06 October 2010

DoT Caves to Big Airline

Continuing its policy of serving the industry - the US DoT has approved a broad brush of alliance requests. In doing so it has set the standard for a world of an oligopoly of airlines.

I have long argued that while alliances are very positive from a business perspective for the airlines they are distinctly un-consumer friendly and will ultimately result in higher cost of travel to the customer.

The evidence of this can be found in viewing the average fare revenue cents per mile. Over the last year in 12 months the revenue has shot up for the US airlines by an average of 18%. By any measure that is astounding. And that was with the loss of only one player.

With now CO and UA merging we are going to see more. So the oligopoly is in effect here. What used to be the big 10 is now the fab five.

And if no one else is listening I hope the DoJ and the DoC are.



Alan Hedge said...

A couple of things:

1) Since demand is up and capacity restrained, yields would be up regardless of merger activity, especially considering how depressed they were during the (lingering) Great Recession.

2) If the airlines hadn't just broken a loss streak of billions of dollars, I would be more concerned that mergers would yield excess returns due to reduced competition.

Yes, alliances will eventually result in higher fares, but the passenger airline industry as a whole may make profits consistent with their costs, including aircraft replacement, fuel, and yes, labor.

If one considers the number of airlines, across the North Atlantic, for instance, it's amazing that we consider the reduction in competition to be industry threatening. If the US had the equivalent to the number of home state carriers in the EU, we would have nearly fifty airlines instead of approximately ten. There is still plenty of room for consolidation.

Professor Sabena said...

This deserves a comment.

The issue in my view is broader it is that the total market has its capacity constrained and the actual competition on a large number of routes is reduced to an oligopoly status with resulting ability for supply side control. I agree the total picture of constrained supply and expanding demand leads to conventional higher prices. However that is normal and absent any external influence. Constraining any specific market to just 3 or less players reduces that ability for the demand side to have an open and fair access to product. The result in my view is that the decision moves from being not one of choice amongst carriers but binary choice to travel on that route or not.

Irrational behavior by airlines has been a hallmark of their history. Some good some bad. But historically lack of competition in any industry results in not just higher prices but decrease in service quality. It also promotes economic inefficiency which in my view is a very big threat. It has an unintended consequence that the airlines supply control factors - such as fuel and labour pass economic power to those forces. Thus it results in an automatic upward pressure on these costs which in turn will push consumer prices even higher.

I cannot support that the DoT's action is consumer beneficial. This gives airlines an automatic coverage. As Perry Flint opined in a recent article in ATW. The oligopoly situation creates players who are "Too big to fail". Judging by history of the automobile industry the price paid by the Government will be very high.

There can be no argument that the US airline industry became the model of efficiency over time. But the barriers to entry have been raised significantly by promoting oligopolies. Thus the external threat of new players entering the market is far lessened - further contributing to lack of efficiency and ultimately higher costs all round for the industry players.

As I noted. Great for the few(er) players too bad we will have to pay for it in decreased service quality and higher fares.