The Sky-High Price You’ll Pay for Airline Mergers

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If you want to understand why the U.S. Department of Justice is playing hardball over the pending American Airlines/US Airways Group merger, consider Detroit. The Motor City once harbored hub dreams and built a new Detroit Metro airport to fulfill that desire. Then, you know, the U.S. auto industry wrecked along with the rest of the economy. And airlines went bust before autos, sending Northwest, Detroit’s home team, into the arms of Delta, another bankrupt. Detroit Metro got downgraded to a spoke rather than a hub and lost a ton of flights, which has made it, paradoxically, a very pleasant place to travel to and from.

Today the city of Detroit may be broke but with the auto industry cranking again Metro is a lot busier—and dominated by dominant, post-consolidation legacy airlines. One result: when I needed to book a trip to Motown with a week’s notice the round trip fares ranged from $1,374 to $2,000 on the legacy carriers. Guess who had the highest price? American. That is, until Delta upped the ante to $2,010, which American promptly matched. The only other nonstop option was plucky Spirit Air, priced at $335, but I couldn’t make either of its two daily flights. The next best option was a one-stop through Washington on American’s betrothed, USAirways, at $329.

That is the kind of oligopolistic pricing that has DOJ’s knickers in a twist: a city pair dominated by the big three collecting economic rent and the best second option is the airline that’s going to disappear in the merger. Why does Detroit have such high prices? Some of it can be explained by the fact that, (no offense Motowners), few people fly to Detroit for a vacation. It’s a business market. Most of the passengers aren’t paying for their own tickets so they are not price sensitive. This price inelasticity translates to more pricing power for the airlines. The Dallas-Detroit market appears to have similar characteristics.

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Still, it’s a little amazing that American would let itself be the high-price leader with the trust-busters bearing down on them, but the airline pricing engines don’t play politics, they just seek maximum yield. The Justice Dept., American and US Airways are negotiating a deal but if DOJ doesn’t get what it wants—including the surrender of precious slots at airports such as LaGuardia in New York City and Washington’s Reagan National—the two sides have a court date later this month. A judge is now allowing Southwest to file a brief demanding that the merged airline give up some of these coveted slots to a low-cost carrier like Southwest. In a market like Detroit-New York, Southwest will make the case that it can provide the competition that antitrust law seeks to preserve.

Detroit’s pricing sticks out when you compare it to other cities. When I priced a trip to Chicago for the same times, the fares were entirely different. American offered a $359 round trip, even though Chicago is a greater distance from New York than Detroit. How do you explain such a variance? First, Chicago is a hub, so there are tons of flights here. Second, JetBlue flies to Chicago from New York. The presence of a high-quality, low-cost carrier such as JetBlue keeps the legacy carriers honest. And Spirit also serves Chicago from New York, offering even more cut-rate fares. Same with Los Angeles, farther still, where the round trip fares are ranged from $606 on Virgin America (a terrific airline) to $650 on United, Delta and JetBlue to $713 on US Airways to a high of $948 on, hmm, American.

In its report to Congress on the proposed merger, the General Accounting Office said that the AA/US merger would mean the loss of one effective competitor in 1,665 airport-pair markets, affecting more than 53 million passengers. More to the point, GAO said that the merger would reduce the number of competitors from 4 to 3 in 749 city pairs. That’s way more than the 454 cases of 4-to-3 reductions that occurred with the United-Continental merger.

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When top competitors merge their combined pricing power improves; heck, it’s the whole point? They can reduce the number of seats available in a market, raise fares—or both— because big airlines today are less interested in price wars. This is DOJ’s point. The AA/US merger doesn’t look bad on paper, given that only 12 of their non-stop routes overlap directly. But in the aftermath of the United/Continental and Delta/Northwest mergers DOJ says the reduction in competition is more pronounced.

