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Low-cost carriers won’t weaken strength of a combined American-US Airways behemoth

Aug 08, 2012 5:46 am

Skift Take

Anyone remember low-cost carriers? They would do little to weaken the power of an American Airlines-US Airways merger. For road warriors when it comes to airline consolidation, there are few positive options.

— Dennis Schaal

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In all the talk about a potential merger of American Airlines and US Airways, there are two groups that get lost in much of the conversation — air passengers and low cost carriers.

If the merger takes place before or after American emerges from bankruptcy, travelers would see higher fares as competition is eliminated on 22 routes, and inferior service at smaller airports, while a “dwindling fringe” of low cost carriers, chiefly JetBlue, Frontier and Spirit, would be ill-suited to provide substantial competitive pressures to blunt the power of the four dominant carriers.

The backdrop to this reduced competition would be the emergence of a new Big 4 — American-US Airways, Southwest, United and Delta — that would control 72% of the U.S. market, and have sway over airfares in many markets to a great extent.

These are some of the findings in a new white paper from the American Antitrust Institute and Business Travel Coalition, which takes the position that the previous mergers of Delta-Northwest and United-Continental created “costly post-merger integration problems, substantially reducing rivalry on important routes, producing above-average fare increases, and driving traffic to major hubs and away from smaller communities.”

The white paper doesn’t come out against a potential American-US Airways combo, which is a leading candidate among several merger or investment scenarios being aired, but calls on the U.S. Department of Justice to review the competitive issues, and to view the articulated benefits with a great deal of skepticism.

“A US Airways-American combination poses potential concerns for competition and consumers,” says Diana Moss, vice president of the AAI and co-author of the report.

Where have all the low cost carriers gone?

While Virgin America, Sun Country and Allegiant are often considered in the low cost carrier mix, the white paper counts JetBlue, Frontier and Spirit as the main ones, and paints the merged Southwest and AirTran, formerly considered LCC-like, as now on the legacy carrier side of the ledger.

And, given these facts, coupled with US Airways merging with America West in 2005, LCCs as a counter-balance to the Big Four is a pipe dream, the white paper infers.

Thus, if you don’t count Southwest, LCCs now account for less than 10% of the U.S. airline market.

JetBlue (JFK and EWR) and Southwest and other LCCs (MDW, BWI, FLL and DAL) can provide only “limited substitution options” at alternative airports for routes that would be dominated by American-US Airways, the white paper says.

Flight frequencies at alternative airports won’t breach the gap; competition from other legacy carriers “cannot be relied upon;” and there is “the probability” that remaining carriers will engage in “tacit coordination” on pricing and city pairs, the report points out.

And, as JetBlue puts resources into the Florida and Caribbean leisure markets, it “may not provide a particularly good substitute for business travelers who are adversely affected by a merger of US Airways and American,” the white paper says.

“Trading one monopoly route adversely affected by the US Airways-American merger for another using an alternative airport dominated by Southwest is unlikely to produce fare decreases in the way of the merger,” according to the study.

 Takeover targets

If anyone is counting on the LCCs to provide a counter-weight to the market clout of a Big Four legacy airline line-up, their attractiveness as takeover targets “makes them increasingly unreliable as a source of competitive discipline in the industry,” the white paper says.

It would be a disaster for the LCCs’ decline to be exacerbated ad the white paper’s co-authors call on policy-makers to promote the role of LCCs and to place limits on the dominance of the legacy carriers as a way to promote more competition.

“Likewise, policies to ease participation by foreign airlines in domestic markets will increase competition,” the white paper argues.

 Consumer perspective

From a consumer perspective, none of the American Airlines merger scenarios, including tie-ups with US Airways, JetBlue or even Virgin America, would do anything to trigger lower airfares, or more and better flight choices.

In a view that’s harmonious with the white paper, passenger advocate Charlie Leocha  says “consumers have been the big losers” in past airline mergers, including those of Delta-Northwest and United-Continental.

“We have less competition and though airline pundits claimed that reducing the number of competing large airlines from six to four would have no effect, a look at the trend of airfares plus added fees over the past three years shows that it has been a disaster for consumers,” Leocha says.

He adds: “I don’t think capacity would have been cranked down as quickly or as much as it has.”

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