When airlines merge, consumers usually lose

From USA Today:

By Bill McGee, special for USA TODAY

For weeks now, even the European ash cloud hasn't kept aviation-holics from blogging and speculating about the on-again/off-again potential mergers between major U.S. airlines. Is a deal between United and US Airways really dead? Was it just a negotiating ploy to get Continental to the table with United? Or maybe, as Dan Reed reported last week, all three will combine into a mega-mega-carrier? No doubt we haven't heard the last of Airline Mergers 2010.

The arguments concerning such consolidation are well-documented. Airline executives and financial analysts claim such mergers lead to greater efficiency and service. Labor officials claim they lead to job cuts. And consumer advocates claim they lead to fewer flights and higher fares.

The U.S. General Accounting Office, a non-partisan research service, has reported on airline consolidation and identified several potential threats to consumers, including:

• a decrease in vigorous competition in certain markets

• a greater threat of travel disruptions due to labor or financial crises (imagine the nationwide effects of a strike or shutdown)

• a loss of service in certain communities

• additional barriers for new-entrant airlines

A 2008 report from the GAO concluded: "Mergers and acquisitions can also be used to generate greater revenues through increased market share and fares on some routes."

So what actually transpired after the most recent mega-mergers were implemented?

A closer look

Over the last decade, three major domestic carriers were completely absorbed by their merger partners: TWA with American, America West with US Airways (actually a "reverse merger" in which America West did the acquiring) and Northwest with Delta. From a labor perspective, this consolidation led to thousands of lost jobs while a handful of executives received hefty compensation packages. But what effect did these mergers have on the flying public? Here's a closer look at how passengers have been affected, particularly at former hubs.

Service cutbacks

Shortly after American acquired TWA's assets in 2001, the airline began reducing service in certain markets, particularly at TWA's former hub in St. Louis. According to the latest DOT statistics, total passenger traffic in STL fell from 23 million in 2002 to 12 million last year. This surprised no one, since analysts predicted the demise of that hub nearly a decade ago. In fact, it represents a pattern.

American gradually cut daily departures out of St. Louis from a peak of nearly 500 by implementing more regional flights and shifting service to its existing hubs in Chicago and Dallas. Things worsened last year, when American announced further reductions—from 83 daily flights down to just 36—prompting St. Louis Mayor Francis Slay to blog: "I think American Airlines is making a mistake today." The mayor claimed that last round of cutbacks came about even though American's passenger loads out of St. Louis were high. The only good news for local travelers is that Southwest has been increasing its presence in that market.

Meanwhile, just a few years after aligning with America West, the new US Airways dramatically reduced service in Las Vegas last October, cutting daily departures from 64 to 26 (down from a peak of about 140 as an America West hub). This prompted Sen. Harry Reid (D-Nev.) to write to Chairman Doug Parker of US Airways earlier this year, calling the decision "shortsighted."

Slashing these flight schedules has affected entire communities. A total of 12 cities lost nonstop service from St. Louis this year, while 10 cities are no longer served by nonstops from Las Vegas. Overall, the Airports Council International reports that among the busiest facilities in the world for passenger traffic, Las Vegas ranked 12th and St. Louis ranked 25th in 2000; this year Las Vegas ranks 23rd and St. Louis is no longer in the Top 30.

As for Delta and Northwest—which melded operations in January—it's not hard to predict the near future. Currently the airline's website lists seven domestic cities as hubs but the relative proximity of five of those airports—Minneapolis/St. Paul, Detroit, Cincinnati, Memphis and Atlanta—has already led to downsizing. This February headline from the Consumer Traveler website says it all: "Delta Reneges on 'No Hub Closure' Promise, Closes Cincinnati Base."

The potential match-ups of United and/or US Airways and/or Continental would produce obvious redundancies as well. This is particularly apparent throughout the Northeast corridor, from Newark to Philadelphia to Washington, D.C.

Conclusion: When merger partners' route maps overlap, certain cities will lose service, with fewer flight frequencies and loss of nonstops.

On-time performance

As for efficiency, any improvements obtained by mergers seem to be short-lived and the recent record shows eventually the less punctual partner exerts the greater influence. Back in 2001, the DOT ranked TWA 2nd among all U.S. carriers in on-time performance, while American ranked 7th. One year later, after TWA was absorbed by the larger airline, American shot up to the 2nd spot, but by last year it had sunk to 16th in the rankings.