There are still a lot of reasons to support the AA/US merger: it will preserve jobs, improve options for the elite cadre of global travelers and ensure a profitable future for the combined entity, which is a good thing. But there’s a price to be paid for it, and that’s what DOJ is trying to figure out. In the meantime, I’m looking at $1,400 to get to Motown midweek. There oughta be a law. Oh wait, there is.

25 comments
alextingle
alextingle

Absolutely abhorrent that Time's editors would approve that an article as flagrantly erroneous as this be published. I hardly need to reiterate each of the comments below. Perhaps pointing out the fact that your two major contentions within the first paragraph of the article are blatantly wrong is enough to suggest that you shouldn't be writing on this topic at all. 

As a DTW-based Delta frequent flyer (and former NWA frequent flyer), it seems more likely than not that you've never actually flown into Detroit since Delta's takeover of Northwest. Otherwise, perhaps you'd notice that the mile-long McNamara terminal is entirely occupied by SkyTeam airlines, out of which Delta still dominates the Trans-Pac flight routes using DTW as its gateway.

It would be a gross reflection on the reputation of Time if this article is still up tomorrow without serious amendments.

vincentomoh
vincentomoh

I would recommend that A. corrections be made to this article immediately (Detroit had a new terminal but not a new airport, Detroit was NOT downsized) and B. Saporito apologizes for his mistakes

Everyone on airliners.net is criticizing this article.

Hae-SongPak
Hae-SongPak

I know news media aren't informed when it comes to airlines business, but this. This is a disgrace. It take just a few seconds googling to find out that Delta never rescued Northwest from bankruptcy. DTW airport is one of the largest hubs in Delta's system. AIrlines are there to make a profit. At least you could get a direct flight. Do you expect airlines to give rock bottom, unsustainable prices, because if you do then you go back to economics class. This article is not worthy of the TIME name.

ah1joeam
ah1joeam

If you really research Detroit you will find that Northwest was very similar in its pricing (before it was delta) when it was competing against all other carriers in DTW. I am sure the higher prices has to do more with being allowed by wayne county leadership to have its own terminal which directs business for convenience to now what is Delta in DTW. All other carriers are at a different location in a completely separate terminal which is not connected. The current Delta makes money and charges more for a direct flight convenience since Delta uses DTW as a hub. Much like AA does in Dallas, United in Chicago, US air in Charlotte. Deltas only monopoly of DTW is the fact that they are allowed to have their own terminal which is not connected to the other carriers terminal and it is not even accessible by foot.  Spirit used to have DTW as a hub base, but no longer does as they chose to go elsewhere and not because of competition but more due to lack of people filling the airplanes. The cost of a ticket has very little to do with mergers and more about cost of planes, fuel, labor and govt slot buying. You should do your homework and you will see that DTW was a very poor example to utilize to attack an airline merger.

KellyDaniels
KellyDaniels

I hope Mr. Saporito plans on printing a retraction or at least an explanation for this disgraceful article. Perhaps he wrote it after spending too much time at the airport lounge, drowning his sorrows over having to fly on an airline that wasn't terrific or plucky enough. Seriously?

PHXorBust
PHXorBust

Ha!  So it's the airlines fault that YOU are booking within a week of travel and cannot make YOUR schedule work to take the cheapest flight available?!?   Wow, what journalism!   

KellyDaniels
KellyDaniels

Me again. I'm sorry, but I just can't stand it. You once again disprove your point with Chicago where the recently merged United and Continental maintain their second-largest hub. You then reinforce your argument against yourself by explaining that the presence of low cost carriers is the reason for the lower fares.

Mr. Saporito is a managing editor!

KellyDaniels
KellyDaniels

And further, Detroit was a hub for Northwest long before the new terminal was constructed.

802flyer
802flyer

What shoddy, poorly researched, journalism.  Detroit did not build a new airport.  It built another terminal building at existing airport.  DTW is still Delta's second largest hub.  Perhaps Mr Saporito confused Detroit with Memphis, where Delta has pulled down operations?


