The Justice Department lawsuit against US Airways and American Airlines and the merger spends a lot of time citing city pair as routes where competition would be impacted.

These city pairs were interesting to me and we’ll see which ones they referenced later but right now, let’s focus in on what constitutes a viable route for an airline.

Non Stop routes are generally routes which the airline has identified that there is enough traffic between two city pairs to justify a one or more daily flight between the two cities where it would yield profit.  Airlines fly non-stop routes that are profitable, get it?

Profitable is determined by the distance, the type of aircraft that might be flown and how much the airline can charge for a mix of fares between the cities.

Distance is important because it determines, in part, fuel and labor costs.  If you fly farther, it costs you more to employ crew for that flight.  It costs more in fuel to fly that route.

The type of aircraft is important because if an airline can only fly low paying passengers and there are only enough passengers to fill a small aircraft, it may not yield enough revenue to cover all the costs associated with that flight.  (There are rare times when the airline will fly the route anyway to bring in more people from their network to fill other outbound flights at a hub destination but the number of times an airline will fly an unprofitable route for this purpose are vastly diminished.)

How much the airline can charge for various seats is highly variable.  For instance, if it is a city pair like DFW-ORD (Dallas / Fort Worth – Chicago), the airline will assume it can fill its business class seats with full fare business travelers each day.  That’s a lot of revenue from a relatively small group of people.  Next, the airline might see how many of its Economy Plus seating it can fill with higher incremental revenue (over economy fares).  Finally, Economy passengers will be evaluated.  Are there enough passengers flying at a base economy fare to provide enough incremental revenue to drive the flight into profitability?

Just because “X” number of people want to travel between City A and City B doesn’t mean there is a profit available to the airline for providing the service.

Because business fares provide a great deal of the profit to an airline, airlines look to fly those routes with non-stops.  Business fare consumers want non-stops because they typically are flying a lot and the savings in time and convenience is very valuable.  Cities often have a mutual attraction for each other and provide a great deal of travel between the two.  This is the case, for instance, between Chicago and DFW and Chicago and Denver.  It’s also true between New York City and Chicago and New York City and Los Angeles.

Leisure routes are the hardest to find a profit from.  Travel to and from leisure destinations such as Florida or Hawaii is centered around the lowest fares.  People traveling for leisure are typically willing to make a connection to get the cheapest fare.  However, leisure travelers are often traveling just once a year and that means they are not a reliable passenger for the airline on a week by week basis.

Finally, let’s remember that a route is also attractive for when it occurs.  For instance, a route leaving at 7am from Dallas / Fort Worth to Chicago will be very popular and therefore a route where you’ll charge a higher fare for a higher profit.  Similarly, you can imagine that a flight between those two same cities leaving at 10pm is not very attractive at all and the airline may charge far less to attract enough passengers to the flight regularly.

Here are some specific city pairs mentioned as being presumptively illegal for a merger

• Charlotte, NC – Durango, CO
• Maui, HI – Tampa, FL
• Hilo, HI – Miami, FL
• Austin, TX – Salinas, CA
• El Paso, TX – Honolulu, HI
• Des Moines, IA – Maui, HI
• Hilo, HI – Orlando, FL
• Indianapolis, IN – St. Croix, VI

Look the list of absurdity goes on and on.  Virtually all routes listed as being presumptively illegal for the merger are connections for both airlines.  For those routes where they are non-stops (of which US Airways and American Airlines have just 12 non-stop routes where they compete), yes, the competition is reduced.  That can be fixed by A) waiting for another airline to enter the market because if there are high fares, another *will* enter the market or B) asking the airline to accommodate a new airline on the route.  12 routes (out of hundreds of routes) and 12 easy accommodations at the worst.

For some reason, the DoJ is very worried about routes to and from Hawaii to absurd locations in the US.  How many people think that all 3 people traveling between Tampa and Maui regularly are worried that much about fares?

And I”m not sure we should factor in for concern that husband and wife who travel annually to St. Croix from Indianapolis.

On the routes that *do* count, we already know from historical information over the past 3 years that other airlines will enter non-stop markets where fares are high and the yield for profit is good.

On the routes that do count which comprise at least 90% of the DoJ complaint, I would suggest that we fire AAG Baer for being stupid about the airline industry.

Filed under: Airline News, Mergers and Bankruptcy by ajax
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If we use the premise put forth by the US Department of Justice that the US Airways / American Airlines merger is bad for the consumer, then we need to take a very hard, long regulatory look at all of the US airlines, many of its busiest airports and taxes as well.

