How Airline Mergers Saved an Industry--and May Even Benefit Fliers

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Finnair Celebrates 85th Anniversary In Milan
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MILAN, ITALY - SEPTEMBER 16: The Cabin Crew of Finnair wearing old style uniforms attend Finnair 85th Anniversary Celebration at Malpensa Airport on September 16, 2008 in Milan, Italy. (Photo by Vittorio Zunino Celotto/Getty Images)

In the airline industry, the "turbulence" puns never seem to end, because there's always something that rattles the big carriers and shakes up the business. But if the U.S. Airways-American Airlines merger goes forward as expected, it could be the final leg of a transformation that's been underway since the government deregulated the industry in 1978.

When American Airlines declared bankruptcy in 2011, it was the seventh Chapter 11 filing by a major U.S. carrier since 2000. There's virtually no other business in which a majority of the competitors declared bankruptcy over a given period of time. The U.S. auto industry came close, when General Motors and Chrysler went bankrupt in 2009, but that was a discrete scenario rather than business as usual. In most industries, the bankruptcy of one big company actually benefits competitors instead of serving as a template for their own Chapter 11 filings.

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The airlines, however, face the same set of confounding challenges. It's expensive to buy or lease airplanes, which you have to pay for, whether you fly them or not. The high fixed costs of running an airline make it tricky to adjust supply--the number of airline seats available--when demand falls during a recession or travel slowdown. During periods of excess capacity, when there are more planes flying than necessary to meet demand, brutal fare wars slash airline revenue. Then there's the volatile price of oil, a major cost that airlines can do nothing to control.

All those bankruptcies allowed the airlines to trim an excess supply of jets and cut labor costs that got inflated during the late 1990s, when the carriers were flush and the unions for pilots, flight attendants and machinists had the leverage to demand generous contracts. They also set the stage for a spate of mergers, including American and TWA in 2001; U.S. Airways and America West in 2005; Delta and Northwest in 2008; and United and Continental in 2010. Once American and U.S. Airways have merged, the industry will have shrunk from eight or nine big carriers in 2000 (depending on how you count) to just four. Delta, United, Southwest and the new American will control about 85 percent of all domestic air travel.

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Consolidation is finally helping a money-losing industry become profitable. From 2000 to 2009, U.S. airlines lost a staggering $45 billion, according to Airlines for America, a trade group. But the industry turned a profit in 2010 and 2011, and probably will again once the 2012 numbers are in. Fliers may associate bankrupt carriers with fire-sale airfares, but on the whole, a dysfunctional airline industry is a net drag on the U.S. economy. "What we should all root for is an equilibrium in which the airlines are stable enough to make some money for shareholders and provide steady employment, while not charging consumers too much," says Seth Kaplan, managing partner of the trade publication Airline Weekly.

Too much consolidation, of course, can generate monopolies that gouge consumers. But so far that hasn't happened. Since 2000, the average airfare, adjusted for inflation, has fallen by 18 percent, according to the Dept. of Transportation. Airfares have risen more sharply since 2009, but that follows a plunge in fares during the recession, with ticket prices settling more or less where they were before the downturn.

Airlines do charge more for extra baggage and other extras these days, but travelers have some control over whether to pay those fees or not. "Mega-mergers over the last seven years have not caused U.S. domestic passengers to experience dramatically higher airfares or drastically reduced competition on most routes," a recent study by consulting firm PwC concluded.

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As much as travelers like to gripe about flying, the experience is actually getting better. The rate of mishandled baggage in 2012 was the lowest in the 18 years the government has been keeping records. Nearly 82 percent of flights arrived on time, the third-best annual performance on record, and the cancellation rate was the second-lowest in 18 years. Mild weather, better technology and other factors have contributed to the better performance, but larger route networks with more integration help, too.

Profit-hungry carriers undoubtedly will push fares as high as possible if a shortage of competition on some routes lets them get away with it. But there are still discounters like Spirit and Frontier eager to find markets where they can undercut established carriers by offering lower fares.

Meanwhile, there are still plenty of developments that could bring a return of the turbulence puns, such as another spike in oil prices or a terrorist event that disrupts air travel. But for once, the nation's airlines may enjoy favorable winds and blue skies.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.



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