The world of aviation is full of ironies. The competitive structure of the US airline industry is under closer political scrutiny than ever, with Senate hearings, a Department of Transportation policy statement on anti-competitive behaviour, and rumblings from the Department of Justice and General Accounting Office. So, what do the chiefs of the major airlines do? Indulge in secret meetings to discuss their options for the next round of consolidation through mega-alliances.
It is tempting to suggest that the recent series of Senate hearings into hubs and airline competition may even have assisted the very industry consolidation process which senators abhor. By inviting the chief executives of all the majors to be in Washington at once, they may have made it that much easier to align diaries for those exploratory meetings between Messrs Greenwald and Mullin, Wolf and Greenwald and Wolf and Crandall.
The alliance agreement between Northwest and Continental, together with the continuing march of the global alliances, have made this next phase of airline consolidation inevitable (Airline Business, March p24). The rumours that United and Delta have begun tentative discussions, and that US Airways is talking to both American and United, are not surprising. But when set against the current political landscape in Washington, it is clear that the timing is unfortunate, to say the least.
Once again, it seems that the US majors are being politically naive. Airlines have never been very effective at explaining the complexities of their business to ordinary folk like senators - or any other customers - whose interest lies in basic facts like how much they have to pay, how much choice of airline they have, and how convenient - or not - their hub connection is. All too often, carriers have found themselves trying to swim against the political tide - remember the fiasco over user fees last year?
In some respects, the majors are merely following the general business trend towards consolidation. The urge to merge has become an obsession, as exemplified by the latest $82 billion financial services mega-merger proposed between Citicorp and Travelers Group. The impetus behind airline consolidation is just the same - a desire to offer a comprehensive range of services on a global basis, while ensuring an unassailable market share.
But airline chiefs have always been famous for claiming that theirs is different from any other industry. In another irony, the DOT agrees. Its draft policy document on anti-competitive behaviour states: 'Compared to firms in other industries, a major air carrier can price-discriminate to a much greater extent, adjust prices much faster, and shift resources between markets more readily. . . . Air carriers have access to comprehensive, "real-time" information on their competitors' activities and can thus respond to competitive initiatives more precisely and swiftly than firms in other industries.'
The majors have responded to the DOT's proposals to monitor anti-competitive behaviour with howls of protest and complaints of 're-regulation'. (see story, p12). The Air Transport Association states that 87 per cent of US passengers fly in competitive markets and that fares have fallen 35.5 per cent in real terms since deregulation in 1978.
But the DOT, and the Senate committees, don't buy these arguments. They see an industry which has carved up the market into fortress hubs, where fares on local services are 40 per cent higher than average. They worry about small towns losing access to a choice of hubs. They see an industry where there is little direct competition among the largest carriers and enormous barriers to entry for start-ups.
This is where the supreme irony lies. While politicians are bemoaning hub power, the majors are trying to make their hubs even more powerful by using alliances to split them up among three mega-alliance groups.
Not content with Chicago, San Francisco and Denver, United could add Atlanta, Cincinnati and Salt Lake City to its repertoire. American could add Pittsburgh, Philadelphia and Charlotte to Dallas-Fort Worth, Miami and Chicago. Northwest and Continental already plan to interlink Minneapolis-St Paul, Memphis and Detroit with Houston, Newark and Cleveland. Among the US mega-hubs, that leaves only St Louis independent, and surely TWA will be in the frame as an alliance partner, too?
Such moves will force a reassessment of the global alliance picture; if there are only three US groups, there will also be only three global groups.
Proposals along these lines are bound to attract political flak. The majors already stand accused of failing to compete aggressively enough against each other. It is clear that further concentration will result in the DOT's new competition enforcement policy assuming critical importance.
Source: Airline Business
