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Published: Sunday, 12/8/2013 - Updated: 8 months ago

Experts say mega merger won’t stir up turbulence

American, United cleared for takeoff

BY GREGORY KARP
CHICAGO TRIBUNE

CHICAGO — Chicago’s 233 S. Wacker Drive had a rough day Nov. 12, when it comes to titles.

That’s the day the building, better known as Willis Tower and the former Sears Tower, officially lost its title as America’s tallest building, to be surpassed by 1 World Trade Center when it opens next year in New York.

On the same day, United Airlines Inc., which makes its headquarters in Willis Tower and is the building’s largest tenant, learned it will lose its claim as the world’s biggest airline. That came when antitrust regulators dropped a lawsuit objecting to the merger of US Airways Group with American Airlines Inc., which will end up bigger than United.

Indeed, even on its home turf of O’Hare International Airport, the new American could challenge to be a larger airline than United for domestic flights, and it already is by some measures.

WORLD’S LARGEST AIRLINES

When it completes its merger with US Air­ways, the new Amer­i­can Airlines will regain the title of world’s biggest air­line. Here’s how they will rank, with 2012 rev­e­nue in pa­ren­the­ses:

■1. Amer­i­can ($38.69 bil­lion)

■2. United ($37.15 bil­lion)

■3. Delta ($36.67 bil­lion)

■4. South­west ($17.09 bil­lion)

Source: SEC fil­ings

The effect on United in Chicago is just an example of the fallout from a dramatic reshaping of the airline landscape in recent years — in America and worldwide. In the United States, the metamorphosis has left just three major airlines — American, United and Delta Air Lines Inc. — along with one formidable low-cost carrier, Southwest Airlines Co.

It’s the fulfillment of a decades-old prophecy that the U.S. airline business could support only three major airlines. And it likely marks the end to a wave of major-carrier consolidation that has helped put U.S. airlines on more sound financial footing.

Could the U.S. airline industry finally have reached a healthy equilibrium that is better for the airlines and for its customers?

Some airline experts think so.

“If we can get to an industry that is financially stable, that is operating more of its flights on time, that treats its people better through greater job security, then ultimately the passenger benefits,” said Henry Harteveldt, a travel industry analyst at Hudson Crossing.

Now that the Department of Justice has exacted some concessions from the airlines and dropped its antitrust lawsuit last month, the $17 billion merger between AMR Corp., parent of American Airlines, and US Airways Group can go through, and it is expected to close Monday. American, which has been in bankruptcy for two years, cleared the final hurdle Nov. 27 by receiving the OK in bankruptcy court.

Passengers will begin to notice merging of the carriers Jan. 7, when the airlines plan to begin acting as a single airline, offering reciprocal frequent-flier benefits, for example, executives have said.

The combination ends a spate of recent airline consolidation, spurred by a weak economy and billions in industry losses, starting with Delta and Northwest agreeing to combine in 2008. That was followed by a United/​Continental merger and a Southwest/AirTran Airways combination.

Now, the three majors and Southwest will control about 85 percent of the U.S. market.

It’s a result that was totally expected.

The “Rule of Three” management concept posits that three is the magic number for competitors in a mature market, according to a recent report, “Aviation Outlook,” by management consultant ICF International of Fairfax, Va.

“‘Room for three only’ has been the universal prediction since the 1980s as flying became affordable and airplanes could take you nonstop almost anywhere. By 2014, in the United States at least, it will finally happen,” the report says.

The idea is that three is not too many competitors to perpetually fight and not too few to get greedy.

Europe also has three majors — Air France-KLM, British Airways, and Lufthansa — as do Latin America, China, and the South Pacific. There are three worldwide airline alliances, the report notes.

But the Rule of Three concept isn’t clean when applied to the U.S. airline market. That’s because of Southwest, which is the largest domestic airline in the U.S. as measured by number of passengers carried.

But Southwest is considered a low-cost carrier, not a direct apples-to-apples competitor with the three majors in terms of having an extensive route network, especially to international destinations. It doesn’t offer luxurious first-class amenities, and it doesn’t fly to quite as many smaller destinations as major network carriers do via their regional carrier partners.

“Three — or call it four — giant airlines are completely supportable and don’t sit on top of each other for every nonstop,” said Subodh Karnik, a vice president at ICF and former CEO of the defunct ATA Airlines.

The American-US Airways deal probably concludes the recent merger mania, he said.

“It would be hard to believe that further consolidation would be palatable to the government and to the traveling public,” Mr. Karnik said. “As time goes by and these major U.S. airlines perform well and become normal corporate citizens versus always being in bankruptcy, the idea of ‘let’s cut them some slack’ is also going to disappear.”

So fliers are likely to see the big three — or four — for some time to come. But that doesn’t mean competition is hurt and airfares will rise.

The soon-to-be combined airline made a deal with the Justice Department and several state attorneys general to sell off some airport gates and landing slots, presumably allowing low-cost airlines to gain footholds or increase their presence in U.S. airports.

That’s likely to drive down airfares in some markets.

“It will disrupt today’s cozy relationships among the incumbent legacy carriers, and provide consumers with more choices and more competitive airfares,” Bill Baer, U.S. assistant attorney general, said in announcing the Justice Department settlement.

So far, the effect of five years of airline consolidation on airfares is tough to gauge during a slow economic recovery.

In the second quarter this year, the most recent federal data available, average fares were lower than they were in the same quarters of 2012 and 2011, according to inflation-adjusted numbers from the Department of Transportation. For example, this year’s average fare at Chicago’s O’Hare in the second quarter was $389, compared with $399 last year and $395 in 2011.

It’s has been argued that the most recent merger creates more competition by assembling another megacarrier with international capabilities to take on United and Delta. And many smaller airlines challenge network carriers on some routes.

“Let’s not forget that airlines like Virgin America and Spirit continue to provide healthy price competition,” Mr. Harteveldt said

The key to maintaining that competition is ensuring that smaller airlines have access to airports “without having to shell out a king’s ransom for gates or slots,” he said.

The Consumer Travel Alliance, which opposed the American Airlines merger, said the modified deal, “may turn out to be a blessing for airline consumers and provide legacy carriers more competition than they bargained for.”



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