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Airline Mergers Bring Little Good News to Travelers

With all the consolidation and closure activity among the airlines, the US may soon be left with only four major international airlines. What does that mean to the average traveler?

Delta and Northwest are trying to merge, and United and some suitor and Continental and someone else might follow. That would leave the US with four major international airlines out of the former six. That means fewer flights, higher fares, but maybe less congestion.

First things first: nothing's going to happen until the government approves this merger, which would be months away. Even then, nothing might happen. The merger might yet fall apart, as previous United/US Airways and Delta/US Airways merger attempts did.

If the two airlines do merge, frequent fliers will have access to a wider range of destinations on the combined airline. But they'll likely pay higher fares for somewhat fewer flights. At least the flights will be more likely to arrive on time.

You can definitely argue that mergers lead to both fewer flights and higher fares. The most recent major airline merger was between US Airlines and America West, in 2005/2006. During the first year of that merger, according to the government's Bureau of Transportation Statistics, fares actually went down in the airline's hubs of Philadelphia, Charlotte and Pittsburgh. They went up in Phoenix and Las Vegas, but not by much. The real punch came in the second year, 2006-2007, when fares shot up in Charlotte, Philadelphia and Pittsburgh notably faster than the national average.

Fares are likely to rise even faster during a Delta/Northwest merger. The famous "Southwest effect" has been depressing fares for years; typically, Southwest Airlines or another low-cost carrier like Spirit comes into a city and keeps prices down for everyone else. But pressured by high fuel prices, Southwest CEO Gary Kelly said this week that the company was looking to eliminate "nonproductive flying," which means fewer Southwest routes, and less "Southwest effect." JetBlue's CEO Dave Barger also said they plan to reduce their planned growth by 3-5%.

The previous major merger, of American and TWA in 2001, famously led to the total decimation of TWA's St. Louis hub and the layoffs of half of TWA's employees. American blamed 9/11, which was definitely a factor.

And just like in 2002, this year it will be hard to separate any potential merger from other factors in upcoming fare hikes and service cuts. Face it, fares are going up, driven by high oil prices and the weak US dollar. And there's very little competition to air travel in the US. Gas prices are rising, making driving less appealing, and unlike in Europe and Asia, we have no high-speed rail system or even any real strategy for passenger rail. Arthur Frommer, in his blog on this site, has argued passionately that a stronger Amtrak would be the best possible way to keep the airlines on their toes. There's no sign we're getting that anywhere in the near future.

There's one bright spot on the fare landscape, but even that could cloud over. A recent "open skies" agreement between the US and the European Union paved the way for European airlines to offer many new routes across the Atlantic, and they're already jumping at the chance. But here's the catch: any fares they get from Americans will be in dollars, and those airlines' costs are largely in Euros. If the dollar continues to sink against the Euro -- it's dropped from $1.36 to $1.60 in the past year -- that could negate any fare decreases caused by competition.

Fewer Flights, Worse Service

Don't expect any merger to lead to better service, if past performance is a guide. The US Airways/America West merger led to a total service meltdown, including confusion at airports, lost bags and crashed reservations systems in 2007.

Just like with fares, we're in the middle of a general decline in airline service standards. According to the Airline Quality Rating, a report periodically issued by professors at the University of Nebraska-Omaha and Wichita State University, the industry "declined in quality ... over the course of 2007 ... the decline can be viewed as across-the-board." Delta's rate of mishandled baggage, customer complaints and denied boardings all went up this year, as did Northwest's. Three out of ten Northwest planes failed to arrive on time. Using government statistics as their source, the professors say airline quality has been declining steadily since 2003.

Fewer flights are a must from any merger. One of the recent trends in aviation has been airlines' shifting from fewer flights with larger planes (such as Boeing 737s) to more flights with smaller regional jets, because they think that consumers want more options of flight times.

Some pundits blame these regional jets for clogging up airways and runways, contributing to the nation's horrible delay problem. The airlines, for their part, blame private planes and the outdated air-traffic-control system. The air traffic controllers say airports need to build more runways. There's enough blame to go around, but everyone agrees that reducing flights is one way to reduce delays.

Now, our nation's planes are running more full than ever. So it wouldn't make sense for Delta/Northwest to eliminate seats on planes. Rather, they'd consolidate hub flights where most people just use the hub to change planes, taking two flights and replacing them with one larger plane. Delta hints at something similar when they say in their official merger Q&A:

"Better coordinated schedules and the ability to use larger-gauge aircraft on key routes through a larger domestic feeder base will further reduce congestion in the Northeast corridor (i.e. rather than flying 50-seat regional jets between Detroit and JFK, the new carrier will be able to fly larger equipment throughout the day thanks to the connectivity of the two hubs in one network)."

Fewer flights reduce congestion, of course, but it also reduces options. For instance, take State College, PA. Delta and Northwest both serve that airport with regional partners. Delta's partner runs three flights to Cincinnati and one to Atlanta; Northwest's runs two to Detroit. The first Cincinnati and Detroit flights leave within an hour of each other. Delta/Northwest could conceivably combine those into one flight, in a larger plane, provided the economics work out. Or take Wichita, KS, another city served primarily by small, regional jets. Delta/Northwest may push to consolidate similarly timed flights to Memphis and Atlanta there.

How About Just Three Airlines?

Delta/Northwest may not even be the end of consolidation. United and Continental have talked about banding together. (Northwest has a veto over any Continental merger unless Northwest themselves merge with Delta, at which point anything goes.)

Morgan Stanley analyst William Greene speaks of a "Delta domino effect" which would mesh not only United and Continental, but American and US Airways. JetBlue, meanwhile, has quietly taken money from Lufthansa and is looking to establish a code-share relationship with Aer Lingus; could that produce some sort of international quasi-low-cost behemoth?

These mergers all have to be approved by the government, of course, and there's another wild card. Both sets of airlines are hoping to get their merger plans to government officials before January, because of the chance that the White House may change hands. Greene says that airlines are rushing to merge "under the current, favorable regulatory environment." With Michigan and Ohio potentially key states in the 2008 election, politicians are likely to take very close looks at anything which may reduce airline service and jobs in Detroit (a Northwest hub), Cleveland (a Continental hub) or Cincinnati (a Delta hub.)

So don't look for airline consolidation to have many benefits for travelers. At best, a few more flights may arrive on time. But you'll be flying less, on fewer and more expensive flights, anyway.

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