There is an anti-trust hearing on the US Airways / American Airlines merger and, as is common, Congressmen are voicing loud concerns about air fares rising and loss of hubs.  This does, at first glance, make them seem For The People but . . . are they?

I’m not a free market capitalist.  In fact, I’m pretty moderate in my views on business in general and regulation.  I think some regulation is extremely important.  I think the financial meltdown of 2008 is the most evidence that anyone needs for a decade or two.

It is ironic that I find this merger more satisfying on what is going on with this merger.  In previous mergers, it really was clear that certain hubs would be downgraded to focus cities at best.  For instance, the close proximity of hubs in Memphis, Cincinatti and Atlanta made it pretty certain that Memphis and Cincinatti would be sacrificed for Atlanta no matter what Richard Anderson told Congressional committees.   I think the same ultimate outcome is quite likely for Cleveland in the United / Continental merger.

In this merger . . . I can’t see hubs going away.  Assumptions being made about Miami being superior, potentially, to Charlotte causes me to laugh.  Charlotte is a far more strategically important hub on the domestic front.  Miami is and will remain a gateway city for all destinations south.  If I question anything, I question how things will work out between Phoenix and Los Angeles.  While I believe both will remain much as they are in many respects, I’ll concede that things are murkier their.  I think Los Angeles becomes a gateway city and Phoenix becomes a domestic hub.  Much the same is true between Philadelphia, New York City and Washington D.C.

But, bottom line, I don’t see hubs getting reduced in this merger.

As for air fares rising?  Well, they may well go up some.  They may well not.  Here is the critical question in my mind:  Why are air fares that prevent airlines from earning a return on investment that is great enough to cover the cost of capital something we don’t want?  In other words, why might it be desirable for airlines to be market limited to air fares that don’t earn them enough profit to be a viable business over the long term?

Consolidation in the marketplace is largely due to the fact that we deregulated the market side of the airline industry but never deregulated the labor side of the industry.  Airlines needed more market power and then finally figured out how to do it effectively.

Let’s not bash airlines for raising air fares when the industry has lost Billions (with a “B”) of Dollars over the past decade.  Our response, ordinarily, would be if you’re losing money and your cost competitive, you need to raise your prices.

Air fares have gone up in areas where they were unprofitable.  Unprofitable city pair have moved into profitable territory in many cases.  That is as it should be.  Bargain basement fares designed to win market share instead of profit are probably gone for a long, long time.  It was nice while it was here but let’s not kid ourselves into believing that those kind of fares are what we deserve.

However, there are many markets and city-pairs that were earning excessive profits which are now experiencing real competition for the first time as a result of these mergers.  Those fares are going down as they should be.  One great example is American Airlines “owning” the DFW/NYC city pair and now . . . not so much.  They have some competition, fares have gone down and it is far more reasonable to fly that route than it has been in a long, long time.

Were I to respond to Congress about claims of higher air fares, I would say something like this:

“Absolutely air fares are going up as a result of this merger . . . in some markets.  And they should go up because we are not earning a business appropriate profit in those markets.

However, air fares are absolutely going down in other markets because you now are going to have very big, very powerful airlines that will need to compete hard on routes in order to support business growth.  We will experience more competition on more routes over time and higher yielding fares will go down as a result.

Businesses are in business to earn a fair and reasonable profit and let’s not vilify that intent.”

And let’s be cognizant of that last statement.  There are a lot of businesses who earn an unfair and unreasonable profit and even do so with massive government subsidies.  The oil industry is one that comes to mind with some companies earning profits that are greater than the GDP of some small nations.

The airline industry, on the other hand, really not only isn’t subsidized but is probably overtaxed in many ways.  In fact, I would seek to start a dialogue on the fact that despite economic benefit accruing to entire communities, only users are taxed and heavily so.  Airports, for instance, are public infrastructure that offer benefits yet we seek to fund them with taxes only on users.   Highways are public infrastructure too but we tax everyone, not just users, for them because the benefits accrue in many ways.

But the airline industry is most inept at making such arguments and generally resorts to a “crouch” position when dealing with most things.  When they do bow their backs at government, they often overplay their hands as well.  It’s an industry that could learn something from the oil business. . . or corn growers.

Filed under: Airline News, Mergers and Bankruptcy by ajax