Air travelers' options may be grounded

Industry observers see higher prices, more consolidation

May 25, 2000|By Kristine Henry | Kristine Henry,SUN STAFF

United Airlines' planned $11.6 billion acquisition of US Airways, which would create a company more than double the size of its closest competitor, could stifle competition, trigger more consolidation and bring higher fares, industry observers said yesterday.

United said it would not raise ticket prices for two years after the deal is completed, but many observers say they don't have faith in that promise.

"I wonder when they make that representation. Why would they make it if the acquisition is completely benign?" said Paul Ruden of the American Society of Travel Agents.

Ruden said his association is already concerned about consolidation. With airlines forming partnerships in which travelers are booked on each others flights and frequent-flier miles are transferable to each other, competition already is suffering, he said.

The group is also fighting a Web site planned by major carriers that would compete with

Ruden said things would only get worse should the United deal go through.

Airline executives, he said, are supposed to go to bed at night worrying about what tricks the other guys have up their sleeves, be they fare discounts or better services.

"If you have fewer people to worry about, it's easier to operate in parallel to what the others are doing," Ruden said. "And that means less vigor, less competition and tends toward higher prices and less concern for the customer."

Not only would the merger be dangerous in and of itself, he said, but it could also have a ripple effect. "This may well trigger defensive mergers," he said, as smaller carriers band together to fight the giant United.

The head of a Washington-Baltimore travel agency, who asked not to be named because he does extensive business with United, says he thinks the deal would be horrible for consumers, especially in airline hubs, where dominant carriers are able to charge significantly higher prices.

US Airways hubs are in Charlotte, N.C., Pittsburgh and Philadelphia while United's are Chicago, Denver, San Francisco, Los Angeles and Washington, D.C., at Dulles International Airport.

"When you have a hub, you end up controlling that market ... and you can pretty much control the shots when it comes to pricing," he said. "The general public has a short-term memory, and people like to say they won't ever fly that carrier again, but if United owns the majority of route structures in the United States, they don't have much choice."

Randy Petersen, editor of trade magazine InsideFlyer, said he's also wary of higher fares, despite any promises from United.

"Given that airlines have numerous ways they can hide the way they raise airfares, promising up front not to raise fares for two years tells me we better watch out," he said, adding that he's also nervous about what would happen after the two-year period. "Does that mean in two years and a day I've got to get my pocketbook out because it's going to cost me?"

Airlines have complex pricing systems, and the fare for seats on the same flight can vary by hundreds of dollars, depending on various factors; airlines can change the number of tickets sold at different price levels without changing the overall price structure.

Petersen also said that even if base fares are not increased, United could end up tacking on a variety of fees that would in effect raise ticket prices.

Despite the fear of fare increases, Petersen said the deal might be good news for start-up airlines. He predicts that United will cut flights where they overlap with US Airways, leaving room for a smaller carrier to fill the gap.

For example, United flies one non-stop flight per day between Baltimore and Los Angeles while US Airways has two. It's likely, Petersen said, that not all three would stay in place under the new structure.

"That makes a nice entrance" for start-ups, he said.

It is still unclear how the planned merger would affect Southwest Airlines, the biggest carrier at Baltimore-Washington International Airport. Some say United won't keep MetroJet, US Airways' low-cost operation that was designed to compete with Southwest. Others said it would make sense for United to keep MetroJet because it doesn't overlap with Shuttle by United, a low-cost carrier on the West Coast.

Southwest says it doesn't know what its strategy will be.

"Basically we're just minding the store and keeping an eye on the competition," said Southwest spokesman Ed Stewart. "Unless you have a super, duper crystal ball, we don't know."

Stewart said it was too early to say if Southwest would go to the Justice Department to fight the matter, but he did say he thinks the merger would be bad for competition and that if Justice officials "come to other carriers for comment, we will tell the truth."

David S. Stempler, president of the Air Travelers Association, said he thinks the deal would be "generally positive" for consumers because they would benefit from a larger linked system. And he said the two companies don't compete head to head in many markets, so prices may not be heavily affected.

But that's not how Lynda Maxwell, president of Destinations Inc. in Columbia sees it.

"The combination of the two will be a very powerful airline and real close to a monopoly," she said. "US Airways and United together will be strong enough to meet or beat any pricing by other carriers. They'll go cheaper and cheaper and lose money on the tickets until the weaker carrier goes out of business. Then they'll bump the prices up again.

"Whoever has the deepest pockets," she said, "can stay in the game the longest and come out the winner."

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