Airline Industry in United States
United States is the largest market for airline industry, In 1996 US air travel accounted for almost 40% of the world total scheduled passengers. In 1945, air travel in United States accounted for 3. 3 billion revenue passenger miles (RPM); by 1970 the numbers had increased to 130 billion RPM. The Civil Aviation Board guaranteed the airlines a reasonable rate of return making the operating airlines inefficient. CAB rules allowed inefficient white elephants to prosper at the expense of the consumers and tax-payers. Any proposals for low fare airlines were kept pending by CAB to help the CAB protected airlines [Branum, 1998].
In 1978, passing of the Airline deregulation Act opened the US air space to other US airlines. The uneconomic airlines could not stand the competition from new low cost airlines. The Airline Deregulation Act reduced the average fare per passenger mile by 30% in inflation adjusted terms between 1979 and 1990 [GAO Report 1996]. The routes with heavy traffic and more competition have seen major drops in passenger fares while less attractive routes the drop has been small or insignificant. The exposure to intense competition, consequences of 1st Gulf War, labor conflict meant doom for nine
Eastern, Midway, Braniff, Pan Am, Continental, America West Airlines and TWA and almost 100 small airlines have either been liquidated or went bankrupt. This round of merger and acquisition created six mega-carriers. The situation on many routes is already like a monopoly. The 9/11 tragedy brought a severe shock to the airline industry. From government grounding of all aero planes for several days to public fear of terrorist high jacking brought many airlines to the point of bankruptcy. The government gave a cash grant of $5 billion and loan guarantees of $10 billion to help the airlines survive that period.
Even after this support the 9 US major airlines posted $7 billion losses that year. Now as the airlines are returning to profitability once again, many analysts and airline executive are complaining that there are still too many airlines and consolidation through mergers will help improve the viability of the airline industry. US Air’s bid for Delta was the most recent attempt to merge to major airlines. The attempt finally failed on 1st February when the Creditors Committee for Delta agreed with the reorganization plans of DL instead of accepting an offer of $10.
2 billion of US airways [Karp, 2007a]. This move ended a possible chain of reaction which could have seen other mergers in the airline industry as a defensive move e. g. it was speculated that Continental and United may also choose to merge. The CEO of US Airways however believes that further consolidation of air lines is inevitable and is only being delayed due to “senior managers of troubled airlines trying to preserve their jobs” and a “fear of unknown” among the stakeholders [Flint, 2007]. On 22nd March 20007, major European and American airlines regulatory bodies agreed to open sky policy.
This will truly open competition in the airline industry and hopefully benefit the consumers [CNN, 2007]. The airline industry has many stakeholders. Consumers of airline industry will be the most effected by the monopolistic situation that is being advocated by the airlines management as in the name of consolidation airlines will reduce flights, sell off air-crafts, reduce workforce and increase fares when the competition ceases to exist. We need to be fully aware of the Pro and Cons of US airlines mergers.