The Fewer Airlines, the Better
The Atlanta Journal-Constitution, November 27, 2006
by Satish Jindel

The fear of airline consolidation is unfounded in the post-Sept. 11 era.

In order to understand the benefits of consolidation, it is important to compare the airline industry with other transportation segments and recognize the cost and service implications of greater density, faster travel time and higher on-time performance with less-congested airports.

No other segment of the U.S. transportation sector is as fragmented as the airline industry. The United States does not need 100 airlines to have a competitive market for lower fares.

There are only eight railroads and 10 major trucking companies. These transportation segments are competitive and yet the carriers continue to make large investments in technology, service offerings and performance to offer a more superior service today than a decade ago while still holding annual price increases at less than 5 percent.

In all transportation modes, density is a key to achieving lower operating cost and higher level of service. Increased passenger density in the airline industry - more seats filled on each plane - will provide more direct flights.

For large cities like Atlanta, Chicago and Philadelphia, greater density will allow airlines to reintroduce larger jet service with higher on-time arrival and departure and at lower cost than is feasible with regional jets.

People do not like to be transported like packages. A hub and spoke system works well for freight movement. However, people prefer to go directly from Chicago to Atlanta and not via Philadelphia. Consolidation builds density and facilitates greater flexibility for airlines to operate non-stop service to more destinations.

Airline competition can be achieved if the merging airlines are limited to less than 50 percent of the flights in any one market.

Combined, US Airways and Delta Air Lines will still amount to only 18 percent of the $140 billion market, in contrast with UPS controlling more than 50 percent of a $55 billion U.S. parcel market. Yet, there is intense competition between UPS, FedEx and DHL that has provided their customers faster transit times at competitive and low rates.

While the international airlines deploy larger aircraft (such as Airbus 380 and Boeing 787), U.S. airlines are sliding into the past by replacing Airbus 319s and Boeing 737s with much smaller regional jets in even major domestic lanes such as Chicago to Atlanta and Dallas to Pittsburgh.

The trucking industry has used larger trucks to reduce transportation costs and minimize traffic congestion on highways. Similarly, redeployment of larger jets in major domestic lanes will reduce congestion in the air network, enhance timely take-off and landing at major airports and provide a much welcome relief for the air traffic controllers.

Labor contracts carried over from the regulated era were the major contributor to higher air fares prior to Sept. 11, 2001. Those contracts have since been dramatically modified with bankruptcy filings and losses at most airlines.

US Airways' bid for Delta should be evaluated under these new conditions. The airline industry was deregulated in 1978 but has not operated as such due to legacy labor contracts and government failure to manage the distribution of air traffic and airport capacity. To enhance competition, the government has facilitated start-up of more than 200 new airlines since deregulation and contributed to industry problems and billions of dollars in wasted time for travelers.

Airline consolidation, if managed to avoid control by a single airline in any one market, will ensure a bright future for the industry and bring back for fliers the golden days of air travel at current low fares.