Mixed outlook on merger mania

Proposed linkups could put half the US air-travel market in the grasp of two airlines. At what price for consumers?

In the two decades since America began deregulating Big Industry and breaking up monopolies, the notion of free-market competition has swept much of the globe. Now, though, the Land of the Free Corporation is having second thoughts.

True, Americans have saved billions of dollars in lower long-distance telephone charges and air-travel costs. But as deregulation gradually creates a winner-take-all economy, in which only a few big firms survive per industry, an overriding question arises: Will the big winners eventually soak consumers with monopoly-style prices?

That question is uppermost again this week, amid news that American Airlines plans to buy out Trans World Airlines and expand its holdings with other air carriers. Currently, the nation's two largest airlines - American and United - are negotiating deals that could allow them to own, between them, half the market for domestic air travel.

If approved, such proposals would bring more consolidation and reshape the industry. It's not clear air travelers would pay more. But consumer advocates and some policymakers are casting a wary eye at the trend. "It is hard to imagine how this could be good for competition or for consumers," said Sens. Mike DeWine (R) of Ohio and Herb Kohl (D) of Wisconsin, who lead the Senate's antitrust subcommittee.

The American Society of Travel Agents is equally as blunt. "ASTA strongly believes that no more mergers, buyouts, or airline alliances should be approved until an air travelers' bill of rights is approved by Congress," the group's president, Richard Copland, said in a statement.

News reports about the proposal outline a deal in which TWA would declare bankruptcy and be acquired by American. American would also pay United nearly $1.4 billion for, among other things, joint ownership of the Boston-New York-Washington shuttle service. The service, now run by US Airways, would become a separate firm. Spinning off the shuttle, in turn, could help US Airways complete its already-announced merger with United.

Federal regulators had raised concerns that the shuttle would give the United-US Airways pairing too much market share. The result of this complex deal would be two megacarriers, each with about one-quarter of the industry.

"I'm surprised [American] would want to take this risk, but there are some long-term strategic advantages," says Raymond Neidl, an analyst at investment firm ING Barings in New York. The deal would eliminate St. Louis-based TWA as a competitor and give American a third major hub besides Chicago and Dallas-Ft. Worth.

How the deal would affect ticket prices or routes is unclear. That's because the history of US deregulation suggests a paradox: In several deregulated industries, the same market forces that gave rise to new competitors are now gobbling them up. In telecommunications and railroads, for example, the big players are slowly consolidating power. Fierce competition, it seems, spawns industry concentration.

Eventually, such concentration hurts consumers, because a single dominant company can control prices. The US government has sued software giant Microsoft for just such behavior.

But how many players are needed to keep competition alive? The answer may depend on the industry. Airplane manufacturers went from three major players to two in 1997, when Boeing Co. bought McDonnell-Douglas. But few would dispute that Boeing and archrival Airbus Industrie remain fierce competitors.

On the other hand, when the US originally set rules for cellular phone service, allowing only two competitors in each local market, prices declined slowly. Today, with new competition from digital wireless firms, rates have plummeted in a price-war free-for-all.

Airline deregulation is an even more mixed picture. Fares, adjusted for inflation, have fallen by about one-third since the industry deregulated in the late 1970s. "Our work has consistently shown that airline deregulation has led to lower fares and better service for most air travelers," the General Accounting Office (GAO) said in a report last month.

But some areas have not benefited as much. Take Buffalo, N.Y. By 1998, airfares had crept back up from 1994 levels (although they were still lower than in 1990). A major reason: little competition on major routes. In the spring of 1994, for example, Buffalo passengers paid an average of $58 one way to fly to Newark, N.J., on either Continental or US Airways. A year later, after US Airways dropped its service, they were paying $114, almost double, a 1999 GAO report found.

Some critics argue the emergence of new megacarriers will lead to more such situations, raising prices and hurting service. When one airline holds nearly 30 percent of the market, any internal problem or labor strike would vastly limit consumers' choices, says Bill Maloney of ASTA.

Deregulation backers counter that mergers save airlines money and could create new competition. Predictions that the six major airlines will collapse into three are premature, they add.

Tricia Cowen contributed to this report.

(c) Copyright 2001. The Christian Science Publishing Society

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