Have things gotten so bad at Time that it no longer has fact checkers?

SLNF813
SLNF813

It seems to me that you have three or four options here and I don't feel sorry for you in the least. Take Spirit, (not my problem if you can't make either of their cheap direct flights). Take the connecting flight through DCA. Or bitch to Delta and Northwest bc Detroit is their territory. American/USAirways are keeping up with their ticket price, not setting the tone, so get your facts straight. Another option... drive!Or walk. $1400 doesn't sound so bad when looking back to the, 'wagon train,' days now does it? And oh! Take Amtrack! Have you priced out an Amtrack ticket? It seems to me that you're just lazy. You want a nice comfortable direct flight to Motown. You want convenience and that's exactly what you're getting with your $1400 hence the reason your last sentence stated that you're facing a $1400 airline ticket. One more thing, since you're so smart. Research inflation and how airlines have NOT raised their prices over the years. High oil prices, gas prices and taxes yet the price of the airline ticket has stayed the same for years. Research that, then post that in Time. Write something beneficial for a changeinstead of this bogus trash!

KellyDaniels
KellyDaniels

Do you actually work for Time? I might have to cancel my subscription if so. First, Detroit is Delta's second-largest hub, behind Atlanta. Second, you disproved your own point. You had other options. A monopoly exists when consumers have no choice. Third, did you even bother to check what the last-minute fares were prior to the Delta-Northwest merger? Really shoddy reporting.

elbirdo
elbirdo

You lost me at "The only other nonstop option was plucky Spirit Air, priced at $335, but I couldn't make either of its two daily flights."

Tommy34684
Tommy34684

Try to fly through Flint Michigan, it might be cheaper.

GlennReuben
GlennReuben

Airlines sure have to face a lot of scrutiny for a deregulated industry.

bloganalyst1
bloganalyst1

An industry is a self-regulating collection of individual businesses. If there is too much capacity or competition, profits naturally decrease or disappear all together. This naturally forces some to exit and others possibly to consolidate and reduce capacity. This again naturally brings back the industry to financial health and modest profitability. This exact phenomenon is taking place right now within the airline industry. On the other hand, if profits are too high, new airlines will naturally start entering the industry lowering profits for everybody. All economists out there agree that the merger of American Airlines and US Airways is a good thing and that government should not interpose. 

Wmflyer
Wmflyer

Instead of thinking only about yourself and complaining how high ticket prices are think of the first officer of your jet who only makes about 24 thousand a year...these artificial government induced price wars is what has killed this industry. Like others have said...take the bus if you don't want to pay a fair price.

ha65ah
ha65ah

Do you know anything about the industry? If an airline commands pricing power, than that airline is gonna use it. Plus Detroit is a massive Delta hub. A business route less than a week out, good luck with any decent price. The whole side-commenting-on-airlines thing is terrible, too. You clearly can see, but you can't see WHY some things are the way they are. If you don't like it, drive or take Amtrak.

vaishnavjagdip
vaishnavjagdip

It is said, competition extends much relief to consumers , More Airlines leads to tough competition.

However if Mergers start taking place of Airline  Cos, Consumers shall have to pay more ,since less competition.

Air travel has become necessity, govt has to reduce taxes & since it is service Industry Management has to keep strict control over various expenses

RonAllen
RonAllen

Detroit is not only a hub for Delta, it is a rather large hub. Get a clue.

dude7654321
dude7654321

American didn't make a profit for like 10 years straight, so prices should be higher

Hae-SongPak
Hae-SongPak

@GlennReuben Are you endorsing this obviously factually incorrect article. Jeez, airlines are here to make money not to provide a chauffer service at your price

Tommy34684
Tommy34684

@Wmflyer How much should the first officer earn having limited responsibility?

ratfester
ratfester

@tkulaga @Wmflyer How about more than $24k, maybe be able to pay a mortgage and just maybe send his kid to community college.  That asking too much?