Similarly, America West ranked 4th in on-time flights in 2005 while future partner US Airways ranked 13th. The following year, US Airways ascended to the 4th spot. However, by last year it had fallen back and was ranked 7th.

It's way too early to predict how Delta will perform now that it has absorbed Northwest, but the initial results are that so far this year it has ranked 11th in on-time flights. That's down from the same period in 2009, when Northwest ranked 7th and Delta ranked 10th.

As for other performance measures, the partner with weaker customer service skills seems to win out as well. In 2005, the last year America West was ranked by the DOT for consumer complaints, that carrier secured the 11th spot, while future partner US Airways was dead last at 19th. A year later, US Airways crept up to 18th place, and by 2009 it had barely budged up to 17th in the rankings. As for American, its acquisition of TWA had little long-term effect on its consumer complaint rankings.

Conclusion: Ignore talk of "synergy" and "efficiencies;" airline mergers don't improve customer service.

Competition and airfares

Airline execs always pledge that fares won't rise after a merger, while many pundits claim the opposite. The truth is the GAO was right—to a point.

I found examining average fares at a given airport doesn't work, because one airline's exit can mean another airline's entrance. Take St. Louis, where the legacy carrier TWA folded into American, which prompted low-cost carrier Southwest to increase its presence and therefore drive down prices. But even the largest of low-fare airlines usually don't offer as comprehensive a route map as a legacy hub-and-spoke carrier. So it makes more sense to examine specific routes where head-to-head competition between the two former rivals suddenly evaporated.

Take St. Louis in the fourth quarter of 2001, at the time TWA merged with American. I dug out the DOT's Domestic Airline Fares Consumer Report to find the routes from St. Louis where these two airlines competed most vigorously prior to becoming partners. My findings are in the chart below.

FOURTH QUARTER 2001
ROUTE	AVERAGE ONE-WAY FARE	MARKET SHARE
STL-Dallas	$172	TW: 51%; AA: 34%
STL-Washington	$215	AA: 49%; TW: 38%
STL-Baltimore	$125	TW: 40%; AA: 13%
STL-Boston	$271	TW: 50%; AA: 24%
STL-Santa Ana	$247	TW: 57%; AA: 24%
STL-Seattle	$233	TW: 60%; AA: 17%
FOURTH QUARTER 2004
ROUTE	AVERAGE ONE-WAY FARE	MARKET SHARE	INCREASE/DECREASE
STL-Dallas	$201	AA: 91%	$29
STL-Washington	$240	AA: 71%	$25
STL-Baltimore	$141	Southwest: 56%	$16
STL-Boston	$264	AA: 64%	($7)
STL-Santa Ana	$206	AA: 65%	($41)
STL-Seattle	$216	AA: 64%	($17)

Of the six St. Louis routes dominated by both TWA and American prior to their merger, average fares rose on half those city-pairs within three years. In fact, the 34% year-over-year increase on the St. Louis-Dallas route in late 2004 was the seventh-largest fare increase nationwide that quarter. Average fares fell on the remaining routes, primarily because of the increased presence of low-cost carriers such as America West, Frontier and Southwest. Even better news: By late 2006, the average fare on the St. Louis-Dallas route posted a 45% decrease—down to just $95—after Southwest aggressively increased its market share to 36%.

Meanwhile, after the 2007 US Airways-America West merger analysts wondered if ticket prices would rise in Las Vegas and Phoenix, former hubs for low-cost carrier America West. Happily, fares on many Las Vegas routes are kept low by the presence of several discount airlines. Out of Phoenix, however, America West and US Airways jointly dominated two routes, to Washington, D.C., and Colorado Springs. In 2008, one year after the merger, the average fare on the PHX-Washington route had shot up by $51 from $293 to $344, before falling back to $289 last year. But don't bother looking up fare info for PHX-Colorado Springs, since US Airways pulled out of that market entirely.

Conclusion: When one airline suddenly dominates a route where it previously competed with a merger partner, ticket prices are likely to rise—often considerably. If a low-cost carrier begins flying on that route, then fares undoubtedly will drop. But that's a big IF.

Here we go again?

If we've learned from recent history, then the patterns of airline mergers indicate we already know what will occur when the next mega-deal is approved. Let us know what you think of all this consolidation talk.