Airline Mergers: What to Fear
Sometimes it seems that if you stick around Washington long enough, you start to see policy issues repeat themselves, coming around for a second spin like horses on a merry-go-round. That’s how I felt when I heard that United Airlines agreed to acquire US Airways, and that other airline mergers are on the way.
Competition is at an end, merger opponents predict. Fares will skyrocket, and service will plummet, they say. But wait, haven’t we been here before? During the late-1980s the airline industry went through a similar wave of consolidation, with nine mergers in two years. Doom and gloom were widely predicted. Hobart Rowen of the Washington Post, for example, foresaw the end of cheap fares, adding, “To 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, in inflation-adjusted terms.
Strangely enough, US Airways’ own 1987 purchase of Pacific Southwest Airlines provides a case study in the transience of market power. At the time, PSA was the number one airline in California, and the merger gave US Airways (then USAir) a strong position on the West Coast. But USAir was unable to maintain that presence, losing out to a number of competitors, including upstarts Alaska Airlines and Southwest Airlines. Today, US Airways is only a minor presence in the West. (Check out members.aol.com/catchoursmile for a story by a former PSA ticket agent who returned to LAX in vain to search out former colleagues. While the USAir ticket counters were a “ghost town,” she found intense activity at a dozen or so former PSA gates now used by Southwest Airlines).
The lesson is that competition is a much hardier beast than people give it credit for. While it’s too early to say exactly what the consequences of this year’s merger (or mergers) will be, it is unlikely the effects will be much different than in the past.
But what about the politics? Knowing that their merger proposal would be greeted skeptically by politicians and regulators, 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 gaining minority support for the deal at the same time. But is it good for consumers? 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 again.