Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Number of competitors in airline industry has changed little in recent years, GAO reports, (Jun 12, 2014)

By Linda O’Brien, J.D., LL.M.

Despite a wave of airline mergers and bankruptcies, the number of competitors in the U.S. airline industry changed little between 2007 and 2012, according to a Government Accountability Office report on the state of competition in the domestic airline industry.

Since 2000, the U.S. passenger airline industry has faced a number of major challenges, according to the GAO. The industry struggled to recover from the economic recession and the aftermath of the events of September 11, 2001. While U.S. airlines partially rebounded, record-high fuel prices and the financial crisis led to heavy financial losses, particularly for network airlines which are the largest segment of the industry. These challenges contributed to a wave of bankruptcies and airline consolidation through several major airline mergers.

Since 2007, six domestic network and two low-cost airlines have consolidated to four major airlines. As a result, there are fewer major U.S. airlines today than at any time since deregulation in 1978. Furthermore, approximately 85 percent of U.S. passengers traveled on the four domestic airlines in 2013.

The GAO conducted the study due to concerns raised by industry observers that consolidation could have adverse effects on airline competition, such as higher airfares and reduced service. However, other observers argue that consumers stand to benefit from recent changes in the industry, as profitable airlines reinvest in new planes and expand their networks.

To assist Congress in overseeing changes in the airline industry, the GAO was asked to examine the state of competition in the domestic passenger airline industry. Its report addresses (1) changes to the financial health of the U.S. airline industry since 2007; (2) changes to the structure of the market since 2007; (3) how consumers have been affected by these changes; and (4) views of stakeholders on the key challenges to airline competition and actions the federal government could take to address these challenges.

The GAO analyzed airline financial data reported to Department of Transportation (DOT), as well as passenger itinerary data from 2007 through 2012, the latest year available. The agency also interviewed DOT and Department of Justice (DOJ) officials and 26 stakeholders—selected based on prior work and their expertise in the field from organizations in sectors such as academia, airlines, consumer advocacy, and finance—to provide perspectives on a range of competition issues.

The GAO found that, in recent years, the average number of competitors has not substantially changed in markets traveled by the majority of passengers, despite several major airline mergers. From 2007 through 2012, the average number of effective competitors (defined as airlines with more than a 5 percent market share) ranged from 4.3 to 4.5 in the markets with the most passengers. During this period, the average number of effective competitors in markets with the fewest passengers decreased slightly from 3.3 to 3 airlines. The mergers created larger networks and new connections in some markets. In addition, low-cost airlines have expanded since 2007, thereby adding new competitors into some larger markets. The structure of the market will continue to evolve as economic conditions change and the recent airline mergers are fully implemented.

In recent years, consumers have experienced higher airfares, additional fees, and fewer flights in certain markets, but also new services and expanded networks. Consumers paid about 4 percent more, on average, for air travel in 2012 than in 2007, without considering additional fees. The airline industry has reduced flights, especially to smaller airports, and consolidated service at large airports. Airlines have also invested in new aircraft and introduced new services, such as early boarding and entertainment options, in an attempt to differentiate products and increase revenue.

Most airline stakeholders cited barriers to market entry, especially restrictions on takeoff and landing slots at four U.S. airports—Washington, D.C.'s Reagan National and three New York City area airports—as a major challenge to airline competition. Barriers that make airline entry more difficult can hamper competition and enable incumbent firms to charge and maintain higher prices. In addition, access to capital and the size advantages of major airlines present a formidable challenge for any new airline.

Stakeholders suggested addressing challenges to competition by increasing capacity at congested airports, enhancing fare transparency, and allowing states a greater role in consumer regulation of airlines. However, stakeholders differed regarding the role of the federal government in addressing competition challenges, in part because changes to the airline industry due to consolidation are ongoing.

The June 2014 report is entitled “Airline Competition: The Average Number of Competitors in Markets Serving the Majority of Passengers Has Changed Little in Recent Years, but Stakeholders Voice Concerns about Competition.”

Companies: American Airlines; Delta Air Lines; Southwest Airlines; United Airlines

News: Antitrust