Tuesday, August 13, 2013

American-US Airways Merger: Fewer Seats and Higher Fares? Airline Linkups Boost Prices at Hub Airports

Updated August 12, 2013, 7:35 p.m. ET


The Wall Street Journal 

The looming merger of AMR Corp.'s American Airlines and US Airways Group Inc.  could lift fares at some of the combined carrier's hub cities, if past mergers are an indication. But reduced competition doesn't always boost ticket prices.

Years of consolidation in the U.S. airline industry have shown that one of the critical factors affecting fares is whether enlarged carriers cut flying to align their networks and reduce costs. When they do, higher fares usually follow. Steady or expanded service, by contrast, often keeps ticket prices stable.

American and US Airways have said their merger is predicated on expansion and that the larger airline will increase competition. The new American will fly "all the routes to all the markets we currently serve," US Airways Chief Executive Doug Parker told Congress in June. "Where appropriate, we expect to increase such service." Mr. Parker is slated to become CEO of the combined carrier

Merged carriers in recent years have culled unprofitable and redundant service, while further reducing overall schedules amid soaring fuel prices and a weak economy. Airline experts question whether the new American will be able to retain nine hubs—New York, Los Angeles, Chicago, Dallas, Miami, Philadelphia, Charlotte, Phoenix and Washington, D.C.—particularly nearby ones that often compete for connecting passengers.

George Hamlin, an independent airline consultant who has advised carriers on network planning, said the Philadelphia hub could face cuts because it is near New York. "Do you run two hubs that are 90 miles apart?" he said. He also said Phoenix is vulnerable because it serves similar markets to Dallas.

The Government Accountability Office said in June that the new American "could be expected to rationalize its network over time, including where it maintains hubs." The GAO said American's hub in Miami may lead the carrier to de-emphasize its new Charlotte hub, as 56 of the 116 U.S. airports that US Airways serves from Charlotte are also served by American from Miami.

Airlines have shrunk or closed hubs after past mergers. American eliminated its St. Louis hub, which came with its 2001 acquisition of Trans World Airlines. Delta Air Lines Inc. sharply cut back its hub in Cincinnati after its 2008 merger with Northwest Airlines.

That experience worries many frequent fliers. Mitch Miller, a retired industrial-supply executive who has homes near Philadelphia and Phoenix, said he prefers flying between them with Southwest Airlines Co. "because they're so much more flexible" and charge fewer fees. Even so, he fears an impact from the American-US Airways merger. "I could see them reducing in Phoenix," he said, predicting Southwest would then raise its fares from that market.

On Thursday, the U.S. Bankruptcy Court judge overseeing AMR's bankruptcy is scheduled to rule on the company's reorganization plan, which could let it exit court protection through its merger with US Airways. The Justice Department continues to investigate the transaction on antitrust grounds, but the two carriers have said they are confident they will receive approval.

If the deal closes, American, Delta, United Continental Holdings Inc., and Southwest—all products of mergers since 2008—will control 85% of domestic seats, according to aviation research firm Innovata LLC.

Such concentration doesn't always dictate the direction of airfares. Discount airlines can still police pricing, even with just 5% to 10% of the seats in a market, experts said. In many airports where competition is healthy or where discount carriers are growing, fares actually have fallen since 2008.

United's hub in Denver is still one of the most contested markets in the U.S., with robust service from Southwest and Frontier Airlines. The average inflation-adjusted domestic fare there has declined 9.3%, to $321, since the first quarter of 2008, according to Department of Transportation data. And in Atlanta, Delta has increased its seats by 5% since its 2008 merger, according to Innovata, helping reduce domestic fares there by 2%.

"Airline pricing is incredibly complex. It is driven by a combination of factors, including competition, capacity, demand," said Jonathan Kletzel, head of the transportation practice at PricewaterhouseCoopers LLP. "All move the needle a little bit."

However, some of the biggest fare increases since 2008 have come at airports where carriers are dominant, according to a Wall Street Journal analysis of government data. Mergers generally have strengthened carriers' grips on their key airports by attracting passengers to their improved overall networks, experts said.

But consolidation has also led carriers to cut service, which is one reason fares have risen sharply in hubs such as Salt Lake City, Cleveland and Memphis.

In Detroit, where Delta gained three-quarters of the market in its merger, the carrier has since cut its seats by 15%, helping to increase the average domestic fare there by nearly 20%, to $415, adjusted for inflation. At Bush Intercontinental Airport in Houston, United has cuts its seats by 9% since just before its 2010 merger with Continental Airlines, contributing to a 13% overall increase in domestic fares there.

Delta said fares are influenced by many factors, including the destination, the price of fuel, and the time and date of travel. United said it has "remained focused on keeping capacity in line with demand" and that the average rise in fares in most of its markets trails the increase in the Consumer Price Index.

Surprisingly, discounter Southwest has posted some of the largest fare increases at its big airports, including Dallas Love Field, Chicago Midway International and William P. Hobby Airport in Houston. Southwest is still completing its 2011 merger with AirTran Airways.

A Southwest spokesman attributed the fare increases to more passengers flying pricier long-haul routes.

Vinay Bhaskara, the U.S. analyst for Aspire Aviation, an aviation research firm in Hong Kong, said that in the age of four U.S. airline giants, a new breed of aggressive discounters like Spirit Airlines Inc. will help keep fares down. But, he said, that was the case before the pending American-US Airways combination.

"There was a time when you could make the argument that the sky is falling" if American and US Airways are allowed to merge, Mr. Bhaskara said. "But that doesn't really change the ballgame. It's already an oligopoly."

Source:   http://online.wsj.com