Airline Mergers: Good for Travelers?

April 27, 2012— -- A great merger is probably what Messrs. Baskin and Robbins had in mind back in 1970 when they began combining pralines and cream, but whether a possible pairing of American Airlines and US Airways can be as successful as the iconic ice cream is unknown. If such a merger even comes off at all.

Sometimes missed chances are a win. I'll bet Time Warner wishes it had been left at the altar after its marriage to AOL imploded. A couple of years after saying "I do," the media giant posted a $99 billion dollar loss before the eventual separation.

But for airlines - some of them, anyway - merging may be their only shot at staying alive. For passengers, that's good news and bad news.

For more travelnews and insights view Rick's blog at farecompare.com

Running an airline is a risky business; it's a messy, complicated, often money-losing proposition. It's fraught with pitfalls like the ever-fluctuating price of jet fuel, which may explain why Delta appears poised to buy an oil refinery despite the fact that it too is a messy, complicated, often money-losing proposition.

But running an airline successfully is an especially daunting task; no less a superstar investor than Warren Buffett once said, "I have an 800 number now that I call if I get the urge to buy an airline stock," adding that his phone buddies then "talk me down."

Not surprisingly, a lot of financially-troubled airlines have vanished from the scene in the past decade or so, including iconic names like TWA, as well as Aloha, Skybus, ATA, Midwest Airlines, and so many more.

Other famous airline names now lie buried under coats of paint that once featured the icons of their new merger masters: Continental is now United; Northwest has been subsumed by Delta; AirTran will soon be lost to Southwest; and maybe - maybe - that grand old carrier American Airlines, a stalwart of commercial aviation for the past 78 years, will someday become nothing more than another notch on US Airways' belt.

Or maybe not. Count on American to wage a vigorous fight against any and all interlopers. But if the bankrupt carrier emerges from its latest crisis only to wind up a US Airways asset, what can flyers expect? Four words: higher prices.

It's simple economics. Fewer airlines competing for your business means fewer reasons to drop prices to get that business, and there's less incentive than ever -- thanks to the high price of oil, which remains securely lodged above the $100 per barrel mark (as of this writing).

And this isn't only about domestic airline tie-ups either, with recent "virtual mergers" between U.S airlines and their European and Asian flag-ship carrier counterparts, competition has taken a double hit.

I had to chuckle about a recent FAA report that 'tsk-tsked' about higher ticket prices for passengers, owing, in part, to merger activity, when it's the feds themselves that approve these deals.

And if they approve the potential AA-US Airways deal, it won't get any better.

Here's another thought: if the U.S. is eventually reduced to just three or four mega-domestic carriers (plus a handful of smaller ones), will the airline industry become "too big to fail," like the auto industry and the banks? Another way to put that is: Will we have to bail them out, too?

Still, the newly-minted airlines that emerge from bankruptcy and/or merger-mania are healthier and you can't argue with that. Airlines too broke to fly don't get us anywhere.

So suppose US Airways does manage to take over American, what will happen? The two big questions I'm asked over and over again are these:

Q. Will ticket prices go up?

A. Absolutely. Less competition, remember? Ongoing jet fuel expenses are more likely the near-term catalyst for higher airfares, with lack of competition being a long-term driver of rising ticket prices. In March of this year, the average price of jet fuel was about $3.26 per gallon, compared with $2.87 in December. Since a Boeing 737-700 holds nearly 6,900 gallons of fuel…Well, I'll leave the math to you.

Q. What will a merger mean for frequent flyer miles?

A. If history is any guide, not much. Airlines have been very, very careful about not messing with their awards programs no matter what else they might do during consolidation.

The bread-and-butter customers of legacy airlines are high-paying business travelers who accumulate virtual currency in the form of miles (or points) on the boss's dime, providing free travel perks on their next vacation hot spot.

By the way, should American and US Airways merge, it would be a powerhouse - ranking number one among U.S. carriers in terms of seat-miles-flown – putting it neck-and-neck with the relatively newly-minted Delta Air Lines.

Again, that's a big 'if' for now. However, if a merger does come off, perhaps the marketing team at Baskin-Robbins could take a shot at a celebratory flavor (Lunar Cheesecake honored the 1969 moon landing). Double-Airline Almond, anyone? Or maybe they should just stick with the obvious: Rocky Road.