Since deregulation in the 1970's, the airline industry has seen a shift towards a more competitive structure. The rise of low cost airlines such as AirTran, JetBlue, and Southwest has exacerbated downward pressure on prices and expanded access to many primary and secondary routes. This process has continued unabated to this day; see, for instance, the recent entry of AirTran and JetBlue into the Richmond, VA market at Richmond International Airport (RIC), a fact heavily advertised as part of their "Fly 8" campaign.
When combined with rising costs due to, among other things, increased fuel prices and high labor costs as well as reduced demand after September 11, it is not difficult to see the problems facing the traditional airline powers. Indeed, these problems resulted in $42 billion in losses for the industry over the past 5 years. This has led several carriers, including United and Delta, to declare bankruptcy in a final attempt to restructure themselves in this new environment.
Besides bankruptcy, another strategy that many in the industry are attempting to utilize in order to reduce competitive pressures and increase market power (and, consequently, prices) is mergers and acquisitions. In recent months, US Airways has made a bid for Delta while United has done likewise for Continental. Consolidation has become the main avenue through which airlines are attempting to regain profitability, given that the large losses facing most major carriers suggests an industry with unneeded supply.
Of course, increased prices for air transportation would not be beneficial to travelers, leading to much public debate about the merits of the proposed mergers. Antitrust regulators will be concerned about an excessive consolidation among the largest airlines, fearing the shift towards a more inefficient oligopic market structure with less service to many routes and high prices for said routes. Labor unions, already reeling from prior concessions to their beleaguered employers, will be reluctant to grant even more bargaining power to these post-merger companies.
In the end, the major airlines seem to be trapped in a perpetual cycle of discontent, plagued by a market environment devoid of profits and by a political environment less than conducive to what maybe the most direct way of handling the crisis; as such, the outlook is certainly bleak with respect to the potential for profitability in the airline industry any time in the near future.
Submitted by Caryl Huynh, Chris Coyle, Lance Wang, and Meghan Magennis
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This blog post is very interesting to me. The major airlines must have significant differences in their cost structures to be struggling so badly. Currently, those airline companies with higher market shares (a route, from one destination to another would be considered a market) charge higher prices. These are the same companies running into losses. Thus, companies like JetBlue and Airtran must either be running huge deficits or have much much lower costs. I tried to look for some cost structure data on businesses in the industry but found nothing.
In the end, even if the bigger companies merged, many routes would remain low-priced because of these low-cost competitors. However, there would probably be several markets (routes) that would only be supported by these larger companies. For these routes we would most likely see much higher prices being charged as competition would be nearly non-existant. For this reason I agree that the merger may be a bad idea for consumers.
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