If anyone was truly concerned about competition in the airline industry, the Justice Department should have continued to block mergers as they did with the original United Airlines / US Airways merger (which was vastly smaller than the one being proposed today).  Instead, they did not.  Rather, a few years later they signaled with US Airways the idea that mergers were necessary in the airline industry landscape.

Quite frankly, I was perfectly happy to see the status quo maintained pre-2005.  That landscape saw:

• Delta Airlines
• Northwest Airlines
• United Airlines
• Continental Airlines
• US Airways
• America West
• Southwest Airlines
• AirTran Airways
• American Airlines
• Alaska Airlines
• jetBlue

It was a pretty well balanced mix of airlines of both the legacy and LCC flavors and pretty well distributed across the United States.  Barriers to entry were, compared to today, fairly low.

Then several bankruptcies occurred which included US Airways, United Airlines, Delta Airlines and Northwest Airlines.  One airline (America West) had to get a massive loan after September 11th and essentially reorganize itself to survive as well.  Another airline, American Airlines, got Billion Dollar givebacks from its employees to lower costs instead of performing a bankruptcy.

Of the 11 airlines listed above, 6 suffered exceptional financial trauma.  Another 2 existed on fine line of financial trouble:  AirTran Airways and jetBlue.  Only 3 managed their finances appropriately and saw appropriate returns on investment:  Southwest, Continental and Alaska Airlines.

So we permitted mergers and this is what happened:

• 2005:  America West takes over US Airways and retains the US Airways name.
• 2008:  Delta and Northwest merge as equals and retain the Delta Airlines name.
• 2010:  United and Continental merge as equals and retain the United Airlines name.
• 2011:  Southwest Airlines takes over AirTran Airways and begins the wind down of the AirTran name.

By 2011, the competitive landscape was dramatically different and American Airlines had to throw in the towel (it should have in 2006, in my opinion) in November of 2011 by filing bankruptcy itself.  In the 2012 / 2013 period, the new airline landscape looks like this:

• Delta Airlines:  Revenues  $36.6 Billion (2012)
• United Airlines:  Revenues  $37.1 Billion (2012)
• American Airlines:  Revenues  $24.8 Billion (2012)
• Southwest Airlines:  Revenues $17.0 Billion (2012)
• US Airways:  Revenues $13.8 Billion (2012)
• Alaska Airlines:  Revenues  $4.6 Billion (2012)
• jetBlue:  Revenues  $4.9 Billion (2012)
• Virgin America:  Revenues $1.3 Billion (2012)
• Frontier Airlines:  Revenues $1.4 Billion (2012)

As you can see, the airlines that exist today are hardly equal despite the perception otherwise.  For instance, Delta and United Airlines both are roughly equal as airlines but the next biggest by revenue is American Airlines which is a staggering $12.3 Billion behind.  If you added US Airways revenues to American Airlines revenues in 2012, you still come in at just $38.8 billion.  Put another way, the new American Airlines Group would operate at roughly the level of United and Delta Airlines.

Southwest would be at a disadvantage seemingly but Southwest’s revenues are based entirely on US based operations and therefore see Southwest operating at parity with the other 3 large carriers.  So, now we have 4 carriers operating at roughly the same scale in the domestic US market.

The remaining four airlines:  jetBlue, Virgin America, Frontier and Alaska Airlines have combined annual revenues of $11.2 Billion or a number that is still less than that of US Airways.  It’s notable that those last 4 airlines are nowhere near national airline scale.  They are all regional or niche in their marketshares.  They can and will survive and at least 2 of them have every opportunity to organically grow much larger.

What my point in all of this?  Scale is critical in this industry and while those billions in revenues sounds healthy, airlines often earn zero profits on such revenues.  The dollars are large, the profits are tiny, at least until very recently.

If you stop the mergers now, you have two giants and three other airlines that would have to be labled as “at risk” over the next decade.  While you allowed that to sort out, the two giants would only become . . . more giant.  And the bigger they grow, the more influence they have on airports and route infrastructure.

So, if you feel the combination of US Airways and American Airlines is anti-competitive and anti-consumer, then you *must* be ready to “break up” Delta and United Airlines.  They don’t have the potential to be dominant.  They already are dominant.  So much so that they dwarf every other airline in the industry.

More on these subjects tomorrow.

Filed under: Mergers and Bankruptcy by ajax
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