Wed | Sep 20, 2017

Airlines carve US into markets dominated by one or two carriers

Published:Wednesday | July 29, 2015 | 7:00 AM
AP Photo In this July 25, 2013 file photo, a United Airlines plane, top left, takes off from Newark Liberty International Airport, in Newark, N.J. Over the past decade, mega-mergers reduced nine large U.S. airlines to four - American, United, Delta and Southwest - with the result that travelers are increasingly finding their home airport dominated by just one or two players. United controls 68 percent of the seats at Newark.

The wave of consolidation that swept the United States airline industry has markedly reduced competition at many of the nation's major airports, and passengers appear to be paying the price in higher fares and fees, an Associated Press analysis has found.

Over the past decade, mega-mergers reduced nine large US airlines to four American, United, Delta and Southwest with the result that travellers are increasingly finding their home airport dominated by just one or two players.

Over the same period, domestic airfares rose faster than inflation, and analysts believe one leading factor is the decline in competitive pressure.

"Airlines aren't going at each other like they used to," said Mike Boyd, an aviation consultant frequently hired by airports. "They have their turf, and they very rarely go to the mattresses with one another."

At 40 of the 100 largest US airports, a single airline controls a majority of the market, as measured by the number of seats for sale, up from 34 airports a decade earlier. At 93 of the top 100 airports, one or two airlines control a majority of the seats, an increase from 78 airports, according to AP's analysis of data from Diio, an airline-schedule tracking service.

Overall, domestic fares climbed five per cent over the past 10 years, after adjusting for inflation. And that doesn't include the US$25 checked bag fee and other add-on charges that many fliers now pay.

To be sure, other factors have contributed to higher fares, among them a stronger economy, longer average flight distances and, for most of the past few years, some of the highest fuel prices in history. However, analysts believe consolidation freed airlines to charge more.

strategy paying off

The strategy is paying off. In the past two years, US airlines made a record US$19.7 billion in profits, even though air travel is growing only modestly.

The airlines' main trade group, Airlines for America, said the fare increases reflect stronger demand for travel and are not solely a result of the mergers. The group noted that airlines have used their profits to buy new jets and update airport facilities.

American Airlines CEO Doug Parker rejected the notion that consolidation has hurt travellers.

"We have increased flying out of each of our hubs," Parker said. "We want to expand. That's good for consumers, not bad."

The US Justice Department notified the four largest airlines on June 30 that it is investigating whether they are colluding to drive up fares by limiting the availability of flights and seats. Those four control more than 80 per cent of the US market.

There was a time before deregulation in 1978 when fliers had even fewer choices and paid higher fares than they do now. Back then, the US government controlled which airlines flew to which cities and how much they could charge. Competition intensified in the 1980s. As new airlines entered the market, fares dropped precipitously.

After 9/11 and the recession that hit immediately afterward, major airlines were in financial shambles. Several restructured through bankruptcy, and a wave of deals starting in 2008 led to the combinations of Delta and Northwest, United and Continental, Southwest and AirTran, and American and US Airways.

Justice Department antitrust regulators let the deals go through but forced airlines, in a few cases, to give up some of their spots at key airports to try to encourage competition.

Still, "the airline industry is less competitive now than it used to be," said Seth Kaplan, managing partner of industry newsletter Airline Weekly. "Some of us used to have eight or nine airlines to choose from. Now, we have maybe four or five, just as we have four or five cell phone companies to choose from."

The mergers have altered the competitive landscape at airports big and small.

In Indianapolis, the two leading airlines controlled just 37 per cent of the seats a decade ago, and domestic fares were nine per cent below the national average. Then the city's main airline, ATA, went bankrupt and was bought by Southwest, and its No. 2 carrier, Northwest, was absorbed by Delta. Now two airlines control 56 per cent of the seats, and airfares are six per cent above the national average.

The Dayton, Ohio, airport was served by 10 airlines in 2005, and fares were five per cent below average. Today, just four airlines fly there and prices are almost 10 per cent above average.

hub airports

Big hub airports aren't immune. In 2005, US Airways controlled nearly 66 per cent of the seats in Philadelphia. Now that US Airways has merged with American, the combined airline has 77 per cent of the seats. Airfare has gone from four per cent below average to 10 per cent above it.

Delta's hold on Atlanta, the world's busiest airport, increased during that same period from 78 per cent of seats to just over 80 per cent. At the same time, low-cost AirTran merged into Southwest and reduced flights there. Domestic airfares at the airport went from nearly six per cent below average to 11 per cent above.

Some cities are actually seeing lower fares than they did a decade ago. Prices in Denver were once 5.6 per cent higher than the national average. Now that United's market share there has dropped to 41 per cent from 56 per cent, fares are almost 15 per cent lower than the rest of the country.

Recent deals indicate the big airlines intend to stick to a strategy of dominating one airport and forgoing marginal service elsewhere.

For instance, United announced in June that it will abandon Kennedy Airport and move its dwindling number of JFK flights to New Jersey's Newark airport, where it already controls 68 per cent of the seats. At the same time, if regulators go along, Delta will further shrink its small presence at Newark and take over United's share at JFK, where Delta is already top dog.

One of the few competitive battles is taking place in Seattle, where Delta is mounting a fierce challenge to longtime No. 1 Alaska Airlines. Delta is building Seattle into a gateway to Asia and adding flights on domestic routes long dominated by Alaska. Seattle-based Alaska has responded by adding service.

The average fare at Seattle-Tacoma International Airport was US$377 in the third quarter of 2014, US$18 below the national average.

- AP