Skip to main content

Why American-US Airways deal is good

By Pablo T. Spiller, Special to CNN
February 18, 2013 -- Updated 2259 GMT (0659 HKT)
STORY HIGHLIGHTS
  • American and US Airways recently announced their $11 billion merger
  • Pablo Spiller: Is this the kiss of death to the legacy airline industry?
  • He says consumers will likely get more choices and improved quality of service
  • Spiller: This merger, the last of the large airlines' merger wave, is good overall

Editor's note: Pablo T. Spiller is the Jeffrey A. Jacobs Distinguished professor of business and technology at Haas School of Business, University of California, Berkeley. He has been a consultant for airlines in the past.

(CNN) -- American and US Airways recently announced their $11 billion merger. Is this the kiss of death to the legacy airline industry, which after the merger will only have three major carriers: United, Delta and American? Will the merger reduce consumer choices and increase prices? Is this another proof that airline deregulation is a big mistake and a sellout to corporate interests?

Rest assured -- there's no reason to panic.

According to the Bureau of Transportation Statistics, the average round-trip ticket (net of fees paid at the airport, including baggage fees and on-board fees such as meals, both of which are important sources of new revenues) increased by 28% since 1995.

Pablo T. Spiller
Pablo T. Spiller

In contrast, average retail prices in the same time frame increased by 47%, which means that the average air fare fell in real terms by about 15%. At the same time, crude oil prices (a key factor in airline costs) increased by a factor of 5, from around $17 per barrel to more than $90 per barrel.

During this period, we saw many legacy airlines disappear, mostly through mergers. TWA -- the fourth major legacy -- was acquired by American in 2001. America West was absorbed by then bankrupt US Airways in 2005. Continental merged with United last year. Southwest, a major new entrant at the national scale since deregulation, took over ATA Airlines in 2008 and Air Tran in 2010, which previously absorbed ValuJet, another new airline since deregulation. Delta purchased Northwest in 2008.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



Although the U.S. airline industry is more concentrated than the rest of the world, in reality, its competitive nature changed dramatically.

The entrance of new players at the national stage such as Southwest, JetBlue, and Virgin America, among many others, as well as the development of strong hub-and-spoke networks among the major airlines, put strong competitive pressure on the majors.

On the one hand, the new entrants are all nimble. Southwest has been the only consistently profitable airline for 20 years. When compared to the majors, they all have lower labor costs, and more modern and standardized equipment -- leading to low operational and fuel costs. They tend also to be highly selective in the markets they serve.

On the other hand, the majors' strengthening of the hub-and-spoke networks (by which travelers go from A to B via a hub in airport C) imply that entry into new markets -- what in the industry is called "city-pairs" -- is relatively simple. All a major needs to do is to start service between one hub and a given city to have service to hundreds of new city-pairs, all prior existing cities being suddenly connected to a new destination. So if an airline attempts to gouge its customers on a particular destination, other airlines with reasonably located hubs will have a strong incentive to add such destination to their networks, frustrating the gouging airline's ability to raise prices.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



It is in this framework that the American-US Airways merger needs to be looked at. Although there will be some competitive overlap, particularly at national airports where both American and US Airways have a substantial presence (US Airways providing the North East Shuttle service as well as regular service), such overlap will be investigated by the antitrust authorities.

Actually, the two networks are quite complementary and will provide consumers with more choices and improved quality of service. In particular, East Coast residents where US Airways has its major eastern hubs will benefit from increased domestic and international connections.

Although the combined airline may decide to streamline some of its hubs, other hubs, such as Phoenix (which is a strong Southwest hub), will provide the combined airline with a strong competitive position to recapture some of the market the majors lost to Southwest over the years (US Airways competes today with Southwest in about 80% of its routes).

Overall, this merger, the last of the large airlines' merger wave, has the potential of being not only good for shareholders and airline employees, but to domestic travelers alike. It's not a bad deal.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Pablo T. Spiller.

ADVERTISEMENT
Part of complete coverage on
July 27, 2014 -- Updated 1615 GMT (0015 HKT)
Megan McCracken and Jennifer Moreno say it's unacceptable for states to experiment with new execution procedures without full disclosure
July 26, 2014 -- Updated 1728 GMT (0128 HKT)
Jeff Yang says it's great to see the comics make an effort at diversifying the halls of justice
July 26, 2014 -- Updated 1555 GMT (2355 HKT)
Rick Francona says the reported artillery firing from Russian territory is a sign Vladimir Putin has escalated the Ukraine battle
July 27, 2014 -- Updated 1822 GMT (0222 HKT)
Paul Callan says the fact that appeals delay the death penalty doesn't make it an unconstitutional punishment, as one judge ruled
July 24, 2014 -- Updated 2225 GMT (0625 HKT)
Pilot Robert Mark says it's been tough for the airline industry after the plane crashes in Ukraine and Taiwan.
July 25, 2014 -- Updated 1510 GMT (2310 HKT)
Jennifer DeVoe laments efforts to end subsidies that allow working Americans to finally afford health insurance.
July 26, 2014 -- Updated 1533 GMT (2333 HKT)
Ruti Teitel says assigning a costly and humiliating "collective guilt" to Germany after WWI would end up teaching the global community hard lessons about who to blame for war crimes
July 25, 2014 -- Updated 1245 GMT (2045 HKT)
John Sutter responds to criticism of his column on the ethics of eating dog.
July 25, 2014 -- Updated 1302 GMT (2102 HKT)
Frida Ghitis says it's tempting to ignore North Korea's antics as bluster but the cruel regime is dangerous.
July 25, 2014 -- Updated 1850 GMT (0250 HKT)
To the question "Is Putin evil?" Alexander Motyl says he is evil enough for condemnation by people of good will.
July 24, 2014 -- Updated 1803 GMT (0203 HKT)
Laurie Garrett: Poor governance, ignorance, hysteria worsen the Ebola epidemic in Sierra Leone, Guinea, Liberia.
July 24, 2014 -- Updated 1349 GMT (2149 HKT)
Patrick Cronin and Kelley Sayler say the world is seeing nonstate groups such as Ukraine's rebels wielding more power to do harm than ever before
July 23, 2014 -- Updated 2205 GMT (0605 HKT)
Ukraine ambassador Olexander Motsyk places blame for the MH17 tragedy squarely at the door of Russia
July 24, 2014 -- Updated 1142 GMT (1942 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1853 GMT (0253 HKT)
Les Abend says, with rockets flying over Tel Aviv and missiles shooting down MH17 over Ukraine, a commercial pilot's pre-flight checklist just got much more complicated
July 24, 2014 -- Updated 1317 GMT (2117 HKT)
Mark Kramer says Russia and its proxies have a history of shooting down civilian aircraft, often with few repercussions
July 24, 2014 -- Updated 1637 GMT (0037 HKT)
Gerard Jacobs says grieving families and nations need the comfort of traditional rituals to honor the remains of loved ones, particularly in a mass disaster
July 24, 2014 -- Updated 1413 GMT (2213 HKT)
The idea is difficult to stomach, but John Sutter writes that eating dog is morally equivalent to eating pig, another intelligent animal. If Americans oppose it, they should question their own eating habits as well.
July 23, 2014 -- Updated 1630 GMT (0030 HKT)
Bill van Esveld says under the laws of war, civilians who do not join in the fight are always to be protected. An International Criminal Court could rule on whether Israeli airstrikes and Hamas rocketing are war crimes.
July 23, 2014 -- Updated 1408 GMT (2208 HKT)
Gordon Brown says the kidnapped Nigerian girls have been in captivity for 100 days, but the world has not forgotten them.
ADVERTISEMENT