Higher airfares ahead? Not necessarily


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If the announced Continental Airlines / United Airlines merger is approved by regulators, current speculation is that the combined airline will push for higher faces. Because the merger will result in a consolidation of carriers which should eliminate excess capacity, the pressure to raise fares will be natural.

According to Adam Pilarski, senior vice president at AVITAS, an aviation consulting firm, “Mergers mean less competition, which generally leads to higher prices. “In the long run, I think it’s fairly obvious that it’s not incredibly wonderful for consumers…It wasn’t designed to be good for consumers. It was supposed to be good for the airlines.”

In a US News and World Report article, Pilarski says: “…the merger makes sense for the two airline companies because it’s the best way for them to become more profitable and hopefully more efficient. The result will likely be that the new company will charge consumers more in order to make more money.”

But there are others who disagree.

Peter P. Belobaba is the program manager for the Global Airline Industry Program at MIT and he feels that consumers are missing the point. According to Belobaba, “The airline industry is different from other industries because the number of competitors isn’t the most significant driver of price increases. There were times during the 1990s when you had six, strong, big legacy carriers, and they were all very happily coexisting with not-so-low fares,  Study after study has shown that the No. 1 explanatory variable determining the availability of outrageously low fares is the presence or absence of one of the so-called low-cost carriers.” The low-cost carriers he is referring to include Southwest, JetBlue, and AirTran.

As for my opinion, I think that the new Continental / United airline will attempt to selectively raise fares some of the smaller, less-competitive routes. Those fare hikes may be sustainable depending on the particular route, but any attempt to raise fares across the board will be unsustainable. Remember, the low-cost competition (Southwest and JetBlue) also happen to be the most profitable; they are in far better shape financially than the combined United / Continental organization. And because of their financial strength along with their lower cost base, Southwest and JetBlue will be quick to initiate price wars on routes where they feel they can pick up a couple more points of market share at the expense of the new combined airline.

Here’s the takeaway: I’m skeptical that the merger between United and Continental will result in a stronger, single airline. Combining two high-cost organizations into one will most likely lead to  just a bigger high-cost organization. The combined entity will be at a disadvantage to the Southwest’s and JetBlue’s of the world and this will be reflected in their ability to project pricing power. Higher fares going forward? I’ll believe it when I see it.


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Republished with author's permission from original post.

Patrick Lefler
Patrick Lefler is the founder of The Spruance Group -- a management consultancy that helps growing companies grow faster by providing unique value at the product level: specifically product marketing, pricing, and innovation. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.


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