Airline Consolidation? Hell No

The chairman of the House Committee on Transportation & Infrastructure says a merged Delta-Northwest or United-Continental would hurt consumers

by James L. Oberstar

Mergers in the airline industry are nothing new. Most of the air carriers flying today are the products of one or more mergers over the past three decades or so. Yet this latest round of rumored mergers, which includes a United (UAUA)-Continental (CAL) scenario, as well as a Delta (DAL)-Northwest (NWA) combination, is significant. It would mean further consolidation in the airline industry, further reductions in choice for consumers, and probably fewer flights, fewer jobs, and higher fares.

Congress deregulated the airline industry in 1978. Prior to that date, airlines had to get Federal approval for fares and routes from the Civil Aeronautics Board (CAB). Deregulation lifted those restrictions and allowed the marketplace, not the government, to determine where an airline flies and how much it charges to take you there.

Deregulation held out the promise of a market-driven industry that would give rise to a host of new entrants, bringing more competition, lower fares, and better service. The immediate aftermath of deregulation saw the expected flurry of airline startups and new market service. That activity, however, was short-lived.

Pan Am Is but a Memory

The mid-1980s experienced the first round of merger mania in the airline industry, as the bigger fish began devouring the smaller ones. Delta bought Western. Northwest swallowed Republic. Allegheny changed its name to US Air (LCC) and bought Piedmont. Frank Lorenzo merged Texas International and New York Air with Continental and People Express, then bought once-proud Eastern, which faded into bankruptcy.

Airlines that didn't grow, withered. Others tried to grow too fast and imploded. Pan Am, for so many years America's flagship international carrier, merged with National. TWA, another U.S. carrier with a strong overseas trade, bought Ozark. Pan Am sold its prime Pacific routes to United. Carl Icahn bought TWA and sold its prize asset, the London Heathrow route, to American (AMR). Now, TWA itself has been absorbed by American, and Pan Am is just a memory.

Meanwhile, the surviving carriers fattened up on the carrion of the failed and failing airlines. The Transportation Dept. did little to stop this rush toward market consolidation, or even slow it down. Former Transportation Secretary Elizabeth Dole and her successors never met an airline merger they didn't like. Samuel Skinner, Transportation Secretary under President George H. W. Bush, stated there would still be competition even if the industry consolidated down to three major carriers.

Fear of a Three-Airline Future

I was then, and still am, extremely fearful of a three-airline future. With only three major airlines, there would be enormous incentives for each carrier to refrain from competing with the others at their strong hubs and routes. This strategy would likely lead to the greatest mutual profitability, while strong competition across the board could prove suicidal to the airlines. Moreover, as each major carrier became larger and stronger, it would become increasingly difficult for new competition to gain a foothold in a market.

For example, let's take a look at a potential Northwest-Delta merger. Northwest operates major hubs at Detroit and Minneapolis-St. Paul. Not surprisingly, the airline's busiest route, in terms of passengers carried, is between those two markets.

Delta's home hub is Atlanta. Its most popular route is Atlanta-Orlando. Although Delta does not dominate service into and out of Orlando International Airport the way it does at Atlanta's Hartsfield-Jackson, the airline does dominate the Atlanta-Orlando route, and Atlanta is the most popular point of origin for flights to Orlando.