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Airline mergers – beneficial for consumers?

By Wei Seng

Experience a "change" in your airfares & customer service

I have been writing quite a bit on politics and environment, so I guess it's time to write about something more relevant to business and economics. The aviation industry has always interested me as a passionate geographer, as the industry's contribution to modernization and globalization has been immense, not just in terms of economic contribution but changing societies, cultures and even individuals. In recent years one would often read in the papers about the wave of consolidation of airlines as many of these airlines face tough times and seek mergers to be bailed out. Even if an airline is nowhere near collapse, it could still consider a merger as a way to open up access to new markets as well as tap into economies of scale with bigger operations.

But given the spin that airlines put onto the benefits of a merger, both to consumers and to the airlines, one must really wonder if consumers really do benefit from a merger of airlines. The answer, at least for American consumers, is sobering: rarely do consumers benefit directly from the merger of airlines.

Airline mergers have a long history, but even in recent times as the economy is recovering, airlines are still considering mergers. A list of some of the important airline mergers in recent history would include:
1. Delta Air Lines with Northwest Airlines in America (2008)
2. Air France with KLM Royal Dutch Airlines (2008)
3. British Airways with Iberia (2010)
4. United Airlines with Continental Airlines (to be confirmed soon)

Just these 4 merged entities alone, whether by measures of miles flown, passengers ferried or fleet size, would figure heavily in the top 5 / top 10 of the world's largest airlines. Such trends seem to affect mature air travel markets like Europe and North America where most people would have flown before, air travel is almost ubiquitous and airspace is densely congested. In economics, we learn the benefits of mergers and acquisitions to the companies involved as well as to the industry in general, and to a smaller extent to the consumers. While the benefits to companies are well-documented and recognised, the benefits to consumers are usually hazy and not recognised.

As early as 2006, while Delta was looking around for a partner to consolidate operations with, travel experts have already been weighing the benefits and costs of mergers to consumers. Ed Perkins on Smarter Travel asserts that consumers "as usual, would get the short end of the stick", because the incentives for airlines to merge would often be to reduce competition, though this wont be made public: they will probably tell us that it allows airlines to be bailed out to stem losses or avert bankruptcy. He claims that because of the gargantuan size of the airlines involved, any economies of scale that can be reaped would have been reaped, hence the attraction of reduced competition: allowing airlines to pare down on service, number of hubs to operate from and even increase fares - all for increased revenue and profit.

Bill McGee of USA Today writes recently about airline mergers' "potential threats to consumers", with statistics to back him up. Some of his conclusions, after studying some airline mergers in America:
1. Service cutbacks - "when merger partners' route maps overlap, certain cities will lose service, with fewer flight frequencies and loss of nonstops" (nonstops being flights that get you from point A to point B without a stopover in between)
2. On-time performance - airlines dont seem to become more efficient as they become larger, their on-time performance in fact deteriorate
3. Customer service - consumer complaint rankings indicate that mergers have insignificant effect on ranking improvements
4. Competition and air fares - when its original competition (its merger partner) disappears, air fares often sky-rocket, though the presence of budget airlines has kept air fares in check

Not very promising for consumers, all these airline mergers. It seems to be mainly to fatten the wallets of executives of the airlines concerned as well as bankers who process the merger. Even workers, those at the non-executive level and below, might not necessarily benefit from the merger as much as management makes it out to be. After all, it is the bottom line that management is considering: profit-maximisation or shareholder value-maximisation.