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