The airline industry is buzzing with consolidation. Delta (NYSE:DAL) and Northwest are teaming up, Southwest (NYSE:LUV) just announced plans to buy AirTran, and on Friday United wrapped up its deal with Continental, forming United Continental (NYSE:UAL).
While that's music to the ears of airline investment bankers, passengers have only one question: Will I pay more to fly?
“Clearly, fares are going up, and the mergers we’re seeing are only going to strengthen the airlines’ pricing power,” said James Brock, airline industry expert and professor at Miami’s Farmer School of Business.
What’s happening for the consumer is fairly obvious, Brock said. The number of options is shrinking, and it’s only competition that compels carriers to lower their fares and reduce their costs. If there is less competition, there is less incentive to lower fares.
Although most of the airlines have hinted that “cost savings” will be a product of their respective mergers, it’s unclear whether the consumer will see a benefit reflected in ticket prices, according to Seth Kaplan, managing partner at Airline Weekly.
“It depends on which merger you’re talking about,” Kaplan said. “With United and Continental, there are some markets where there will be one less competitor, which can mean potentially higher fares. Look at Chicago and Houston -- one fewer airline means they might cut service a bit, and the airlines will have more pricing power.”
Kaplan said that affected areas could be anywhere between hubs, including the route between New York and Chicago. Service could also be cut in Cleveland, and at Baltimore International Airport fares may rise more than other areas of the country.
However, the merger between United and Continental means the two had to concede a large number of takeoff and landing slots at New Jersey’s Newark International Airport to Southwest, and Southwest’s presence there will almost certainly mean lower fares overall, according to Kaplan.
And in the Southeast there may be some positive news. In Atlanta, with the Southwest and AirTran merger, Delta will likely be forced to slash its prices, according to George Hoffer, a transportation economist at the University of Richmond.
“Southwest is getting both feet in the door in Atlanta to take on Delta. It puts them right on Delta’s home turf. But unfortunately, any drop in price will be temporary,” Hoffer said. “At a certain point, Southwest will realize it can make more money if it charges higher fares along with Delta.”
Hoffer said one of the negative things about all the mergers is the absence of a “renegade” airline.
“The airline industry has always had a history of someone being a renegade -- someone who needs cash and always comes up with great deals on fares. The less competition, the less likely you have someone who can come out as that renegade,” he said.
Today, it's unlikely anyone will try to come into the market or start their own airline, Hoffer said. With each acquisition in the space, the barrier to entry for a new player in the space only gets higher. Any new airlines over the next decade would have to be large in size to compete.
However, there is a positive for consumers who often find themselves on regional commuter jets. Hoffer said the current consolidation has replaced some elasticity in the system that was lost in the last five years as airlines lost capacity. When airlines began farming out their flights to small regional third-party carriers or independent subcontractors, it put tremendous rigidity in the system that may be loosening now, he said.
“When you’re at the airport and you look outside, it may look like you have a lot of planes there, but they are all owned by different companies,” Hoffer said. “But as the airlines merge, they’re also consolidating their fleets, giving them more availability of aircraft. So if you’re stranded, they’ll be more likely to send you to another hub and get you back home through a back door.”
For individuals who prefer to fly on a 737, the Southwest and AirTran merger is good news, according to Nathan Smith, industry analyst and consultant for Frost & Sullivan's aerospace & defense group.
“By 2012, Southwest will have gotten rid of all airplanes other than their 737s, because a fleet that matches with the ones gained from AirTran will be a huge cost savings for them from maintenance perspective,” said Smith.
Passengers can also expect Southwest’s policies on checked baggage to take effect on AirTran flights.
“Southwest will eliminate those baggage fees that are currently charged by AirTran, because when the two merge, it will be AirTran becoming Southwest and not the other way around,” Smith said.
But even if ticket prices go up a few dollars, Kaplan said that consumers shouldn’t fret too much.
“In the long term, this is still a competitive industry that is charging less than ever for people to get where they are going when you look at inflation adjusted dollars. Flying is still a really good deal, and more people than ever are doing it.”