- The Washington Times - Monday, June 5, 2000

No one really likes airlines. Just mention air travel at any party and people will drag out all their horror stories of delayed flights, lost luggage, and rude service. Thus, consumers greeted warily the announcement that United Airlines would buy US Airways. "Now this just can't be good," most probably thought.
In fact, consumers do have reason to be concerned. The problem, however, lies not in the air travel marketplace, but in the political marketplace through which this merger must pass.
In sheer size, there's no denying this is a big merger. United is currently the nation's No. 1 airline, and US Airways No. 6. But we've seen big mergers before. During the late 1980s, the industry went through a wave of consolidation, with some nine mergers in two years. Doom and gloom was widely predicted. Hobart Rowen of the Washington Post, for example, foresaw the end of cheap fares, adding "[t]o believe anything else is also to believe in the tooth fairy." Guess what? The fairy arrived: airfares have actually fallen about 20 percent since then.
The consequences of this merger are likely to be no different. First of all, consumers in the west are unlikely to be affected US Airways has little presence there. (This despite US Airway's 1987 acquisition of Pacific Southwest Airlines, then a west coast leader. So much for market power).
In the east, both carriers are powerful, but not overwhelmingly so. US Airways currently serves about 19 percent of the traffic east of the Mississippi, and United only 10 percent. And while there are a number of Eastern "hub" airports dominated by UAL or US Airways, there are few airports where both are strong. The merger would not create a dominant carrier at any airport.
Of course, United and US Airways do compete on a number of key routes. But for the past few years, the big eastern contest has been between Southwest Airlines and everybody else. Starting in Baltimore a few years ago, and expanding rapidly from there, Southwest has been bringing increased competition and lower airfares up and down the East Coast.
It is true Southwest still flies to a limited number of destinations, and that it primarily targets non-business travelers. But that doesn't keep it from having a major effect. According to economist Stephen Morrison of Northeastern University, Southwest has affected fares on routes accounting for 94 percent of traffic nationwide, leading to almost $10 billion in consumer savings since deregulation.
Meanwhile, US Airways has not fared well. Profits, when they exist, have been minuscule about 1.4 percent last year. And the highly unionized company's costs have been sky-high at about half again the industry average. To get around this, US Airways even created a new wholly owned airline MetroJet to compete for discount travelers, with only moderate success.
In light of these troubles, the United merger looks less like an attempt at dominance and more like an attempt by a troubled airline to get back on track. United's national network could offer more and better connections for travelers. Its status as an employee-owned airline may also have been seen as a plus in keeping labor problems under control.
Knowing the merger would be greeted skeptically, UAL and US Airways threw in a couple of political sops to decrease the turbulence. In a dramatic gesture, most of US Airways' operations at Reagan National Airport would be handed over to a new start-up, D.C. Air owned by Robert Johnson of Black Entertainment Television.
This was a public relations master stroke not only eliminating a potential competitive concern, but buying minority support for the deal at the same time. But is it good for consumers? Mr. Johnson has little experience in the airline business, and it's not at all clear that a small start-up airline would serve D.C. consumers as well as one with a larger network. What we know for sure it that this new airline was conceived with the desires of politicians in mind, not consumers. Another concern: Will D.C. Air receive special protections? What happens when it is challenged by a larger rival?
Even more worrisome is the merging airlines' pledge not to raise airfares for two years after the merger. That sounds like good news, but who enforces it? After 22 years of success under deregulation, do we really want Washington back in the business of controlling airfares? What would William Shatner think of that?
Consumers have little to fear from the economics of this merger. They should, however, keep a suspicious eye on the regulatory deals that might be cut to make it happen. Once the regulatory camel gets its nose back into the airline tent, it may never come out.


James L. Gattuso is vice president for policy and management at the Competitive Enterprise Institute.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide