "BA and Iberia are also in talks to hook American Airlines in on the revenue sharing in a deal that would allow them to fix prices on trans-Atlantic flights."

The trends are clear, the public skies are privately controlled by only a few carriers well situated to charge higher fares with less competition.

Champions of the free market boast about upwards of a 20% reduction in fares since 1978 when airlines were freed to set their own prices without the nuisance of government regulators. But this is very misleading. There are several factors contributing to the decline in prices. For example, booking online has almost entirely eliminated the large commissions of travel agents. Experts state these fees normally accounted for a full 10% of ticket prices.

And while it is true that fares to large cities has benefited from increased competition, where it exists, smaller communities have, conversely, seen substantial fare increases as their airports have experienced reduced or lost service. Millions of travelers are also forced to purchase tickets to major hub airports they otherwise would have bypassed during the period of regulation where direct flights to and from smaller markets were offered.

In addition, assorted service fees are among hidden costs which do not appear on the announced ticket prices. These can add up. Continental expects $350 million from baggage fees alone this year.

In the end, no matter how fares have fluctuated up or down over the years, there is no doubt that less competition ultimately will mean higher fares. And it is already beginning.

"If you're going to fly, you're going to be paying more," said Terry Trippler on April 29, 2010, an analyst with Cheap-seats.com, an online travel company that monitors fares.

Regulating Service, Prices & Profits

Under regulation, the government exercised control over fares and routes, established labor standards and limited market entry of new airlines. The idea was to ensure service to a wide variety of markets, to establish uniform working conditions and to maintain reasonable pricing. Carriers were guaranteed a profit through a cost-plus income formula.

In an attempt to expand airlines more efficiently, competing airlines were spread out, thus reducing competition in any one large market while ensuring service to many smaller airports. Anti-trust immunity was granted to airlines who were assigned a market in exchange for maintaining government regulations such as fare structure and labor standards.

But Congress, amidst free-market clamors for ending government interference reminiscent of today's noisy outbursts, largely preserved federal anti-trust immunity enjoyed by the airlines even after jettisoning regulation itself.

As a result, while over 300 airlines are estimated to have started up immediately after deregulation, now, thirty years later, competition is largely a distant memory.

According to thetravelinsider.info, by successively extending US airlines anti-trust immunity in "request after request, the Dept of Transportation has created a situation now where three airline[s] [join together to]... always control at least 50% of the market, often control more than 80% of the market, and sometimes control over 90% of the market."

Mergers only accelerate this dynamic by directly absorbing assets of the competition.

Surprisingly, such acquisitions, however, have not really paid off for investors over the years. There are several factors including the difficulty of efficiently combining the operations but primarily it is the industry's extreme vulnerability to the highs of the oil market and the lows of economic cycle that has acted to diminish returns from consolidation.

Nonetheless, despite the mixed results for Wall Street, the tantalizing prospect of achieving market monopoly remains the strategic objective of each combination, a net loss for laid off airline workers due to service cuts and a net loss for consumers paying higher ticket prices.

Monopoly by Any other Name

Even before recent mergers reduced major US airlines to five (apparently soon to be four), carriers were aggressively looking for ways to get a competitive edge by use of code shares and alliances stretching across the continents.

Today, there are three major world alliances, Star (UAL), Skyteam (Delta) and OneWorld (American) which share routes, equipment and facilities. This efficiency would ordinarily be laudable but in an unregulated market, these partnerships also dramatically reduce competition, enabling airlines throughout the world to jointly maintain higher fares.

Code shares and world-wide alliances are less complex alternatives to full mergers but employ the same monopolistic techniques clothed in consumer-friendly terms to sugar coat the bitter pill of offering fewer travel options to passengers.

Proponents of consolidation claim there is no other way to overcome the problem of overcapacity. This argument is fashioned to win public sympathy but it is very misleading. Low-cost carriers have demonstrated many times over that new travelers flood the airports when attractive fares are provided.

Monopolists wish to limit passengers to an ever-shrinking set of travel options, squeezing more and more of us into the proverbial middle seat while charging premium rates. Eliminating many of the anti-trust exemptions enjoyed by Wall Street is a major topic in Washington today, let's not forget how airlines have also manipulated the market while making their own rules.