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
September 30, 2014 -- Updated 1653 GMT (0053 HKT)
Jeff Yang calls Ello a wakeup call to Facebook and Twitter, and a sign of hope for fast-rising upstarts Pinterest and Snapchat.
October 1, 2014 -- Updated 1423 GMT (2223 HKT)
Paul Waldman says the Secret Service should examine its procedures to make sure there are no threats to the White House--but without losing the openness so valuable to democracy
October 1, 2014 -- Updated 1455 GMT (2255 HKT)
Jesse Williams says the videotape and 911 call that resulted in police gunning down John Crawford at a Walmart reveals the fatal injustice of racial assumptions
September 30, 2014 -- Updated 2303 GMT (0703 HKT)
Mel Robbins says officials should drop the P.C. pose: The beheading in Oklahoma was not workplace violence. Plenty of evidence shows Alton Nolen was an admirer of ISIS.
September 30, 2014 -- Updated 1911 GMT (0311 HKT)
The Occupy Central movement has already achieved much by bringing greater attention to Hong Kong's struggle for democracy, William Piekos says..
September 30, 2014 -- Updated 1911 GMT (0311 HKT)
The Occupy Central movement has already achieved much by bringing greater attention to Hong Kong's struggle for democracy, writes William Piekos.
September 30, 2014 -- Updated 1413 GMT (2213 HKT)
As Prime Minister Narendra Modi visits America, Madeleine Albright says a world roiled by conflict needs these two great democracies to commit to moving their partnership forward
September 30, 2014 -- Updated 1404 GMT (2204 HKT)
John Sutter: Lake Providence, Louisiana, is the parish seat of the "most unequal place in America." And until somewhat recently, the poor side of town was invisible on Google Street View.
September 29, 2014 -- Updated 1311 GMT (2111 HKT)
Julian Zelizer says in the run up to the 2016 election the party faces divisions on its approach to the U.S.'s place in the world
September 29, 2014 -- Updated 1419 GMT (2219 HKT)
Ruben Navarrette says Common Core supporters can't devise a new set of standards and then fail to effectively sell it.
September 30, 2014 -- Updated 1329 GMT (2129 HKT)
Earlier this month, Kenyans commemorated the heinous attack on the Westgate Mall in Nairobi.
September 30, 2014 -- Updated 1859 GMT (0259 HKT)
David Wheeler says Colorado students are right to protest curriculum changes that downplays civil disobedience.
September 27, 2014 -- Updated 0158 GMT (0958 HKT)
Sally Kohn says when people click on hacked celebrity photos or ISIS videos, they are encouraging the bad guys.
September 26, 2014 -- Updated 1155 GMT (1955 HKT)
Loren Bunche says she walked by a homeless man every day and felt bad about it -- until one day she paused to get to know him
September 30, 2014 -- Updated 1332 GMT (2132 HKT)
ISIS grabs headlines on social media, but hateful speech is no match for moderate voices, says Nadia Oweidat.
September 29, 2014 -- Updated 1233 GMT (2033 HKT)
A new report counts jihadists fighting globally. The verdict? The threat isn't that big, says Peter Bergen.
September 23, 2014 -- Updated 2137 GMT (0537 HKT)
Ebola could become the biggest humanitarian disaster in a generation, writes former British Prime Minister Tony Blair
September 26, 2014 -- Updated 1658 GMT (0058 HKT)
ISIS has shocked the world. But will releasing videos of executions backfire? Four experts give their take.
September 26, 2014 -- Updated 1439 GMT (2239 HKT)
Eric Holder kicked off his stormy tenure as attorney general with a challenge to the public that set tone for six turbulent years as top law-enforcement officer.
September 26, 2014 -- Updated 1309 GMT (2109 HKT)
LZ Granderson says Obama was elected as a war-ending change agent, not a leader who would leave behind for his successor new engagement in Iraq and Syria. Is he as disappointed as the rest of us?
September 24, 2014 -- Updated 0910 GMT (1710 HKT)
Gayle Lemmon says the question now is how to translate all the high-profile feminizing into real gains for women
ADVERTISEMENT