In February, when American Airlines (AA) and US Airways rolled out a proposal to merge into what would be the world’s largest airline, they also launched what has become one of the largest topics of controversy in the travel industry in a while, with a widespread expression of angst in the meetings sector.
“I can’t see how anything good could come from this for our industry,” says Brian Stevens (MPI Southern California Chapter), president and CEO of worldwide meeting and event company Conference Direct, headquartered in Los Angeles. “Our experience over the years has been that when airlines merge or acquire each other, the consolidation results in fewer airline seats available, and the traveler is going to be paying more for them. Any savings the airlines achieve get passed on to their shareholders, not to their customers.”
That exact line of thinking—that the AA/US Airways merge would benefit airline stockholders at the expense of airline customers—was the central thread in a 56-page lawsuit filed by the U.S. Justice Department on August 12 seeking to block the merger.
“Airline travel is vital to millions of American consumers who fly regularly for either business or pleasure,” Attorney General Eric Holder said in a statement. “By challenging this merger, the Department of Justice is saying that the American people deserve better. This transaction would result in consumers paying the price—in higher airfares, higher fees and fewer choices.”
Stevens’ opinion that airline mergers have historically not been good for the meeting industry is reflected by a cross section of meeting planners.
“The era in which mergers and acquisitions tend to be good for the customer ended long ago,” says planner Mike Rowan, a Nashville-based account executive for Experient. “Unfortunately, when you hear the announcement of a merger, the next thing you are going to hear from the airlines in the merger deal is that they are going to pursue ‘increased efficiencies,’ which is really just a way of saying ‘we are going to cut services so we can make more money.’”
Rowan cites the increased airfares and decreased amount of airlift in cities such as St. Louis and Cincinnati that resulted from a round of mergers and acquisitions over the past decade, including Delta’s acquisition of Northwest Airlines in 2009 and the United/Continental merger in 2010.
“When two airlines with competing flights on any given air route merge into one, it is of course going to follow that the number of seats offered on that route are going to decrease and the airfares are going to increase,” Rowan says.
A good example of that was cited in an August 16 New York Times report by James B. Stewart, which pointed out that the United/Continental merger resulted in the merged airline controlling 79 percent of the service between Chicago O’Hare and Houston George Bush Intercontinental, for instance. During a three-month period after the merger, fares on the route between those two cities went up 57 percent, while fares across the entire route system of the newly-merged airline went up just 16 percent.
“Our experience in the meeting industry is that the destinations that have meaningful competition are going to have more rational fare pricing than the destinations that don’t,” Stevens says. “And consequently, because airfare is such a major component of meeting costs, those destinations with competing air carriers are going to have the edge over the others in their attractiveness as meeting destinations.”
The Justice Department lawsuit, which centers its opposition to the merger on the contention that it will be costly for consumers, points out at that a newly merged AA/US Airways would control 69 percent of the airlift out of Washington Reagan-National Airport (DCA) and that there would be competition on just 21 non-stop routes out of DCA.
Washington-based planner Joan Eisenstodt (MPI Potomac Chapter) of Eisenstodt Associates LLC says that even without the proposed AA/US Airways merger, airfares out of DCA have ramped up over the past few years, faster than normal market forces should dictate.
“When I am flying from DCA to second-tier and third-tier and even fourth-tier markets around the country, I am paying unheard of airfare prices, even when flying economy,” she says. “And you have to look at the fact that because of airline consolidation over the past decade, fares have gone up because seat availability has gone down. Some routes to smaller cities just go away when mergers happen, and it becomes harder and harder for them to market themselves for anything but the drive-in meetings clientele, which is limited.”
But at the same time the merger has detractors, there are high-profile proponents of the AA/US Airways proposal. Their central thesis is that the merger would be good for the economy.
The two airlines themselves point out that the new combined airline could save more than US$1 billion in operating expenses just by consolidating core operations such as administration, accounting, marketing, equipment maintenance, reservations and booking and more. The two airlines say that even without reducing a single flight, they could emerge as one stronger airline, offering highly competitive service that would be good for the U.S. airline industry. Other strong proponents include the airline pilots union at American Airlines. Also in the strong proponent category are mayors and other local government officials in the cities of Dallas, Fort Worth, Charlotte, Miami and Phoenix (cities with AA or US Airways hubs) who point to the potential economic boost from having the world’s largest airline with major operations in their communities.
This becomes particularly controversial in those communities because attorneys general in Texas, Florida, Virginia, Arizona, Tennessee and Pennsylvania have joined the Justice Department lawsuit seeking to block the merger, citing the merger’s potential to raise airfares in their states.
One high-profile industry analyst who is a proponent of the merger is Mike Boyd, whose Denver-based firm, Boyd Group Intl., is often critical of actions by the airlines. For instance, Boyd lambasted AA earlier this year for a rebranding/marketing campaign (which came before the merger proposal) saying that it would cost millions and not gain a single passenger.
However, on a recent appearance on CNBC he said he normally opposes airline mergers but favors this one because it will bring AA service to about 50 small markets that do not currently have access to it, giving them far better connections to the worldwide air travel grid. He also said that he thinks airlines will continue to consolidate whether this merger is approved or not, and without question, airfares around the world will go up regardless of what AA and US Airways do.
The Justice Department counters with some significant statistics of its own from a General Accounting Office study, stating that while the merger affects only 12 major non-stop routes served by the two existing airlines, it would eliminate any competition on seven of those 12 routes and eliminate at least one effective competitor on routes between 1,665 city-to-city pairs involving 53 million annual passengers.
When the merger was originally announced, the two airlines expected possible approval of the deal by this month (August), but now, a ruling in the court case, which has been filed in U.S. District Court in Washington, D.C., is not expected before December.
--By Rowland Stiteler