Over the past 2 or 3 weeks, mainstream media has often made statements that the merger between American Airlines and US Airways was going to lead to less competition and higher prices.  A number of generic talking heads make it sound as if this is a no brainer.

Is it?  I’m not so sure.

Fares are up over the past 4 years, without any doubt.  Are these fare increases due to less competition?  I think that argument is rather simplistic.  I think that, among the airlines, capacity discipline has resulted in higher air fares far more than reduced competition.  There is a new generation of leadership among the airlines who rightly identified that grabbing all market share was insanity and focusing your business on routes that provide a real return on investment was far wiser.

And it’s worked.  Richard Anderson of Delta, Jeff Smisek of United, Doug Parker of US airways and even Gary Kelly of Southwest Airlines have all focused intensely on managing capacity of their airliners.  If capacity needed to be increased, it was done by upscaling the airliner serving the route slightly rather than by adding an entire new flight to a route.  These men have managed capacity growth at their airlines with great discipline.

In many cases, fleets have contracted in count but maintained neutral or ever so slight positive capacity growth with upscaling.  An example of this has been Southwest adopting the 737-800.  They are growing capacity, where needed, by introducing the 737-800 to routes with that demand.  They are replacing seats on the 737-700 to grow that capacity from 137 seats / aircraft to 143 seats without impacting seat pitch.  This is wise, conservative capacity discipline and it has led to significantly increased ability to raise fares.

Airlines have also been far less reticent to enter markets that have been dominated by legacy airlines in the past.  Virgin America identified opportunities on routes to and from Dallas and Chicago, for instance.  They’re squarely aiming themselves at American Airlines and United Airlines and just a few years ago they would expect a capacity fight from those legacy airlines.  Today, those same legacy airlines aren’t fighting back by dumping capacity and below cost fares onto the routes.  (Or at least not nearly as they once did.)

Delta has been quite willing to start routes against airlines such as American Airlines (NYC to DFW, for instance) when there has always been a unspoken agreement that AA owned that route and no one would bother them over it.  Just as Delta had Atlanta to NYC and Northwest had Minneapolis/St. Paul to NYC.

The competition is there and it’s not only putting pressure on prices, it’s putting pressure on the right prices.  Those routes previously dominated by a single airline who was charging fantastical prices even for economy seats are now being challenged by equal airlines which are lowering high fares.

No, low fares aren’t being made lower.  Yes, in many cases low fares have gone up significantly.  They should have gone up as they reflect a very marginal business case.  Under the new rules, those routes must independently earn a return on investment or they aren’t worth it.  The choice at that point is to raise a fare or quit the route.

And because costs are now more or less aligned across the industry, all need to raise fares and there is a harmony in that.  Those costs will, over time, start to diverge some and when they do, the advantage will go to those with lowest costs.  Right now, the advantage goes to those who are most productive within the cost structure.

Southwest, for instance, is most productive despite the fact that they have some of the highest costs of any airline in the US now.  It’s their advantage and as long as they maintain it, they’ll succeed well.  It allows them to stay on parity with their competition and it allows them to cooperate with fare increases.

It’s daunting when an airfare goes up $100 to fly somewhere.  On a personal level, I feel that pain too.  I fly far less today than I did just 5 years ago for just that reason.  But . . . costs have gone up everywhere.  We, as individuals, see significant increases in our costs on a daily basis.  Gasoline is far higher today and so are things such as milk and even meats.  Electricity costs more and so do things like car tires.  We shouldn’t be surprised that costs are higher at airlines requiring more money to exist.

Filed under: Airline News by ajax