The airline industry is experiencing a domino-effect of mergers and acquisitions, started by Delta and Northwest in 2008. Frontier and Midwest made their announcement at the beginning of 2010 and recently, United and Continental stated their intention to join forces, with Southwest and AirTran following on their heels.
In an industry fraught with bankruptcy – 37 airlines have filed for Chapter 11 since 2000, according to the Air Transport Association – mergers make sense as airlines look to cut capacity and raise profits while expanding their route networks.
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More extensive flight routes draw more business travelers, the lifeblood of the airline industry, but how will they be affected when airlines merge? As each pair of merged airlines pools their enormous fixed costs and seek to trim the fat, will customer service or the few remaining amenities take a hit – or will these duos create new ways to generate revenue while improving travelers’ experiences?
Only time will tell, but here are a few potential results to watch out for as the story unfolds:
Fewer flights: 2010 already saw fewer flights thanks to capacity cuts by struggling airlines, and some large airports still haven’t recouped domestic capacity lost in 2008 due to the rise in oil prices. As airlines join forces and combine their routes, will passengers have fewer choices? Though it may not be as much of a problem at airports where the merging airlines’ routes don’t overlap, expect fewer flights and possibly fewer convenient flight time choices.
Fare hikes: As the first major low-cost carrier merger, it will be interesting to see if Southwest and AirTran raise prices to compete with the full-cost behemoths. Low-cost carriers have typically benefited from the point-to-point model of flying into less popular airports with lower gate and landing fees, allowing for aggressive price discounting. Full-cost airlines carry on the outdated legacy of the hub-and-spoke model, whose inefficiencies can be costly.
However, as Southwest and AirTran step up to challenge larger carriers at major airport hubs – such as Delta/Northwest in Atlanta – will they be forced to raise prices to maintain profitability?
Service level changes: To justify the risk of merging, airline shareholders require a quick increase in profitability – usually achieved by reducing costs and raising revenues. One way to reach this goal is through personnel cuts – but that would lead to a decrease in customer service levels. How much will airlines value J.D. Power ratings over their bottom line?
More ancillary costs: Airlines have become quite adept at finding ways to charge for things that were formerly free – like baggage, exit row seats and food on domestic flights. In fact, US Airways’ president reported this month that ancillary fees “represent 100% of profitability” in 2010. While it looks like extra fees are here to stay, travelers may not feel as nickel-and-dimed if airlines innovate new services to charge for that actually improve the customer experience – such as passing through the elite security line and express boarding.
While mergers sometimes connote hassles like learning rules of new frequent flier reward programs and customer service snags, airlines have the opportunity to create a better traveler experience while still maintaining profitability. Since the fare wars of the 80s proved an unsustainable competition model, airlines should focus on differentiation through ancillary services that actually add value and convenience for the frequent travelers they seek to serve.