Will U. S. Airline Consolidation Help the Industry?

By Richard McCabe, PhD, supporting faculty of Strategy

Tuesday, March 4th, 2008

This is a guest post by Richard M. McCabe, PhD, supporting faculty in Strategy at the Graziadio School of Business and Management, Pepperdine University

A recent Air Travel Consumer Report (February 2008) describes the continuing decline in service experienced by airline passengers in the United States. More than 24 percent of scheduled flights by U.S. airlines were late arriving at their destinations in 2007. That is almost 7 percent more late arrivals than in 2006 and continues a five-year history of increases in late arrivals. And when flights arrive late they often leave late for the next flight, over 21 percent of flights departed late in 2007. That is almost 6 percent worse than in 2006, and again continues a five-year history of increases in late departures.

Over seven checked bags were mishandled in 2007 for every 1,000 passengers, an increase of more than 4 percent over 2006. There was a 12 percent increase in involuntary denied boardings in 2007 versus 2006. Denied boardings is an indicator of selling more tickets than seats available. And consumer complaints increased about 59 percent in 2007 over 2006.

So now a merger of Delta Air Lines and Northwest Airlines appears imminent. Continental Airlines and United Airlines are reportedly discussing a merger, particularly if the Delta-Northwest merger is formally pursued. Other combinations have been discussed.

What can the various stakeholders expect if there is a significant consolidation in the U. S. airline industry?

Airline passengers are only one of the stakeholders in the U.S. airline industry, but certainly significant is that the history of airline mergers in the U.S. does not suggest improved customer service. Scott McCartney suggests in his column The Middle Seat for the Wall Street Journal: “…when big airlines merge, it changes life for travelers, leading to higher ticket prices, poorer service…” However, other stakeholders may benefit if the apparent primary objective, increasing traffic and revenue, is met. But even investors and executives benefit only if those additional passengers cost less to transport than they pay for their tickets.

With the discount airlines such as Southwest, JetBlue, and Virgin America likely able to provide less costly service, the merger candidates may have some difficulty increasing fares sufficiently to overcome the added bureaucracy and its cost inefficiencies.

Recent significant mergers in this industry indicate mixed results, both in terms of the apparent objectives of increasing traffic and revenues and in terms of profitability. Two recent significant mergers are the American Airlines acquisition of Trans World Airlines in 2001 and the America West acquisition of US Airways (now known as US Airways) in 2005. The American combination resulted in about 2 percent combined growth in revenue passenger miles since 1999, compared to industry growth of about 15 percent over that period, and a decline in passenger revenue (adjusted for inflation). The “new” US Airways has grown a little over 4 percent in combined revenue passenger miles since 2003, compared to about a 14 percent industry growth in that period, and combined passenger revenue is about the same as in 2003.

In terms of unit profitability, it looks as if American will report about three-and-one-half mills per available seat mile and US Airways about eight mills per seat mile for 2007. A standard for comparison might be Southwest Airlines which is likely to report about seven mills per available seat mile for the year.

It isn’t at all clear that consolidation in the U.S. airline industry will be an “inflection point” for the industry.

What do you think?

Are there any benefits to consumers (or the industry) if these mergers actually happen?

What should the U.S. airline industry do to get back on track?

Note: The U.S. Department of Transportation released its latest Air Travel Consumer Report containing data for January 2008 on March 4, 2008. Click here to view the report.

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Related in the Graziadio Business Report

Key Success Factors for the Airline Industry by Richard McCabe, PhD

Planning in a Complex World by W. Scott Sherman, PhD (a look at the founding of Southwest Airlines)

Topic: Corp Governance, Economics, In the News, US Airline Industry
Tags: acquisition, air travel consumer report, consolidation, continental, delta, merger, northwest, u.s., united, US Airline Industry