The airline industry is in the midst of a major transformation as it works to address high fuel costs and heavy competition. While it may be years before the dust settles, consumers ultimately can expect higher fares and fewer carriers.
The proposed merger of Delta Air Lines and Northwest Airlines is expected to trigger further consolidation, including a possible pairing of United and Continental airlines. Additionally, Denver-based Frontier Airlines has filed for Chapter 11 bankruptcy and small carriers including ATA, Aloha Airlines and Skybus have gone out of business.
Independent of the consolidation, carriers including United — the largest carrier at Denver International Airport — and Continental are already planning to ground planes and cut back on domestic flight capacity.
“Airlines are trying to adjust to a higher cost structure,” said Frontier chief executive Sean Menke. “At the end of the day, what does that mean for the consumer? At some point, if done properly, it is going to mean higher prices.”
While it remains unclear exactly how the changes will reshape the industry over the long term, it’s likely to mean strained customer service, fewer flights and fewer choices of carriers for consumers.
If airline mergers are approved, complications in the process of combining airlines could add more hassles to the air-travel experience.
“When you put computer systems and other things together, it doesn’t always work smoothly at first,” said George Hamlin, the Fairfax, Va.-based managing director of ACA Associates.
A merger also can be a painful process for employees, which can affect customer service.
Labor unions at United have taken a defiant stance toward management, saying their concerns must be addressed in any merger involving United.
“Whenever you put two airlines together, union members always pay a price,” said Evergreen-based aviation consultant Mike Boyd. “If you’re a 777 captain at United and you get bounced down to flying a smaller airplane, you can lose 25 or 30 percent of your pay, and it’ll affect your retirement. It’s a huge issue.”
Will mergers pass muster?
A first major question will be whether big mergers will pass muster with the U.S. Department of Justice.
“The more you get big industry into a traditional oligopolistic model, the more the government’s going to be concerned,” said C. Evan Stewart, an antitrust expert and partner at Zuckerman Spaeder in New York. “On the other hand, the government has to balance that with an airline industry that can get you and me and the rest of the country from point A to point B to point C.”
Delta and Northwest propose that their merger will create a powerful global airline that will offer more choices for travel around the world and will be better able to compete with leading airlines from other countries.
Although businesses may end up paying higher fares, many value the more comprehensive route networks that can result from mergers.
“As the economy becomes more and more global, . . . business travelers are often traveling to destinations overseas, so it certainly is important for companies to be able to get people there more quickly and easily and to have carriers that have global reach,” said Caleb Tiller, spokesman for the National Business Travel Association.
For that reason, he said, there’s a degree to which higher costs resulting from a merger are going to be acceptable to businesses.
In the current viciously competitive environment, airlines are struggling to attract customers and most have been unable to raise fares enough to cover rising fuel costs.
In the future, if there are fewer airlines and less competition, “there are always going to be particular times in individual markets when there will be cheaper seats because that’s when most people want to go, but there won’t be as many of them,” Hamlin said. “That’s almost inevitable if this industry is going to get its financial act together.”
Some are willing to bear somewhat higher air fares in exchange for carriers on firmer ground.
“We need stability in this industry,” said Minneapolis-St.Paul-based travel expert Terry Trippler. If airline mergers create stability, “it’s well worth it.”
The impact of the Delta-Northwest merger on competition will also be evaluated closely by the Justice Department.
Mergers reduce competition and “smaller communities end up being hurt with capacity being pulled out,” Menke said. “But these are business entities that are under a lot of pressure right now trying to make profits.”
Frontier could be vulnerable
Some analysts noted that increased consolidation could leave Frontier particularly vulnerable. “Where’s the room for Frontier?” Hamlin said. “It’s a nice carrier, a good product, but they may find themselves in an atmosphere where (they’re) starved for oxygen.”
Others, including Menke, say consolidation will help Frontier because it will be able to more easily raise fares to cover high fuel costs. Such issues are key in Frontier’s efforts to restructure under bankruptcy protection.
Some analysts have also speculated that Frontier could be swept up in the consolidation process, potentially teaming with Southwest, JetBlue, AirTran or Alaska Airlines.
The U.S. airline industry has gone through consolidation in the past, but it doesn’t solve all of the industry’s problems, Hamlin said.
“I would contend that one thing mergers don’t get rid of very effectively is the underbrush and the deadwood,” Hamlin said.
If a combined carrier cannot fix fundamental problems, he said, “it will be more spectacular if it fails.”
Kelly Yamanouchi: 303-954-1488 or kyamanouchi@denverpost.com
