Do Airline Mergers Mean Higher Prices?

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You were probably one of the 678 million airline passengers in 2007. What a year. Flying wasn't much fun, was it?

Summer was the worst of it. We were hit with flight delays and cancellations at a rate of more than 25 percent (yes, that's 1 out of every 4 flights); plus, there were a record number of lost bags and planes were packed to capacity. Oh, and for the first time in history, the airline industry scored below the IRS in customer satisfaction.

But that didn't stop us from buying tickets. In fact, demand for air travel was up slightly in 2007, and according to recent airline investor calls, demand continues to be strong this year. It appears we passengers have decided to endure it all, even as the winds of economic turmoil continue to swirl around us.

And just when things couldn't get much more "entertaining" for air travelers, we now have to deal with the likely merger of at least four of the remaining six legacy carriers. The more imminent of the airline mergers: Delta and Northwest.

The catalyst for "merger mania" is centered on the unprecedented run-up in fuel prices since late last summer. After several quarters of airline profitability, this run-up has stopped most major airline "comebacks" dead in their tracks, and stockholders and management have decided that merging may be the way out.

Mergers are a tricky business, especially for airlines: there can be labor issues, fleet changes, reservation system snafus to complicate merging, and past history has shown that mergers have not always been kind to travelers or airlines.

So, will the merger of Delta and Northwest be a big yawn like that of US Airways and America West? Or will it mean "curtains" for cheap airfare in the coming years?

For me, the answer is in the data — what I affectionately call "geek data." One of the perks of being CEO of FareCompare.com is that I can call upon one of the world's largest databases of current and historical airfare and flight schedule information. Plus, I also "live, breathe and talk" about all aspects of air travel (see my personal air travel blog at http://rickseaney.com).

Golden Rule of Cheap Airline Tickets

Okay, we know that millions of airfare prices change each day; so, finding a cheap airline ticket starts with one very simple golden rule: Live in a city with plenty of airline competition.

I have seen my golden competition rule hold true, time and time again:

Prices dropped dramatically with the launch of Virgin America in San Francisco and modifications to the Wright Amendment increased competition in Dallas.

Smaller regional airports woo airlines by subsidizing new flights, which can foster lower overall ticket prices through competition, think of AirTran in Wichita, Kan.

Airfare prices dropped, then shot up again when the start-up airline Independence couldn't make it at Washington Dulles.

There were 23 attempted system-wide airfare hikes in 2007 — and 17 of them were "sticky" — with most of the stickiness occurring at smaller regional airports with little or no competition to drive the prices back down.

Airline pricing-systems are programmed to achieve real-time equilibrium with competitors. These systems have gotten much better at maximizing revenue on popular and non-competitive flights (which means higher ticket prices)

Okay, so competition is important; now let's take a look at what this could mean for a "merged" version of Northwest and Delta.

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