Consolidation not the threat opponents feared

When discussing mergers and consolidation, one of the constant refrains heard from opponents is that competition will be limited and these quasi-monopolies will result in higher consumer prices. That position is becoming less tenable as the process unfolds, partly because the present US situation already implicitly grants regional monopolies and, increasingly, those fortresses are being challenged.

We have often presented articles that display a regional concentration in the US market that is virtually unheard of elsewhere – especially on the US east coast. Try living in Miami or Dallas and not flying American; or if in Atlanta or Detroit, good luck not using Delta. A recent article on Delta’s expansion noted that the carrier will begin service from Detroit to Sao Paulo, adding South America to the hub’s destinations and putting additional pressure on United at O’Hare.

Challenges at hubs

The new Delta has also announced plans to increase service to Cleveland, Charlotte and Toronto in an obvious bid to challenge the incumbents there. Rather than ceding the competitive edge to others in their strongholds, Delta has embarked on a programme of direct challenge which will increase, rather than erode, competition.

And then there's American. In our 22-Jul-2010 report on American’s second quarter earnings, President Tom Horton outlined a strategy clearly focused on challenging its rivals at their core operations. Gerard Arpey, the carrier’s chair and CEO, publicly stated that American would move more aggressively into Charlotte, Atlanta and Minneapolis. Acknowledging the past failure of such endeavors, they believe that the newly gained oneworld immunity will alter the outcome this time.

Management also stated clearly that, with the alliance’s new freedom, they intend to “compete more effectively with Star and SkyTeam”, and to be “ focused on taking customers from Star and SkyTeam and putting them on American or BA”. These are not statements that signal a less competitive environment, and since much of that initiative will hinge on pricing and capacity, consumers do not appear to be facing a period of reduced options.

Level field not playing American's favour

Given the three alliances are now playing on a level field, there are a number of likely results.

1. As AA pointed out, under the non-immunised arrangement BA has been both a competitor and an ally and that conflict has been defused. Interestingly, the comments focused almost exclusively on the AA/BA combination. Iberia was cited only in its new relationship to BA, and the other immunised partners, Finnair and Royal Jordanian, received no mention.

Furthermore, the structure of oneworld, allowing members regional exclusivity, continues to make intra-regional travel a complex and often roundabout exercise. Even with immunity, it is difficult to see how oneworld might attract residents of most European cities where other alliances prevail. While being far better able to challenge the competition on routes like Barcelona-Los Angeles, they remain unable to carry that same Barcelona passenger to Zurich or Munich without a connection.

2. The problems that are plaguing BA as well as the ongoing congestion issues at Heathrow went unaddressed, as did any reference to the downsizing and restructuring that are remaking JAL.

Even though the rulings allow for closer cooperation, a number of oneworld partners are in critical periods of redefinition and restructuring. The ongoing and seemingly endless problems between BA and union Unite have created an operational uncertainty that is especially unnerving to time-sensitive premium travellers, and the recent ATC strikes in Spain have made that gateway equally problematic.

Africa and much inter-Asia travel remains either impossible or deeply challenging. The airline acknowledged that unit revenues were up in Europe and China, “but our relative share is less than that of our competitors”. Immunised or not, the purposeful effort to protect spheres of influence amongst members is limiting the alliance’s scope and coverage.

3. oneworld’s stunning and long-held advantage in Latin America is eroding as more airlines in the region join competitive alliances. While the combination of Iberia, LAN and American create a powerful synergy, the new networks being fashioned will take a toll, mainly by creating competitors that have the alliance access that has been very much a oneworld preserve.

4. Whatever synergies may emerge from the UA/CO merger are yet to be seen. Size alone is no guarantee of success, a fact we have seen repeatedly throughout the history of aviation. But the apparent strength that was created by the DL/NW union indicates that in a world of increasing consolidation there are benefits to size. Faced with two very substantial US competitors that also are key components of competing alliances, American will be hard pressed to achieve the advantage they propose.

Three broad takeaways

Whatever the final outcome for any of the players, three things are clear.

First, any assumption that this phase of consolidation will act against consumer interests is misplaced. In the end, those left standing may indeed have achieved more market power, but that day is far in the future and regulators will be vigilant if such an outcome were to surface.

Second, like them or not, with the immunisation of oneworld and the imminent replication of the Atlantic model on Pacific routes, alliances are forces to be reckoned with. More importantly, any disparity of coverage or benefits will be registered in the market.

Third, in every geography there are now alternatives. A recent report in the Minneapolis Star Tribune noted that since Southwest’s arrival in the MSP-CHI market, fares had fallen by more than 60% and the route volume had grown by 50%. While recognising that “Delta connects Minneapolis-St Paul to the world”, Southwest’s presence has had a marked effect on domestic fares and service.

Finally, the residents of Charlotte, targeted by both AA and DL as a growth market, can look forward to some pretty good offers in the months to come.

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