Do Airline Mergers Mean Higher Prices?

Feb. 13, 2008
Special to ABCNEWS.com— -- 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.

Delta and Northwest Route Overlap

Legacy airlines like Delta and Northwest rely on extensive code-sharing networks to get travelers to the most popular cities in the U.S. on a single airline ticket. In other words, part of your flight may be operated by a partner airline. This allows an airline to extend its reach.

Since competition is the main driver of prices, I decided to review the current U.S. domestic flight schedules to see just how much non-code share overlap occurs between Delta and Northwest. My thought: uncover those cities that are potential losers in the competition arena.

But first, a few overall stats (these numbers represent U.S. domestic flights on a typical week in May 2008):

Delta Air Lines offers about 2.3 million seats a week.

Northwest Airlines offers about 1.4 million seats a week.

The newly merged airline would become the largest U.S. domestic airline with 3.7 million seats offers each week, surpassing the current domestic king, Southwest Airlines.

I was surprised by the small number of "overlapping cities" on Delta and Northwest routes — only 10 city-pairs had overlap and only seven of those had significant overlap. They are:

Atlanta – Memphis

Atlanta – Minneapolis

Atlanta – Detroit

Cincinnati – Detroit

Cincinnati – Minneapolis

Salt Lake City – Minneapolis

Los Angeles – Honolulu

Other than Los Angeles and Honolulu, these are hub cities of both airlines. Hub cities provide the main connection point for smaller cities to access the rest of an airline's network and typically are cities with significant non-stop business travel, the lucrative routes.

To give you some perspective: flights to and from the top 50-air travel cities in the U.S. represent slightly more than 1,200 city pairs, so seven city pairs with competition issues is really a very small number.

Some Travel Agony Ahead

The merger of Northwest and Delta doesn't, at first blush, appear to have much negative effect on general competitive ticket pricing, though the current trend of airfare hikes across all airlines — mostly related to fuel — will likely continue.

Cincinnati and Salt Lake City (Delta hubs) are already two of the most expensive travel cities in the United States, while Atlanta continues to have heated competition from AirTran Airways, so I don't look for much change there.

Northwest hub cities (Minneapolis, Detroit and Memphis) have all ranked pretty well in terms of cheaper airfare for passengers and that will probably continue.

The problem is likely to be in the implementation of the merger, which in theory will cut operational costs by removing redundancy: I'm talking about labor, and a variety of business systems including reservations, call centers, baggage and airport operations. Travelers are more likely to experience heartburn in these areas, since the devil — as we know — is generally always in the details.

The Other Shoe Drops

The real problem for airfare pricing? We'll see that with a second merger, as competition is likely to be more drastically consolidated. There is talk about a possible merger of Continental and United Airlines.

For one thing, legacy airlines have ceded their growth-strategies of the past decade to the lower cost domestic airlines that have hungrily gobbled up the excess. This trend is likely to continue as legacy airlines merge.

And air travelers, especially business travelers, should brace themselves for higher prices as legacy airlines continue the trend of packing their planes for greater profitability.

That said, there is some good news for flexible leisure travelers (especially baby boomers with time and money on their hands): most airlines will likely continue to market off-peak Tuesday, Wednesday and Saturday travel sales and expand their international routes.

A final thought: travelers in the coming years are going to find it harder and harder to find a deal. What to do? Check out Web sites and read up on all the tips and tricks of finding cheap airfare. In short, educate yourself. That's one of the best ways to save time and money, in the eternal quest for a good deal to get out of town.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Rick Seaney is one of the country's leading experts on airfare, giving interviews and analysis to news organizations including ABC News, The New York Times, The Wall Street Journal, Reuters, The Associated Press and Bloomberg. His Web site FareCompare.com offers consumers free, new generation, software combined with expert insider tips to find the best airline ticket deal.