US Airways’ upcoming merger will either usher in a new era of increased competition and keep fares in check – or mean the arrival of ever-higher fares as consolidated carriers tighten their hold on the air travel industry.
Which version of the future consumers believe depends on whether they trust the assertions of airline executives or those of consumer advocates. Both sides have been making their pitch to the public as antitrust regulators consider the merger, which is expected to close in the third quarter.
Consumer advocates say further consolidation of the already shrunken airline industry will give the remaining airlines more latitude to increase ticket prices and fees, and remove much of their incentive to compete to provide better service. But US Airways CEO Doug Parker said the merger will actually create more competition by creating a viable global competitor to United Continental and Delta Air Lines.
Parker testified this week in front of a U.S. Senate subcommittee on antitrust issues, and visited Charlotte to pump up support for the merger. And though consumer advocates raised concerns during the Senate hearing, the merger has the support of both airlines’ unions and no serious opposition. Regulators have also given the go-ahead to the past three big airline mergers – Southwest-AirTran, Delta-Northwest, and United-Continental – and experts say there’s little chance US Airways-American will face major roadblocks.
“We anticipate it will go through smoothly,” Parker said of approval for the merger.
Higher ticket prices ahead?
At the heart of the consumer advocates’ argument is that putting together two of the biggest airlines means less competition and more ability to keep the total number of available seats low, which will inevitably lead to higher fares.
“Fewer airlines mean less reasons to resist fare hikes,” William McGee, a consultant for Consumers Union, told the U.S. Senate subcommittee. “Less competition means less incentive to innovate.”
The exact effect of past mergers on fares is unclear. A study published by the American Antitrust Institute last year found that fares rose above average on the majority of hub-to-hub routes following the Delta-Northwest and the United-Continental mergers. But the report also noted that other factors such as rising fuel costs and higher demand for service could account for some of the rise.
At Charlotte Douglas International Airport, US Airways accounts for about 90 percent of the daily flights, one of the heaviest concentrations in the nation. Charlotte Douglas ranked as the 29th most expensive airport in the U.S. out of the top 100 for domestic flights in the third quarter last year, the most recent data available.
Domestic round-trip airfare at Charlotte Douglas averaged $401, above the national average of $367. Charlotte’s average prices were up about 2 percent from the same quarter a year ago, but down almost 20 percent from their $498 average in 2000.
Still, consumer advocates point out that the 2000 fare included a free checked bag, something you’ll pay $25 for now on US Airways, and likely also included a meal.
Consumer advocates point out that U.S. travelers have fewer options than they did just a decade ago, when there were eight major carriers. Mergers have taken that number down to four major airlines, who will control almost 80 percent of the domestic market after the US Airways-American merger is complete.
But Parker said that because US Airways and American are both significantly smaller than the big three airlines now, they’ll actually be better able to compete once they merge.
“Those airlines today have less competition than they will once we put these companies together,” Parker said in Charlotte. “It’ll be intensely competitive.”
He also said the main drivers of airline tickets include things such as labor costs and fuel costs, and it’s difficult to separate those factors from competition. Fuel costs have increased substantially – from $1.31 a gallon in 2004 to $3.17 a gallon last year – and US Airways burned 1.1 billion gallons of fuel in 2012. That alone is enough pressure on airlines to keep ticket prices marching up.
The US Airways-American merger plan calls for the combined company to generate more than $1 billion worth of synergies to make the business profitable. Parker said that increased revenue will be based on attracting more customers, not higher ticket prices. “In our analysis there’s not one assumed fare increase,” he said. “Our synergies aren’t built on fare increases.”
Parker and his counterparts at American have also pointed out that their route networks have little direct overlap. They only have 12 domestic routes that directly overlap. Still, on those routes where they do overlap, the differences in price can be sharp. A one-stop round-trip ticket from Charlotte to Phoenix cost $244 on American Airlines this week. The same trip on US Airways cost $477.
“There are definitely routes where competition will be severely limited,” Diana Moss, director of the American Antitrust Institute, told the Senate hearing.
Hubs, cities could suffer
Whatever happens to individual ticket prices, consumers could still suffer if the combined airline cuts back air service to less-profitable markets. Small communities and hub cities like Charlotte that are totally dependent on US Airways to provide flights could be the most at risk.
“Analysts already are speculating about the future of US Airways hubs in Philadelphia, Phoenix and Charlotte,” McGee said. He pointed to former hubs such as Cleveland, St. Louis and Las Vegas that lost air service and hub status after former mergers.
Parker said that the point of the US Airways-American merger is to build a larger route network to better compete, not cut where the company flies. Some cities will lose out in the coming merger, however. Tempe, Ariz., will lose the US Airways headquarters when the merged company shifts to Fort Worth, Texas. And either Pittsburgh or Dallas will lose its large flight operations center as the company combines.
But Parker has been adamant that the new American Airlines won’t be cutting in Charlotte. The city has more than 7,100 employees based here, and Parker said there are no plans for any layoffs or furloughs.
The combined company will have more than 650 daily departures from Charlotte Douglas. While Parker said he can’t commit to specific growth numbers, having a larger route network will lead to more opportunities for new international and domestic routes from Charlotte.
“What I hope is they’ll grow from this,” Parker said of the number of flights. “I can’t imagine it gets any smaller.”
But consumer advocates caution that fliers should keep a critical eye on the combined company’s promises.
“Assurances from the airlines should be regarded with skepticism,” McGee said. “There is no substitute for competition.”