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(01/12/2001 - Prestowitz) Fewer Airlines, More Choices

Fewer Airlines, More Choices
By Clyde V. Prestowitz Jr.
607 words
12 January 2001
The Wall Street Journal
(Copyright (c) 2001, Dow Jones & Company, Inc.)

Coming on the heels of the proposed merger between United Airlines and US Airways, American Airlines' offer to purchase Trans World Airlines has triggered an avalanche of criticism among consumer groups, lawmakers, and passengers. Although well meaning, critics of the airline mergers are wide of the mark because they rely on two faulty premises: that the status quo in the airline industry is better than the proposed changes and that consolidation would reduce competition.

For all the talk about preserving competition to benefit consumers, the existing structure is simply not sustainable. TWA, despite its storied history, is a shadow of its former self. Its annual income has been negative since 1988. The carrier is on the verge of declaring bankruptcy for the third time since 1990, amassing about $115 million in losses through the first nine months of 2000. With the company's stock trading at less than $1.50 per share before the merger announcement, TWA's chances of remaining a independent were somewhere between slim and none.

US Airways is in better financial shape, but its regional network is far from being a strong competitor to the major airlines. Many analysts have expressed serious doubts about US Airways' ability to remain independent, and the carrier was a takeover target well before the proposed deal with United.

The myth that fewer competitors always translate into higher prices plagues the current debate. In fact, many capital-intensive industries are characterized by competition among only a few firms. For example, Boeing and Airbus now dominate airplane manufacturing, yet no one is complaining about the high prices and low quality of planes. The declining price and rising computing power of microprocessors have unlocked the door to the information age, yet production is concentrated largely in two firms, Intel and Advanced Micro Devices.

The lesson from other industries is that consolidation need not harm, and may even benefit, consumers. Even in the airline industry, there is no evidence that consolidation would lead to higher prices. Indeed, past airline mergers have not been driven by the desire to raise fares.

Moreover, according to our analysis, airline consolidation is likely to benefit many passengers by increasing travel convenience. By combining regionally focused carriers into national networks, airline mergers will enable travelers to reach more destinations without switching airlines. Not only is direct travel more convenient in terms of connection times, baggage handling and frequent flier miles, it is also 55% cheaper than switching airlines.

Combining airline networks would actually increase the possibilities for direct travel. Imagine a route from A to C that is currently served by one airline. A traveler in city A can also travel to C via city B but only by changing airlines. Given the expense and inconvenience of travel with different airlines, the passenger will fly direct. If the two airlines that serve B merge, there is suddenly a new competitor that allows passengers to travel from A to C without switching airlines.

Our study found that the consolidation of the six largest U.S. air carriers into three would increase such competition in 74% of affected domestic markets, decrease it in 13% and stay the same in 13%. Overwhelmingly, the gains in such competition are concentrated in the markets underserved by the current system.

Careful analysis thus suggests the fears of consolidation in the domestic airline industry are grossly exaggerated, and the benefits of such mergers are often overlooked.


Mr. Prestowitz is president of the Economic Strategy Institute in Washington.

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