It is a new day in the US airline industry. The complex network of trunk, regional and local service carriers set up by the Civil Aeronautics Board (CAB) decades ago has been cut, pruned and merged to an industry that could be dominated by four majors by the end of the year with the merger of American Airlines and US Airways.
The new American, Delta Air Lines, Southwest Airlines and United Airlines, plus their regional affiliates, could carry up to 90% of domestic traffic. In other words, more than twice the number of Americans than stepped on a commercial flight in 1978, when deregulation began three decades of industry consolidation, flew on one of those four airlines in 2012.
That's a good thing. "With mergers you have the potential for a stronger, more reliable and more profitable industry," says Henry Harteveldt, a travel industry analyst at Hudson Crossing. But he adds that competition will be fierce.
"Much like a really exciting Olympic race, the winners will be measured in the hundreds of seconds instead of in minutes," he says.
Analysts expect further capacity discipline and pricing rationalisation across the airline industry as a result of the merger.
"It removes a decision maker," says Helane Becker, an airline analyst at Dahlman Rose. "Even if you don't take capacity out of the system specifically, what you really do is remove another layer of somebody who could lower fares and mess up the pricing structure."
Industry revenue metrics have improved since Delta and Northwest Airlines merged to create the first US mega carrier in late 2008. Passenger revenue per available seat mile (PRASM) has increased 31.5% to 13.03 cents at American, 33.5% to 13.8 cents at Delta, 28.6% to 12.56 cents at Southwest (includes AirTran Airways in 2009), 36.4% to 13.09 cents at United (includes Continental Airlines in 2009) and 27.9% to 13.92 cents at US Airways since 2009.
The US industry has also been profitable. Airlines reported net income totalling $2.95 billion for the past three years, according to industry body Airlines for America.
"I'm going to do something unprecedented here on Mad Money," said Jim Cramer, host of CNBC's show Mad Money, in March. "I'm going to recommend the stock of an airline [US Airways], an industry I have outright hated for at least 10 years."
Even executives at other carriers see the deal as a positive. "This announcement is good news for United," said Jeff Smisek, chairman, president and chief executive of United, in a recent letter to employees. "[We] have benefitted from the improved financial health that consolidation has brought to our industry."
Competition will be fierce. American, Delta and United will duke it out for the lucrative New York market with JetBlue Airways keeping them "honest" in terms of fares, says Becker. The new American will have options on how best to allocate its slots at New York's JFK and LaGuardia airports, where it will be the second largest airline behind Delta, in order to take market share from its competitors.
"Speaking of Delta, it's going to be a positive," said Ed Bastian, president of the Atlanta-based carrier, during an investor meeting in March. "It's just another form of continuing to maintain discipline in a business [but] it will continue to be as competitive as ever."
Chicago (American, Southwest and United), Los Angeles (American, Delta, Southwest and United) and the Washington DC area (American, Southwest and United) are three other metropolitan areas where the four majors will compete closely with each other.
Southwest is really the unknown out of the four. The Dallas-based low-cost carrier's strategy targets rolling out a new reservations system developed by Amadeus, launching international flights on its own metal and completing the AirTran integration in 2014 but lacks details on how it will challenge its three main competitors. Comparatively, American, Delta and United have se their stall out to use their network reach and sheer size to attract business travellers while maintaining fare discipline and improving investor returns.
"Southwest is emerging increasingly as a very business friendly airline," says Harteveldt. "There are a lot of places on the map that they could fill in. Southwest has to decide what it wants to be."
How everything plays out is anyone's guess. American and US Airways cannot begin collaborating on network integration until they receive Department of Justice (DOJ) antitrust approval, which is expected in the third quarter, and the reaction of other airlines can only come after those changes become evident.
"Consolidation is positive for airline fundamentals," said John Godyn, an airline analyst at Morgan Stanley, in a February report. "[But] it's too early to say whether these forces will be sustainably transformative given the industry's volatile history."
BIG FOUR SNAPSHOT
United Airlines
Hubs and focus cities: Chicago O’Hare, Cleveland, Denver, Guam, Houston Intercontinental, Los Angeles, Newark, San Francisco, Tokyo Narita and Washington Dulles
Fleet (December 2012): 702 mainline, 551 regional
Passengers (2012): 140.4 million
Strengths: US northeast especially Newark, midwest and west; transcontinental, Asia-Pacific, North Atlantic and Latin America.
Weaknesses: US south and deep South America. Limited alliance network in latter with TAM’s Star departure. “United really needs to figure out what [Washington] Dulles is,” says analyst Henry Harteveldt at Hudson Crossing, adding that it is too far north to competitively serve the south.
Delta Air Lines
Hubs and focus cities: Atlanta, Cincinnati, Detroit, Minneapolis-St Paul, New York JFK and LaGuardia, Los Angeles, Memphis, Salt Lake City and Tokyo Narita
Fleet (December 2012): 717 mainline, 568 regional
Passengers (2012): 164.6 million
Strengths: US northeast especially New York, south, midwest and
west; transcontinental, Asia-Pacific and north Atlantic. “[Delta] is big worldwide, though not as big in transatlantic and Latin and South America, but it’s growing,” says Helane Becker, an airline analyst at Dahlman Rose.
Weaknesses: US west coast. Limited alliance network in South America.
American Airlines/US Airways
Hubs and focus cities: Charlotte, Chicago O’Hare, Dallas-Fort Worth, Los Angeles, Miami, New York JFK and LaGuardia, Philadelphia, Phoenix and Washington National
Fleet (December 2012): 948 mainline, 563 regional
Passengers (2012): 140.6 million
Strengths: US northeast, south and midwest; transcontinental, north Atlantic and Latin America. Large alliance network in north Atlantic and South America. “It will dominate four of the most important cities in the USA,” says Henry Harteveldt of Hudson Crossing, referring to American’s network in the northeast.
Weaknesses: US west and Asia-Pacific.
Southwest Airlines/AirTran Airways
Hubs and focus cities*: Atlanta, Baltimore, Chicago Midway, Dallas Love Field, Denver, Houston Hobby, Las Vegas, Los Angeles, Orlando
Fleet (December 2012): 694 aircraft
Passengers (2012): 134 million
Strengths: Extensive network covering all major US metropolitan areas.
Weaknesses: Limited international network and presence at major
east coast airports, and slow integration since 2010 merger. Helane Becker of Dahlman Rose calls their “inability to do foreign exchange until 2014” their biggest weakness.
*Southwest/AirTran does not have “hubs” or “focus cities”, destinations listed have more than 100 daily departures as of January 2013
Source: Air Transport Intelligence news
