Why Airline Mergers Are Good For You
12 November 2000
Since May, when United Airlines announced a proposed merger with US
Airways, consumer advocates, newspaper editorialists and lawmakers have
overwhelmingly condemned the prospect of a merger between two of the
nation's 10 largest carriers. The prevailing wisdom has been that this
union would provoke further consolidation and thereby erode competition
in the airline industry. A summer filled with airport delays did little
to build public confidence in aviation.
However, a detailed examination of how three mergers actually would
affect travelers yields surprising results. The doom-and-gloom scenario
that some people expect is unlikely to materialize. In fact, passengers
underserved by the current system are likely to benefit most from a
restructuring of the airline industry.
The driving force behind these gains are the network effects that
result from the aggregation of independent networks. Imagine two
telephone systems independently operating on either side of the Rocky
Mountains. Each network provides substantial value to its regional
users, but the sum of their combination would add value greater than
the separate parts to all who use the resulting network.
These effects are critical to understanding the impact of
consolidation, but are ignored completely by critics of airline
consolidation, whose main credo seems to be that "big is bad." In
contrast, the gains from expanding the breadth of airline networks form
the basis of a recent study of airline consolidation by the Economic
Strategy Institute and GKMG Consulting Services.
The report analyzed 322 individual markets currently served by the six
largest hub-and-spoke carriers: American, Continental, Delta,
Northwest, United and US Airways. It assumed a restructuring that would
combine these carriers into three national networks.
When two airlines combine, the resulting network is larger than the
individual ones it replaced. This means that travelers on the larger
network can now reach more destinations without switching airlines.
Traveling on one airline is preferable on many levels to travel on
multiple airlines (interline travel). Not only traveling on a single
airlin more convenient in terms of connection times and frequent flier
miles, it is also cheaper. The ESI-GKMG study found interline travel is
55 percent more expensive than single-airline travel.
It may be counterintuitive, but the study found that combining airline
networks would actually increase competition. Imagine a route from "A"
and "C" that is currently served by one airline. A traveler in city "A"
can also travel to "C" via city "B," but only by traveling on two
different airlines. Given the expense and inconvenience of interline
travel, the passenger will fly direct.
If the airlines that fly from "A" to "C" through "B" merge, there is
suddenly a new competitor for travel between "A" and "C." The study
found that in the domestic market, such competition would increase in
74 percent of affected airport markets, decrease in 13 percent and stay
the same in 13 percent in the event of consolidation. Overwhelmingly,
the gains in competition are concentrated in small and medium-sized
By increasing connectivity, consolidation is also likely to increase
air travel. The study found a strong relationship between access (the
number of city-pairs available to a community) and traffic: higher
access is associated with more travel. That is, with more cities
connected to more places more conveniently, more people will travel.
Because the greatest gains in connectivity due to the mergers would
occur in smaller markets, the largest increases in traffic would occur
there as well. Nationwide, the number of single-airline points is
estimated to expand by 26 percent. This would translate into a 9.1
percent increase in traffic levels. On a state-by-state basis,
Pennsylvania would do even better. With 14 smaller airport markets,
such as Altoona and Lancaster, benefiting from increased access, origin
and destination traffic in the state is predicted to climb by 17.7
The benefits of consolidation extend to international air
transportation in much the same way. Small and medium-sized communities
would enjoy more links to foreign cities after consolidation, and these
links would be the subject of even greater levels of competition.
Moreover, better access to international markets would enable these
communities to benefit economically from the globalization of business.
Twenty-two years ago, the United States deregulated domestic air
travel, setting in motion a series of moves and countermoves by
industry players that resulted in the competitive landscape that exists
today. Though the current system, by all accounts, has increased the
level of service and lowered prices, larger markets -- the hubs of the
hub-and-spoke system -- have benefited disproportionately.
Consolidation in the industry should be viewed as the natural continuation of the process initiated by deregulation.
The next response to deregulation seems likely to intensify
competition, expand access, increase traffic, and broaden commercial
opportunity even further. Only this time, the little guys won't be left
Andrew Szamosszegi is a fellow at the Economic Strategy Institute and a
co-author of "Consolidation, Connectivity, Competition, and
Communities: The Advent of National Aviation Networks." ESI is a
nonprofit research organization that receives annual funding from
foundations and corporations, including United, Northwest and American