By Jennifer Waters, MarketWatch
The Justice Department has decided to allow American Airlines and US Airways (LCC) to combine to create the largest airline on earth. What does that mean for you?
First, the good news: It will be many months, if not years, before passengers' pocketbooks and traveling schedules feel the full effect. But after that, brace yourself for higher ticket prices, fewer loyalty benefits and lots of trouble getting in and out of smaller cities.
"People are concerned about ticket prices, and they should be," says Rick Seaney, chief executive of online air travel site FareCompare.com. "We had eight mega-airlines five years ago. Now we're down to four, and in the long run, that will hurt ticket prices."
Indeed, historically, airline mergers have not been financially pretty for passengers. Earlier this year, The Wall Street Journal dissected data that showed some big-city routes saw 40% to 50% price hikes following past mergers. It looked, for instance, at what happened to fares between Chicago and Houston, the hubs of what once were United Airlines and Continental Airlines. Consumers were hit with ticket prices that were 57% higher in the third quarter of 2012 versus three years prior, the Journal reported. Meanwhile, United's average domestic fare was higher by only 16% over that same period.
Meanwhile, the merged American and US Airways is being forced to give up slots at Reagan National Airport and New York's LaGuardia Airport. That's expected to give Southwest Airlines and JetBlue Airlines (JBLU) opportunities to grow. It's part of why Attorney General Eric Holder said the deal could "shift the landscape of the airline industry."
"By guaranteeing a bigger foothold for low-cost carriers at key U.S. airports, this settlement ensures airline passengers will see more competition on nonstop and connecting routes throughout the country," Holder said in a statement.
Don't count on it, wrote Virgin America in its request to file a friend of the court brief on Monday: "Virgin America believes that it can show the court that unless this merger is blocked, a simple fix for a few large airports will leave most of the hub-hub routes as monopoly markets and the connecting city pairs and all the passengers who travel in them without any remedy at all."
What's more, Southwest (LUV) is not really much of a low-cost airline anymore. "Already Southwest carries more passengers in the U.S. than any of the other airlines," says Robert Mittelstaedt, an aviation expert, commercial pilot and dean emeritus of the W.P. Carey School of Business at Arizona State University. "On routes where they compete with other airlines, the fares are comparable."
And Seaney says he has seen Southwest, which has generally been the airline with veto power on attempts at industry rate hikes, increasingly joining the legacy players.
Still, there is a silver lining to this, says George Hobica, founder of Airfarewatchdog.com. "I've always held that consumers are the ultimate losers, one way or another, with a sick U.S. commercial aviation industry," he says. "This merger, which will be the last major one in our lifetimes -- there's no one left -- will result in better service, better job security for historically underpaid employees, and other pluses."
Here's how you can expect your travel to change:
Immediate changes. Your US Airways and American fares, flights and tickets will stay the same, as will your frequent-flier programs and status. It will take several years to integrate the two brands and it will be done gradually.
Ancillary fees. You can expect ancillary fees to eventually start climbing higher. Worldwide, airlines rang up $27.1 billion last year from fees for services ranging from checking bags to selling frequent-flier miles, according to a recent study from IdeaWorksCompany, a consultancy. Five of the top 10 carriers were U.S. airlines, with United Airlines collecting the most, $5.4 billion. Delta brought in $2.6 billion, and American and US Airways combined stood at $3.1 billion.
It has become big business to the airlines, and with fewer competitors, there will be less incentive to keep costs lower. US Airways, for example, followed United last spring when it hiked to $200 per leg from $150 its fee to change flights. Since then, all the major carries have matched that -- except Southwest, which doesn't charge a fee.
Loyalty programs. US Airways passengers are likely to benefit from changes to create a consistent program across two carriers. American is part of the One World alliance, which includes British Airways and has larger extended routes than the Star Alliance that US Airways is part of. The differences in elite status and points accumulation and redemption are likely to be worked out in the consumer's favor. An airline doesn't want to anger their best customers.
But here's the downside to that. With fewer carriers, some consumers will be stuck with whatever airline dominates flights out of their city. If you live in New York, Los Angeles or Chicago, you will still have choices among which major carrier you fly out on most. But if you're in Charlotte, you're only real choice will be the new American, or Delta in Minneapolis. Seaney worries that the airlines will eventually water down their programs. 'With these mergers, loyalty is not as big of an issue, because consumers will not have other choices," he says.
Service to small- and medium-size markets. As part of the DOJ agreement, the new American agreed to use all of its Reagan commuter slot pairs -- used for smaller planes -- to service those markets. However, the new American hasn't determined which 44 daily departures of the 290 it serves now will be cut. And there's no guarantee that the airlines getting those slots will maintain services to those communities cut.
The deal also calls on American to maintain hubs in Charlotte, New York's JFK, Los Angeles, Miami, Chicago O'Hare, Philadelphia and Phoenix for three years. Also, it will continue daily service from those hubs to states participating in the lawsuit: Arizona, Florida, Michigan, Pennsylvania, Tennessee and Virginia. After that, all bets are off.
Service. Besides merging computer systems and company policies, there's the corporate culture to think about. If the glitches that plagued United and Continental are any indication, get ready for many problematic months, including service disruptions at the airport and online.
However, US Airways chief Doug Parker, who will run the new American, is a well-liked guy who is expected to help mend a decade's worth of labor-relations issues at the old American.
-Jennifer Waters; 415-439-6400; AskNewswires@dowjones.com
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(END) Dow Jones Newswires
11-13-13 1140ETCopyright (c) 2013 Dow Jones & Company, Inc.
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