Does Airline Consolidation Mean Fewer Seats and Higher Prices?
AMR Corp. (OTC:AAMRQ), the parent company of American Airlines, is in court on Monday to seek approval of a settlement with U.S. regulators, opening the door to the firm’s long-sought merger with US Airways (NYSE:LCC). The merger, if approved, would create the world’s largest airline and catalyze a series of changes within the airline industry that some believe will leave consumers worse off than before.
Broadly speaking, there are two groups of people with an economic interest in the merger: shareholders and bondholders of the two airlines, and would-be passengers. According to Reuters, Stephen Karotkin, a lawyer for AMR Corp., said that not a single shareholder or bondholder filed an objection to the deal. A group of consumers, though, has stood up to oppose the merger, filing a lawsuit and claiming that the deal would make flights more expensive.
The reasoning for this is fairly straightforward. An airline in trouble will consolidate, and consolidation can leave certain consumers in the lurch as routes are shut down and fewer seats are flown from certain airports. Demand for seats, though, generally does not decrease simply because supply decreases, and as a result, prices will rise. The trend over the past seven years has been exactly this: fewer seats and higher prices at many of the largest airports in the United States.
A USA Today analysis of traffic and airfare data from the U.S Bureau of Transportation Statistics and OAG Aviation Worldwide shows that at most of the largest 100 airports in the 48 contiguous U.S. states, total seats on domestic flights have decreased while average fares have increased. According to the data, the number of seats flown on domestic flights between 2005 and 2013 has fallen an average of 16 percent, while fares have increased an average of 6.46 percent.
The airlines should know this week — no later than Wednesday — about the status of their case in bankruptcy court. Terry Maxon, who runs the aviation blog at The Dallas Morning News, tweeted on Monday afternoon that the judge doesn’t “plan on thinking about this over Thanksgiving.”
After the airlines reached a settlement with the Department of Justice, bankruptcy court is the only thing standing in the way of the merger. If approved (which seems likely), the merged company, called American Airlines Group, would trade on the Nasdaq under the ticker AAL. Earlier in November, the Justice Department announced that it had reached an agreement with the two airlines and will allow their merger to go through.
The DoJ had previously sued to block the merger, saying that it would cut down on competition in the airline industry and raise the price of airfare for consumers. In the agreement, US Airways and American have to give up slots at airports around the country and are being required to sell them to low-cost carriers, rather than other giant companies.