Mergers grounding competition


January 12, 2001|By Paul Adams | Paul Adams,SUN STAFF

To veterans of the domestic airline wars, the names are familiar: Eastern, Pan American, Republic, Western, Pacific Southwest, Piedmont, People Express.

All are among the large flock of major airlines that have failed, been merged out of existence or otherwise dismantled by competitors despite optimistic predictions that the Airline Deregulation Act of 1978 would usher in a new era of competition and innovation in airline travel.

Soon, US Airways and the venerable Trans World Airlines - which traces its roots to the era of Charles Lindbergh - will join the ranks of the vanquished.

American Airlines' plans to buy 20 percent of US Airways and swallow cash-starved TWA are a familiar story; only the names are changed.

American and United Airlines - which intends to buy the other 80 percent of US Airways in a deal worth $11.6 billion - have dominated the domestic airline industry for more than 20 years. If these latest mergers are approved, American and United will control slightly more than half the domestic airline market served by major carriers.

And the consolidation trend may not end there. Northwest Airlines, Continental Airlines and Delta Air Lines are expected to look for strategic acquisitions of their own in a bid to keep up.

All of which raises the question: What happened to the vigorous competition that academics and politicians promised would be a product of deregulation?

There was a brief period of entrepreneurial activity in the aviation business in the early 1980s, when airlines such as People Express entered the market. But the pressure to lower fares and develop ever-larger networks favored the airlines that largely dominated the skies before 1979. In other words, airlines such as American and United.

By 1986, mergers were claiming victims at an accelerating pace while the Reagan administration nodded its approval.

"The airline mergers in the 1980s turned out to be disasters," says Bob Lande, an antitrust expert at the University of Baltimore Law School. The mergers have led to the industry being dominated by a small number of airlines, squeezing smaller competitors out of hub cities and making it difficult for upstarts to enter the market.

It's too early to say how the incoming Bush administration will treat the latest round of airline consolidation. But consumer groups and key members of Congress might not let the TWA and US Airways names disappear without protest.

"I've never seen Congress this agitated about aviation issues, and I've testified on aviation issues for 20 years," says Paul Stephen Dempsey, a University of Denver transportation law expert and vice chairman of Frontier Airlines.

Merger critics say the surviving airlines will no longer feel pressure to compete aggressively on price, leaving consumers with limited choice among carriers.

Indeed, these seem to be the rules of the air: The many become few, the large become larger.

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