For Travelers, the Math Points to Substantial Price Hikes Where Carriers Merge and Dominate
In airline mergers, monopoly markets pay the highest toll. Scott McCartney looks at which routes will face the richest price hikes with when American and US Airways are to combine, and offer tips for travelers seeking alternatives. Photo: Getty Images.
Some big-city air routes have been hit with punishing price increases of 40% and 50%, and other well-traveled paths likely face big fare hikes in the future.
It’s the fallout from airline mergers, and the planned combination of American Airlines and US Airways LCC +2.91% could bring a new round of hefty fare increases. When two competitors combine to dominate prime routes, those markets tend to bear the brunt of higher prices.
Consider United Airlines and Continental Airlines, which used to compete for customers flying between Chicago and Houston, for example. After the two airlines merged in 2010, the combined company, which took the United name, now carries 79% of the traffic traveling between Houston’s Bush Intercontinental Airport and Chicago’s O’Hare Airport, not counting connecting passengers. United’s average fare on that route soared 57% in the three months ended September 2012 compared with the same period three years earlier, according to Department of Transportation data compiled by consulting firm Oliver Wyman. By comparison, United’s total average domestic price per mile over the same three-year period went up only 16%.
Travel will change significantly for consumers on a few routes served by both American and US Airways. Between Miami and Philadelphia, for example, US Airways carries 54% of travelers, according to DOT data for the third quarter of last year. American has 44%, and a combined American-US Airways will have 98% unless other airlines decide to do battle against the behemoth. A saving grace for price-conscious consumers: Southwest flies between Philadelphia and Fort Lauderdale nonstop, and other airlines offer connecting flights.
“There are definitely routes where competition will be significantly eliminated,” said Diana Moss, director of the American Antitrust Institute, a nonprofit group that aims to promote competition, at a March 19 Senate hearing on the American-US Airways deal.
The Delta-Northwest and United-Continental mergers resulted in “substantial elimination of competition on some very important routes,” Ms. Moss said. Fare increases resulted—”and some pretty significant ones. We also saw very few fare decreases.”
A Delta spokesman says many routes where the two airlines together dominate have actually seen increases in traffic, including passengers flying between hub cities and others making connections. “Because demand went up, fares went up,” said spokesman Anthony Black.
United has attracted a larger share of business travelers as a result of its merger, so average fares have gone up since business travelers tend to pay more than vacationers, a spokesman said.
A spokesman for US Airways declined to comment while the Justice Department considers its merger with American. Executives of American and US Airways said in testimony before the Senate in March that overall, their financial projections include no fare hikes. They said their combination will increase competition across the country because they can offer more connections and be a stronger competitor to United and Delta. US Airways officials also have pointed out that in many of the two airlines’ dominant markets, Southwest offers alternatives to nearby airports.
US Airways Chief Executive Douglas Parker, who will be CEO of the merged airline, notes the two airlines have only 12 routes overlapping out of 900. “By putting these two networks together, we would provide better service, more efficient service to consumers,” he said at the Senate hearing in March.
Another route that will be dominated by the planned merger is between Philadelphia, a big hub for US Airways, and Dallas-Fort Worth, American’s biggest hub. The two airlines will have a combined 92.4% market share of that route, based on current business numbers.
Spirit Airlines SAVE -0.18% already sees opportunity there. Last week, the small rival, which likes to fly where fares are high and it can stimulate traffic with low prices, began flying that route. Spirit says it decided to enter the Philadelphia-Dallas market last year before American and US Airways announced their combination because fares were already high on that route.
With Spirit in the market before the merger is completed, “we will never know how high fares would have gotten post-merger,” said Barry Biffle, Spirit’s executive vice president.
Over the past three years, from the third quarter of 2009 to the third quarter of 2012, the average domestic price per mile paid by Delta customers increased almost 33%. American’s domestic price per mile—called “yield” in airline parlance—increased 23% and that of US Airways rose 20%. Southwest, which doesn’t charge fees for a passenger’s first two checked bags, pushed its prices up faster than its competitors: Its yield jumped 35% over the same period.
Those increases look strong given the slow pace of economic recovery. But airfares had sunk to very cheap levels during the recession, driving several mergers and pushing American into bankruptcy reorganization. Despite the higher prices, Wall Street analyst Jamie Baker said in a report last week that mergers haven’t resulted in the price hikes analysts expected. “Looking at industry revenue, you might not realize that America West, Northwest, Continental and AirTran are gone,” he wrote.
In some markets, United has pushed fares sharply higher. There are 15 markets with a United domestic hub on one end and a Continental hub on the other, and 12 of them have seen above-average increases for the merged airline. Travelers flying between Denver and Houston-Bush saw a 57% jump, and the Newark-San Francisco route recorded a 50% increase between the third quarter of 2009 and the third quarter of 2012, according to average-fare data compiled by Oliver Wyman.
United says on the whole, average fares in those 15 markets combined are up 35%.
Fare increases have shown a similar pattern for the Delta-Northwest merger, though direct competition from AirTran in Atlanta has held down prices some. Of nine routes between Delta’s three main domestic hubs and those for Northwest, seven have seen above-average fare increases over the past three years. Cincinnati-Memphis, a route between the two smallest hubs for each airline, saw the biggest increase: nearly 66%. Busier routes saw increases just under 40%.
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