The proposed merger of US Airways and American Airlines, which the two companies hope to complete this summer, is the latest in a series of consolidations since 2001 that have reduced the U.S. airline industry from 10 major carriers to four.1–2 The merged airline, retaining the American name, would be the world’s largest carrier, followed in the U.S. market by Delta, United, and Southwest. Based on 2012 figures, these four mega-airlines would account for 83% of U.S. air travel.3
On an immediate level, the merger is intended to rescue American Airlines from bankruptcy in a manner that is acceptable to creditors, shareholders, and employees. Under the terms of the deal, the merged companies will be valued at around $11 billion, with 72% going to American Airlines’ creditors and shareholders (unusual for shareholders of a bankrupt company) and 28% to US Airways’ shareholders.4
The larger issue, however, is how the merger and the continuing consolidation of U.S. airlines could affect investors and consumers.
Seeking Cost Efficiency
Since the Airline Deregulation Act was implemented in 1978, the U.S. airline industry has struggled with almost 200 bankruptcy filings and myriad mergers.5–6 Of 129 airline start-ups in the first 25 years after deregulation, only 15 remained by 2003 and fewer are still in business today — with Southwest as the most successful example. American, US Airways, Delta, and United are the largest “legacy carriers” from the pre-deregulation period.7
One of the greatest challenges for the industry has been the cost of fuel.8 Although it may seem otherwise to consumers, airlines have not been able to recoup the increased cost through ticket prices. From December 2000 to December 2012, the price of gasoline rose 125% while airfares rose only 27%.9
Faced with spiking fuel costs, expensive planes, labor issues, security concerns, and too many empty seats, the U.S. airline industry lost $45 billion from 2000 to 2009.10 However, for three straight years (2010–2012), the major carriers have shown a profit — despite losses by American — and appear poised to be in the black again in 2013.11 Larger airlines not only have found cost efficiencies but also have more clout to charge fees for services such as ticket changes, baggage, preferred seating, and meals that have made a big difference to the bottom line.12
Higher Prices, Fewer Flights
Add-on fees are probably here to stay, but mergers have not had as much impact on ticket prices as might be expected. Although airfares have risen since 2009, these increases followed price drops during the recession. The average airfare, when adjusted for inflation, has actually declined by 18% since 2000.13 Even so, with less competition, the upward pricing trend of the last few years seems likely to continue.14
After previous airline mergers, the largest fare increases have been on routes served by both carriers prior to the merger.15 That may not be as significant for American and US Airways because they compete on only 13 routes on a nonstop basis.16
Regardless of ticket prices, fewer airlines mean fewer flights. U.S. airlines have cut domestic flights by 14% since 2007, reducing options for travelers and making remaining flights more crowded. Consolidation also impacts local economies, especially in medium and small hubs, which have experienced reductions in departing flights of 26% and 18%, respectively, in the five-year period from 2007 to 2012. Over the same period, departures from large airports have been reduced by only 9%.17
One example of local impact can be seen at Delta’s Cincinnati hub, which has lost nearly two-thirds of its flights since 2007. According to a University of Cincinnati study, the airport’s direct and indirect contribution to the local economy fell from 56,000 jobs and $4.5 billion in 2003 to 16,000 jobs and $3.6 billion in 2010.18
The Future of the Industry
The American–US Airways merger may mark the end of the consolidation trend because federal regulators would be unlikely to allow further consolidation among the remaining four mega-airlines.19 As a result, these carriers will jockey for market share for many years to come, with smaller airlines competing to fill in the gaps.20
A stronger U.S. airline industry could benefit the economy as a whole and might offer opportunities for investors who have been frustrated with past volatility.21
The mergers may offer less potential benefit to passengers. However, 2012 statistics indicate improved on-time and baggage-handling performance across the industry due in part to larger integrated networks.22 The hope for consumers may be that more successful airlines could provide more efficient and consistent service, even if it comes with a higher cost.
The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. A portfolio invested only in companies in a particular industry or market sector may not be sufficiently diversified and could be subject to a significant level of volatility and risk.
1) The Boston Globe, June 11, 2013
2–3, 16) CNNMoney, February 14, 2013
4) Reuters, June 4, 2013
5, 7–8) Forbes.com, August 20, 2012
6, 19) thedeal.com, February 14, 2013
9, 20) The Wall Street Journal, February 14, 2013
10, 13, 21–22) usnews.com, February 14, 2013
11–12) BusinessTravelNews.com, June 14, 2013
14) Forbes.com, February 11, 2013
15) National Public Radio, April 18, 2013
17–18) The Wall Street Journal, May 7, 2013
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