The Evolving Air Transport Industry

14 INTRODUCTION TO AIR TRANSPORT ECONOMICS
costs globally.4 Moreover, since higher fuel costs affect all airlines in a somewhat similar
manner, there is little or no competitive advantage to be gained in this area. Therefore,
as this extra cost is passed on to the consumer, the relative price structure should remain
proportionately the same. In this case, the ultimate question of profitability depends to a
large extent on the elasticity of demand for the product and the cost containment ability
of the airline's management.
AIRLINE INDUSTRY CONSOLIDATION
The airline industry has been affected by economic recession, rising fuel costs, political
uncertainty, and stiff competition. These factors have caused some major carriers, such
as Eastern Airlines, Pan Am, and Piedmont into liquidation, and US Airways, United
Airlines, Delta Air Lines, and Northwest Airlines into bankruptcy protection.
Table 1.11 displays the market share for various US carriers for the domestic market. In
2000, Southwest Airlines overtook Delta Air Lines to become the largest domestic carrier
(in terms of passengers flown) in the United States. This highlights the fact that low-cost
carriers are capturing more of the domestic market share while legacy network carriers
are losing theirs. This is mainly due to the low-cost carriers' continual expansion and the
advantages they possess because of their lower cost structure. Another major trend (in
terms of market share) is the emergence of regional carriers. In 1998 ExpressJet, American
Eagle, and Skywest had less than 1 per cent combined market share, yet in early 2006 they
had acquired 7.5 per cent of the total US domestic market. In this case, the reason was
the increased use of regional jets by legacy carriers to open up new markets and combat
low-cost carriers.
The industry Herfindahl-Hirschman index (HHI) is a measure of how consolidated
the domestic US market is. As Table 1.11 shows, since 1998 the industry has become
less consolidated. s This spreading out of competition usually equates to lower fares and
increased service. In fact, an American Express travel survey has shown that average US
domestic airfares have steadily declined since 2000 (Amex, 2006).
Historically, mergers rapidly increased following deregulation in 1978. For the ten
years following deregulation there were 51 airline mergers and acquisitions (Dempsey,
1990). The result of these mergers and acquisitions was the creation of six legacy carriers
from the 15 independent carriers that had close to 80 per cent US market share in 1987
(Dempsey, 1990).
Although the number of mergers reduced during the 1990s, critics argue that most
mergers were still part of well-planned strategies to reduce competition in various
markets. Consequently, starting in 1985, the US Department of Transportation (DOT)
assumed approval authority for all airline mergers. To approve the merger, the DOT
must now balance the consumer benefits resulting from mergers against the possibly
negative effects of increasing concentration (Dempsey, 1990). On the other hand, the
extraordinary financial problems of legacy carriers suggest that reductions in capacity,
whether through mergers or alliances, may be inevitable. Some economists argue that
less intense competition, through consolidation and coordination, can actually benefit
4 Information obtained from lATA's Jet Fuel Price Monitor; see http://www.iata.org/whatwedo/economics/fuel_monitor/index.htffi.
5 For more information on the HH.I see Chapter 9.