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 15, 2014 -- Updated 1947 GMT (0347 HKT)
LZ Granderson says Congress has rebuked the NFL on domestic violence issue, but why not a federal judge?
September 15, 2014 -- Updated 1650 GMT (0050 HKT)
Mel Robbins says the only person you can legally hit in the United States is a child. That's wrong.
September 15, 2014 -- Updated 1723 GMT (0123 HKT)
Eric Liu says seeing many friends fight so hard for same-sex marriage rights made him appreciate marriage.
September 15, 2014 -- Updated 1938 GMT (0338 HKT)
SEATTLE, WA - SEPTEMBER 04: NFL commissioner Roger Goodell walks the sidelines prior to the game between the Seattle Seahawks and the Green Bay Packers at CenturyLink Field on September 4, 2014 in Seattle, Washington. (Photo by Otto Greule Jr/Getty Images)
Martha Pease says the NFL commissioner shouldn't be judge and jury on player wrongdoing.
September 15, 2014 -- Updated 2122 GMT (0522 HKT)
It's time for a much needed public reckoning over U.S. use of torture, argues Donald P. Gregg.
September 15, 2014 -- Updated 1608 GMT (0008 HKT)
Peter Bergen says UK officials know the identity of the man who killed U.S. journalists and a British aid worker.
September 13, 2014 -- Updated 1620 GMT (0020 HKT)
Joe Torre and Esta Soler say much has been achieved since a landmark anti-violence law was passed.
September 12, 2014 -- Updated 2055 GMT (0455 HKT)
David Wheeler wonders: If Scotland votes to secede, can America take its place and rejoin England?
September 12, 2014 -- Updated 2207 GMT (0607 HKT)
Jane Stoever: Society must grapple with a culture in which 1 in 3 teen girls and women suffer partner violence.
September 12, 2014 -- Updated 2036 GMT (0436 HKT)
World-famous physicist Stephen Hawking recently said the world as we know it could be obliterated instantaneously. Meg Urry says fear not.
September 12, 2014 -- Updated 2211 GMT (0611 HKT)
Bill Clinton's speech accepting the Democratic nomination for president in 1992 went through 22 drafts. But he always insisted on including a call to service.
September 12, 2014 -- Updated 2218 GMT (0618 HKT)
Joe Amon asks: What turns a few cases of disease into thousands?
September 11, 2014 -- Updated 1721 GMT (0121 HKT)
Sally Kohn says bombing ISIS will worsen instability in Iraq and strengthen radical ideology in terrorist groups.
September 11, 2014 -- Updated 1730 GMT (0130 HKT)
Analysts weigh in on the president's plans for addressing the threat posed by the Islamic State of Iraq and Syria.
September 11, 2014 -- Updated 1327 GMT (2127 HKT)
Artist Prune Nourry's project reinterprets the terracotta warriors in an exhibition about gender preference in China.
September 10, 2014 -- Updated 1336 GMT (2136 HKT)
The Apple Watch is on its way. Jeff Yang asks: Are we ready to embrace wearables technology at last?
ADVERTISEMENT