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
December 13, 2014 -- Updated 2108 GMT (0508 HKT)
The NFL's new Player Conduct Policy was a missed chance to get serious about domestic violence, says Mel Robbins.
December 16, 2014 -- Updated 1740 GMT (0140 HKT)
The slaughter of more than 130 children by the Pakistani Taliban may prove as pivotal to Pakistan's security policy as the 9/11 attacks were for the U.S., says Peter Bergen.
December 17, 2014 -- Updated 1600 GMT (0000 HKT)
The Internet is an online extension of our own neighborhoods. It's time for us to take their protection just as seriously, says Arun Vishwanath.
December 16, 2014 -- Updated 2154 GMT (0554 HKT)
Gayle Lemmon says we must speak out for the right of children to education -- and peace
December 17, 2014 -- Updated 1023 GMT (1823 HKT)
Russia's economic woes just seem to be getting worse. How will President Vladimir Putin respond? Frida Ghitis gives her take.
December 17, 2014 -- Updated 0639 GMT (1439 HKT)
Australia has generally seen itself as detached from the threat of terrorism. The hostage incident this week may change that, writes Max Barry.
December 12, 2014 -- Updated 2020 GMT (0420 HKT)
Thomas Maier says the trove of letters the Kennedy family has tried to guard from public view gives insight into the Kennedy legacy and the history of era.
December 15, 2014 -- Updated 1456 GMT (2256 HKT)
Will Congress reform the CIA? It's probably best not to expect much from Washington. This is not the 1970s, and the chances for substantive reform are not good.
December 15, 2014 -- Updated 2101 GMT (0501 HKT)
From superstorms to droughts, not a week goes by without a major disruption somewhere in the U.S. But with the right planning, natural disasters don't have to be devastating.
December 15, 2014 -- Updated 1453 GMT (2253 HKT)
Would you rather be sexy or smart? Carol Costello says she hates this dumb question.
December 14, 2014 -- Updated 2253 GMT (0653 HKT)
A story about Pope Francis allegedly saying animals can go to heaven went viral late last week. The problem is that it wasn't true. Heidi Schlumpf looks at the discussion.
December 14, 2014 -- Updated 1550 GMT (2350 HKT)
Democratic leaders should wake up to the reality that the party's path to electoral power runs through the streets, where part of the party's base has been marching for months, says Errol Louis
December 13, 2014 -- Updated 2123 GMT (0523 HKT)
David Gergen: John Brennan deserves a national salute for his efforts to put the report about the CIA in perspective
December 12, 2014 -- Updated 1426 GMT (2226 HKT)
Anwar Sanders says that in some ways, cops and protesters are on the same side
December 11, 2014 -- Updated 1439 GMT (2239 HKT)
A view by Samir Naji, a Yemeni who was accused of serving in Osama bin Laden's security detail and imprisoned for nearly 13 years without charge in Guantanamo Bay
December 14, 2014 -- Updated 1738 GMT (0138 HKT)
S.E. Cupp asks: How much reality do you really want in your escapist TV fare?
December 11, 2014 -- Updated 1828 GMT (0228 HKT)
Rip Rapson says the city's 'Grand Bargain' saved pensions and a world class art collection by pulling varied stakeholders together, setting civic priorities and thinking outside the box
December 13, 2014 -- Updated 2310 GMT (0710 HKT)
Glenn Schwartz says the airing of the company's embarrassing emails might wake us up to the usefulness of talking in-person instead of electronically
December 12, 2014 -- Updated 2233 GMT (0633 HKT)
The computer glitch that disrupted air traffic over the U.K. on Friday was a nuisance, but not dangerous, says Les Abend
December 12, 2014 -- Updated 1740 GMT (0140 HKT)
Newt Gingrich says the CBO didn't provide an accurate picture of Obamacare's impact, so why rehire its boss?
December 13, 2014 -- Updated 0040 GMT (0840 HKT)
Russian aggression has made it clear Ukraine must rethink its security plans, says Olexander Motsyk, Ukrainian ambassador to the U.S.
December 12, 2014 -- Updated 0046 GMT (0846 HKT)
The Senate committee report on torture has highlighted partisan divisions on CIA methods, says Will Marshall. Republicans and Democrats are to blame.
December 11, 2014 -- Updated 1833 GMT (0233 HKT)
It would be dishonest to say that 2014 has been a good year for women. But that hasn't stopped some standing out, says Frida Ghitis.
ADVERTISEMENT