Oh, the Chicken Littles have been out in full force for the US Airways – American Airlines merger. The sky is falling for US Airways frequent flyer members, they say. The sky is falling for consumers who like cheap airfare. The sky is falling for American Airlines customers because US Airways runs such a low frills operation. And on and on – perhaps I’m reading more of this from bloggers than from anyone, but if I were to believe everything I’ve read about this impending link-up, absolutely everyone involved will be screwed over.
Fortunately, that’s simply not true.
Although we think of airlines as a consumer business (and airlines have – quite unfortunately – sold themselves to consumers as a service business), they are, depending on how you look at it, either a manufacturing business or, more simply, a utility.
I remember interviewing at Northwest Airlines a zillion years ago, and someone I met with said that Northwest’s then-CEO (I can’t remember who it was) described the airline as a manufacturing company – they manufacture connections at hubs. If you look at the decisions they made in the late 90s and early 00s, that philosophy explains how the airline was run — they put off replacing their then-25-year-old DC9s because, well, why replace them when they were low-cost and allowed them to make connections in Minneapolis between Minot-originating passengers and flights going to Milwaukee.
They’re also quite a bit like a utility – specifically, the telecom industry. Without blah blah blahing about it here, think back to the history of the long distance companies – starting as small regional players which then came together as AT&T, which the government broke up into smaller companies before re-merging and settling on 3 or 4 groups with a national footprint. Or cell carriers, which developed similarly with smaller regional companies combining into a handful of large national players with a few primarily-low-cost-focused regional players. Sound familiar?
My point is that the US Airways-American merger was inevitable. Following deregulation the US probably needed 3-4 national carriers with a handful of niche players focused on the low end. It took a while for that to happen – I guess because funding was so easy to come by for new airlines for so many years (good luck raising money to start an airline today). But it was ultimately putting off the inevitable consolidation that one would expect in either the utility or manufacturing industries (especially commodity manufacturing, which is pretty much what we’re dealing with in an airline).
Dozens of airlines started up in the US after deregulation and we’re left with JetBlue, Spirit and Allegiant (Frontier will be gone soon enough, no?). That’s pretty much it. Spirit and Allegiant lowered their costs enough to thrive as a low-priced commodity provider. JetBlue is an interesting case where (at least initially) they de-commoditized the product and kept costs low, allowing them to provide a low cost, high value product in a commodity marketplace. Nicely done.
In so many industries we see crowded markets evolve into 3-4 major players, and that’s where we’ll end up with United, Delta, American and Southwest driving the industry. (This probably begs the question of what happens to Alaska Airlines – conceivably someone would scoop it up to build out their West Coast presence, but more likely they’ll enjoy their deep Northwest footprint while continuing to innovate operationally and will be left alone for the foreseeable future).
When an airline merger is announced I always see articles suggesting that airline mergers fail because the combined entity will have too much route overlap; or too many hubs; or too many aircraft types. That’s all nonsense. If there’s too much overlap, the combined carrier can redeploy those aircraft elsewhere. Airlines used to focus on 3 or 4 hubs (if that), but the world has changed and carriers are thriving with many hubs — Delta has a significant presence in Atlanta, Detroit, Minneapolis, Salt Lake City, New York City, whatever’s left of Memphis, and a handful of focus cities. Why is it a concern that US Airways and American will have sizable presences in New York, Philadephia, Washington, Charlotte, Miami, Dallas, Chicago, Phoenix and LA (I feel like I missed one)? If Phoenix doesn’t make much sense they’ll downsize it until it does. Is that a reason not to merge? No.
So-called “consumer advocates” complain that consolidation leads to higher fares. That’s probably true for flights between the hubs of two merging carriers (for example, in United’s case, between Chicago and Houston; or between Newark and Chicago). But according to the Wall Street Journal, airfares have dropped an inflation-adjusted 15% since 2000. You simply cannot argue that consumers are worse off because of consolidation. A healthy set of lowfare airlines keeps prices in check (complain about Spirit all you want, but people in Dallas and Houston should be thrilled they’re adding flights there). And you know what’s worse for consumers than slightly higher fares? No flights at all, which is what you would end up with if all of the airlines that have merged out of necessity over the years disappeared. Check out a route map from 1973 some time –you think we haven’t benefitted from nonstop flights? Consolidation has brought dozens (if not hundreds) of new nonstop flights while at the same time providing customers with cheap fares. This merger is just the final piece of that.
Finally, on the frequent flyer front. I can understand why there may be some concern, especially from US Airways Dividend Miles members. The tie up with Star Alliance (which will end at some point after the merger) provided some amazing fuel surcharge-free international redemptions. And you can kiss that 90,000 mile business class Asia award goodbye. But US Airways also had some annoying quirks (no one-way redemptions). Like with everything, there will be good and bad. And honestly, it doesn’t really matter what you think because this merger is going to happen, and Dividend Miles will disappear and in 18-24 months you can enjoy whatever the AAdvantage program has to offer. Northwest Worldperks had some pretty good awards too, and that’s gone and no one talks about it anymore. In 36 months no one will miss Dividend Miles, trust me (well, except for those of us who churned that credit card over and over).
That’s a lot of words to say this: consolidation is inevitable; US Airways has some of the best managers in the industry and will make AA a successful airline in a way that their own management could not; you won’t lose any service; your fares won’t go up; and you’ll still collect a ton of frequent flyer miles. You think there’s really anything bad about a world where you can print frequent flyer miles through credit card signups and then use them on alliance carriers to go wherever the hell you want for free? We’ve got it pretty good.