Consumer IQ

What do Airline Mergers Mean for Your Wallet?

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Nothing gives a frequent flyer more anxiety than hearing the word “merger.” Customers tend to be fiercely loyal to their airline and don’t handle change very well. But the last few years have seen some big changes across the American airline landscape, forcing flyers to adjust – anxiety and all. The most recent potential merger news involves American Airlines and US Airways.

What can one expect from an airline merger? There will be differences in the branding and the like, but for the most part your frequent flyer miles will not be taken away and the tickets bought in advance will be honored by the acquiring airline. On the flip side, some cities will see a noticeable decrease in service, while others will lose service all together.

What about price? This one is a bit tricky, but you should generally expect to pay more in the long run. This is not because of one merger, in particular, though. It is due to the confluence of mergers that have taken place in the industry over the last few years, which has managed to slowly give the airlines the upper hand in the battle for your travel dollars.

The History of Airline Deregulation & Mergers

To understand this structural change we first need to understand how the industry evolved. Around 30 years ago, the government deregulated the industry, allowing airlines to charge market rates. The airlines that emerged out of deregulation are known today as the “legacy carriers.”

There were a dozen or so airlines that emerged out of deregulation but only a few have survived. Throughout the 80s and 90s, the airlines battled it out with each other in a fight to the death.

During this time of fierce competition airlines didn’t usually merge. Instead, they went bankrupt and either emerged with a new cost structure or liquidated entirely. Some of the notable casualties during that time include Pan Am and Eastern Airlines. Their routes and planes were picked over by the winners while in liquidation.

The legacy carriers were confronted by a new group of airlines in the 80s and 90s that came to be known as the “low-fare” carriers. The emergence of Southwest Airlines as a major force changed the way we all fly today, as they moved people cheaply and in bulk from point to point(rather than in the traditional “hub and spoke” system). The low fare carriers challenged the heavy cost structure of the legacy carriers, putting pressure on prices.

In the early 2000s things began to change, and instead of dying in bankruptcy, the legacy carriers started to be acquired as whole entities by stronger airlines. The first big combo was formed when American Airlines acquired TWA in 2001. That was followed by America West acquiring US Airways in 2005 (the company decided to use the US Airways name). In 2008, Delta Air Lines and Northwest Airlines merged as equals with Delta’s name sticking. And then in 2010 you had United and Continental merging as equals with United’s name staying on top.

The merging wasn’t just reserved for the legacy carriers. Southwest started to get in on the action, picking off other low fare airlines. It first snapped up ATA in 2008 and most recently took over Airtran in 2010.

The latest potential merger involves US Airways and American Airlines. US Airways is trying to acquire its much larger rival while it is in bankruptcy, but it isn’t yet clear that American will be receptive.

What the Mergers Mean for Fliers

So what has come out of all these mergers? Let’s look at the American/TWA merger and the America West/US Airways merger as they present us with the most history. First, both carriers honored the acquired airlines’ frequent flyer programs, so customers didn’t lose their precious airline miles. The names of the programs changed, but there was little difference in terms of perks or mileage needed to go somewhere. The club lounges were merged but some were closed at cities that were no longer major focus points for the combined airline.

The biggest change out of these mergers was the frequency of flights for some cities. TWA’s major hub in St. Louis was hit very hard in its tie up with American. The city went from 800 TWA flights a day coming in and out of the city to just 200. Southwest has taken some of that business American Airlines left on the table, but for the most part, the people of St. Louis lost a lot of nonstop flights out of their city, requiring them now to connect through larger American hubs in Chicago or Dallas. This decrease in frequency was also seen in Pittsburgh when America West took over US Airways. S,o these early mergers seemed to hit passengers in terms of frequency, but not  much in terms of price, as the overall fare war between the airlines continued. The Delta/Northwest and United/ Continental mergers, though, were the big game changers. Here, the airline mergers weren’t forced - but were agreed to willingly by all parties while out of bankruptcy.

The United/Continental merger is the latest big airline merger, so let’s look at how this has been handled: The two airlines were very careful not to upset customers who had been loyal to their respective brands for years. Every change (even minor ones) was announced and introduced gradually as to not shock customers.

The major changes to route frequency have not taken effect yet, but United says it won’t be downgrading Continental’s old hubs in Houston, Newark and Cleveland. The two have merged their frequent flyer programs successfully, allowing customers to combine their accounts if they held miles in both programs. The airline did cancel their relationship with American Express, which affected  Continental customers who had used their Amex points and status to book travel and gain access to airport lounges for years. You must now get the United-branded cards to get those perks, which carry annual fees ranging from $95 to $395. As for fare increases, keep reading.

Higher Airfares

With fewer airlines in existence today due to all the bankruptcies, acquisitions and mergers, the airline industry as a whole has fundamentally changed. Airline ticket prices had been going down, relative to inflation, every year since deregulation, but that is starting to change. With fewer airlines in existence, the airlines don’t have to fight as hard for your business — and can charge more.  

Certain airlines now totally dominate cities and regions of the country, giving them major pricing power. As a whole, the airline industry is now able to cut capacity without worrying about other airlines coming in and stealing their customers. That means there are now fewer seats in the air, which has led to stronger competition between customers to get onboard. This translates into fuller planes and, yes, higher prices. Fare increases seem to stick more often than they did before and last longer.

The airlines now have the ability to charge you all sorts of fees that they were never able to do before consolidation. These fees have serious sticking power and have helped pad airline profits. Airlines could have never gotten away with this when there were a dozen or so major carriers, as two or three would invariably not go along with it to try and capture market share. Now, whenever an airline pops a new fee on the board, the other airlines quickly fall in line. It started with charging you a small fee for your first bag and has gone as far as charging you a fee to book your ticket with a reservations agent. You can’t even drink for free on an international flight on most airlines – the horror.

As a whole, there are really no more low cost carriers in the US today thanks to consolidation. These low cost carriers either match fares with competitors, or charge fees for simple things like overhead bags.

As airlines continue to consolidate you should plan to pay more. Airlines say that merging gives customers more choice, but it really doesn’t. It gives the airlines pricing power that transfers the competitive dynamic away from the airlines and on to the customers.