Airline mergers shrink services, force passengers on fewer flights

(RNN) - The airline industry has come to a harsh realization over the past 10 years.

Airlines have reinvented the way they operate in the wake of 9/11. And they've had to cut the fat in order to optimize profits.

The result: airline mergers.

Problems at American Airlines and seemingly imminent merger with US Airways have brought airline consolidation into the spotlight again.

Mergers are the result of airline deregulation. After the federal government opened up the airline industry in the 1980s, new carriers entered the industry and fares sank.

"There was so much fierce competition that airlines were going out of business, and that helped prevent the type of consolidation you see now," said Joshua Schank, Eno Center for Transportation CEO and president.

Schank said the only way an airline can grow in today's industry is by consolidating.

Unfortunately, that doesn't result in increased service or better prices.

The first in a long line of airline mergers came shortly before 9/11. Feeling the strife of financial issues and bad press, St. Louis-based carrier Trans World Airlines was acquired by AMR Corp, the parent company of Fort Worth, TX-based American Airlines.

The merger closed by the end of the year and American ended up being the only major U.S. airline that did not file for bankruptcy after 9/11.

It was a merger that kept planes flying, passengers moving and employees working.

At least that's how American sold it.

American juristically scaled back the size of the combined operation, preferring assets from the old American Airlines.

TWA had 417 daily departures out of their St. Louis hub before the merger. American decreased that number to 207 flights in less than three years. They currently list less than 40 daily departures.

St. Louis, a mid-sized city, was less valuable to their network because of its smaller population. Hubs with more origin and destination, or O&D, passengers are not dependent on connecting travelers alone.

"The more people you have in the city and metropolitan region, the stronger the hub. That's why the hubs in the smallest regions are first to go," said Schank.

Similar mergers slimmed down airline operations at mid-sized cities after 9/11. US Airways and America West merged in 2005, aiding in the closure of hubs in Pittsburgh and Las Vegas. Pittsburgh, which had over 500 departing US Airways flights before 9/11, now sees about 40 flights.

Delta Air Lines and Northwest Airlines merged about five years later, creating the most flown airline in the world. However, the new airline also trimmed the fat. The company shrank some of the airlines smaller hubs, including Delta's in Cincinnati and Northwest's in Memphis, TN.

Most recently, United and Continental Airlines completed their merger. The new airline, flying as United, serves more cities than any carrier. However, the former Continental hub in Cleveland faces the axe.

"You're going to see the same thing with a US Airways-American merger. There are going to be certain hubs that are deemphasized," said Schank. "If I was Charlotte, I would be a little nervous."

Consequently, passengers have to connect through "mega hubs" like Atlanta, Chicago-O'Hare and Dallas-Ft. Worth.

Less nonstop flights also results in fewer seats. Airlines have cut back their schedules and increasing their load factors.

Empty seats equate to money lost and airlines are filling up planes by forcing passengers on fewer flights.

US Airways has reduced its total capacity by 8 percent over the past 7 years. The airline previously recorded load factors in the mid to high 70 percentile. In September, they announced an 87.3 percent load factor, setting a company record.

Delta's load factor, previously in the high 70s, has also rallied to the low 80s since merger consolidations. September brought an 83.2 percent load factor.

Airlines have not passed any of their savings onto consumers regardless of constant consolidations and capacity cutbacks.

According to the Bureau of Transportation Statistics, the average price of an airline ticket was $355.72 during the first quarter of 2011. The average ticket price was $301.39 during the same quarter in 2005, before the US Airways/America West and Delta/Northwest mergers.

Schank added that a US Airways/American merger would almost certainly lead to higher fares.

The merger would also continue to reduce choices and shrink capacity.

Destinations might be additionally cut from some cities served by both airlines.

For instance, if a city has service to American's Dallas-Ft. Worth hub and the US Airways hubs of Phoenix or Charlotte, NC, a combined airline might discontinue service to one or two of those airports. A move like this would primarily affect smaller airports.

Despite the perils of airline consolidation, there's at least one benefit: a stronger industry.

The airline resulting from a merger typically surfaces as a financially stable company. Although this is due to less competition and the ability to charge higher fares, airlines can give better service.

"(An airline) can offer higher frequencies through big hubs," added Schank. "And the bigger the hub, the more effective the service is for the average traveler," said Schank.

Schank added that business travelers might also benefit from mergers because it gives them an opportunity to stay loyal to one airline and get frequent flier perks.

And although the future of American Airlines may be uncertain, a merger with US Airways might be its best option for stability.

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