02.14.13 8:55 PM ET
Airline Industry: Fine, Don’t Fly With Us!
Another airline merger?!
On Thursday, American Airlines, the nation’s third-largest airline, agreed to merge with US Airways, the fourth-largest, to create the biggest carrier in the U.S. “This is good for consumers, because we can take these two networks and put them together,” American Airlines CEO Doug Parker, who will eventually oversee the combined behemoth, told CNBC. Of the 900 routes the two airlines fly, Park said, “there’s only overlap on 12.”
For now, the two companies will continue to operate as independent entities, with different frequent-flier mile and reservation systems. Their respective CEOs promised the two frequent-flier programs will eventually be combined, with the value of miles being preserved.
The move is certainly good news for those with a financial stake in American, which filed for bankruptcy in late 2011, and in US Airways as well. But for consumers? Not so much. In the short term, it is sure to mean less, not more, competition. Fewer, not more, flights. And higher, not lower, prices.
The sky-high love match is just the latest step in a wave of consolidations that began during the Great Recession of 2008 and 2009. When the economy cratered, it was evident that too many airlines were competing for too few fliers. While upstart independents like JetBlue and Southwest continued to expand, the airline industry as a whole has been shrinking since. So Delta snapped up Northwest in 2008, and Continental merged with United in 2010. Rather than continue to discount one another into bankruptcy, the big airlines have decided to join forces and rationalize.
The result has been a decline in capacity. Since 2007, according to the U.S. Department of Transportation, the number of domestic flights in the U.S. has fallen every year, from 9.8 million in 2007 to 8.643 million in 2011—off nearly 12 percent. Accordingly, the number of passengers flying domestic flights fell from a peak of 679.1 million in 2007 to 618 million in 2009 before rising to 637.5 million in 2011. Through the first 10 months of 2012, the number of flights was down another 2.3 percent compared with the first 10 months of 2011, while the number of passengers was up .8 percent from the corresponding period.
Airlines have become more rational, reducing unprofitable flights and routes. And they’ve also become more rational by using data, software, and information technology to maximize sales and traffic on their flights. A plane seat is a perishable good. Once the cabin doors close, an empty seat becomes worthless. For years, airlines were generally content to throw out a large chunk of their inventory. A decade ago, the industry’s domestic load factor—the percentage of seats actually occupied—stood in the low 70s. But it has risen steadily from 75.5 percent in 2005 to 82.1 percent in 2010. Through the first 10 months of 2012, the load factor for domestic flights was 83.6 percent. In October 2012, the domestic load factor was at a record 84.1 percent.
This significant improvement has been good for the airlines, but bad for consumers. There are now fewer flights. On those flights, there are fewer available window and aisle seats. And those seats are likely to cost more than they did a few years ago—supply, meet demand. Oh, and thanks to that supply/demand equation, it is already getting harder to redeem frequent-flier miles.
These developments are changing the commercial aviation industry. It has become less democratic and more elitist. For much of the last few decades, U.S. airlines have essentially provided mass transit in the sky. But the skies aren’t particularly friendly for bargain seekers or people with lower means or less disposable income, or even for business travelers with limited budgets. Between 2007 and 2012, the number of passengers flying domestic routes annually likely fell by about 5.5 percent in real terms. This, in a period when the U.S. population rose.
The airline industry is shrinking its footprint, and seems just fine with that. Companies don’t seem to mind that they are pricing themselves out of certain markets, or cutting back service to smaller airports. Or that customers are reacting to price increases by seeking alternatives. Flying round trip from New York to Washington on the Delta Shuttle starts at $835—more than twice what the Acela costs. The New York Times reported last summer that Amtrak has seen its market share of the D.C.–New York corridor rise from 37 percent in 2000 to 75 percent in 2011, while its market share of the New York–Boston corridor has risen from 20 percent to 54 percent in the same time. Thanks to the expansion of rail service and the rise of new intercity bus services, there are a rising number of city pairs in which non-airplane alternatives make sense to more travelers. It costs about $500 to fly round trip from St. Louis to Chicago; two tickets on Megabus between the two cities costs about $80.
With each passing day, air travel is losing market share. And the dwindling group of large airlines is fine with that. They are perfectly pleased to have fewer Americans flying on fewer routes in more crowded cabins, and at higher prices.
In theory, American Airlines may now be in a better financial position to upgrade its planes, spruce up terminals, pay employees better, and add amenities like on-board Wi-Fi and entertainment systems. That could make for a better customer experience. But we’ll certainly be paying for it.