Turbulence for air travelers?
Airline mergers could raise fares and reduce service to smaller cities

by Chip Jones
for Virginia Business
February 2007

Welcome to Flight 666 of Fastdrop Airlines. I'm your captain, Jack N. Fareups. We'll be leaving for our next destination, Atlanta, soon… no, check that… we're bound for Charlotte… what… New York? Sorry folks, we're getting mixed signals from our control tower these days. I'll get back to you as soon as I know where we're set to land.

Considering the airline industry's roller-coaster ride, Capt. Fareups' confusion is understandable. As a new year begins, airport officials and business travelers alike are looking for clues to help them figure out where the prevailing winds of airline consolidation will take them.

Half of the top 10 U.S. airlines are engaged in some form of consolidation chat. US Airways has proposed a $10.3 billion hostile takeover of Delta Air Lines, which is trying to emerge from bankruptcy. United Airlines is discussing a merger with Continental Airlines, and AirTran Airways has made a $345 million offer for Midwest Airlines.

Some airline analysts say consolidation is the right path for an industry still trying to regain its financial footing after the devastating effects of 9/11 and rising fuel prices. But others warn that mergers could hurt consumers by reducing competition, raising fares and diminishing service to small cities.

For Virginians, all of the talk about consolidation has cast a cloud of uncertainty over what had been a brightening horizon for air travel in much of the state. Discount carriers such as AirTran, JetBlue Airways and Southwest Airlines have established themselves in Northern Virginia, Richmond and Hampton Roads, helping to drive down fares in those areas.

The prospect of a merged Delta/US Airways is particularly worrying for smaller airports in the state, which are dominated by those airlines. The merger would produce the world's largest airline but also would create major overlaps of routes in the South, where Delta and US Airways have major hubs in Atlanta and Charlotte, N.C., respectively. This concentration "would destroy competition in the Deep South," airline analyst Michael Boyd told The Wall Street Journal.

The high-stakes game of airline poker is bound to show who has the will - and the cash - to stay in the game. For instance, if US Airways or Delta relinquishes landing slots in New York, Boston or other East Coast destinations - something they are expected to do to pass muster with federal antitrust regulators - Southwest Chairman Herb Kelleher stands ready to snatch 'em. Southwest also wants to grab some of Delta's Boeing 737s, since they match the Texans' fleet of jets. "Southwest would be a logical candidate to buy the assets," says Charles Bryson, who heads up the 1,000-member Friends of Richmond International Airport, an airport advocacy group.

Delta has rejected US Airways offer as flawed and inadequate. The Delta board says its plan to reorganize as a stand-alone airline would offer greater benefit to its creditors. Delta also raised doubts that the merger would clear anti-trust hurdles. US Airways countered by sweetening its initial $8.6 billion offer nearly 20 percent to $10.3 billion and giving unsecured creditors a Feb. 1 deadline to respond.

The outcome in this tug of war was unclear at press time (see www.VirginiaBusiness.com for updates), but if the merger goes through, hold on to your wallet. Experts say fares will rise, gradually at first, but - given the history of the airlines - these things have a way of taking off faster than anyone expects. "This is going to be belly-up-to-the-trough feeding time," says Darryl Jenkins, a Northern Virginia airline consultant and former economics professor at George Washington University.

Those who fly from smaller airports might want to start warming up their cars. Airlines are bound to shrink their fleets and route structures - moves that favor bigger airports such as Washington Dulles and Reagan National, says Jenkins. That means more people will be looking for the shortest route to Raleigh or Northern Virginia to snag the lowest fares.

An increase in fares could affect the fate of recently revamped Richmond International. After the Capital Region Airport Commission spent $46.5 million to build a double-decker terminal and roadway system, the airport broke the 3 million passenger mark for the first time. But the surge in traffic really was caused by lower fares prompted by the presence of AirTran and JetBlue. For years, savvy Richmond travelers were accustomed to driving to other airports for fare bargains.

They might return to their old habits if fares get too high.

But Richmond's worries pale in comparison with those of Charlottesville and Lynchburg, where US Airways and Delta represent 80 to 100 percent of flights.

"They will be the losers," Jenkins says of Virginia's smallest commercial airports. If the carriers cut flights to increase profit margins, he says. "They will take a beating."

Bryan Elliott, executive director of Charlottesville-Albemarle Airport, knows one airline can make all the difference in lowering fares. In 1991, he says, Delta entered the Charlottesville market and forced US Airways to drop ticket prices. Today, planes flying out of 'Hooville are nearly full, so any cutbacks resulting from a Delta/US Airways deal would be about as welcome as another Virginia Tech win over U.Va. in football.

Whatever happens this year, including a possible cooling of the U.S. economy, Elliott expects a fare hike. "I do think there will continue to be increases in air fares - not dramatically - but 5 to 8 percent."

Vacation and leisure travelers already are seeing increased fares, leading some passengers to migrate for better deals. "We're seeing an uptick of leisure travelers driving to Roanoke because their leisure fares are cheaper," says Mark Courtney, executive director of Lynchburg Regional Airport. About 12 percent of his annual passenger base drove to the Star City to find fare deals, says Courtney. When families can save $40 to $80 per ticket, that starts to add up.

Yet in the topsy-turvy world of airline economics, such "leakage" of passengers actually can have a silver lining. Lynchburg's passenger exodus should make it more attractive to airlines looking for new opportunities, since it shows people are willing to drive to get better deals.

Courtney is not sitting back and waiting for a phone call from an airline's executive offices, though. Last year, Lynchburg won a $250,000 grant from the U.S. Department of Transportation for small community air service development. With matching funds from local government and business sources, the airport chief has a $400,000 war chest to play the game. The money will be used to market new air service. "We're primarily negotiating with United Express," Courtney says. The goal is to snag at least three flights a day to Washington Dulles International Airport, connecting Lynchburg with a Northern hub airport.

Courtney is eager to improve his competitive position before the game of musical chairs ends, and the new airline structure is finished - at least for the next nanosecond. If the US Airways/Delta deal is consummated, the remaining carriers may be forced to consolidate. "So the six [legacy carriers] may become three," says Courtney. He expects United to be one of the survivors.

Of course, he knows his proactive stance doesn't guarantee lower prices. "The airlines aren't doing all this consolidation in order to lower fares, are they?" he asks. Definitely not. In fact, Jenkins says one likely ripple effect from an industry shakeout could be less wiggle room on fares for business travelers. "It will be different, with fewer negotiated fares and less variance. The difference between the highest and lowest fares will be less. You'll probably have fewer opportunities to negotiate."

Airlines are trying to normalize their fleets - trying to squeeze the most bucks per seat. It stands to reason, adds Jenkins, "If you have fewer seats, you don't need as many fares."

All business travel, like politics, is local. For Jonathan Lyle, a director of Metis/America Marketing, a Richmond-based marketing firm, this means shifting his allegiance from his old faithful airline, Delta, to one of the new kids on the block - AirTran.

Even before AirTran entered the Richmond market in mid-2005, travelers throughout Central Virginia saw fares plummet - a lesson in competition that Lyle won't soon forget. After all, for years Richmond regularly achieved the dubious distinction of "most expensive airport" in the U.S. "My loyalty has been to AirTran," Lyle says. "They stepped up and the fares came down." JetBlue's arrival last year turned up the competitive heat in Virginia's capital, not to mention adding its trademark blue potato chips.

Yet, Lyle still finds himself longing for the good old days of hot meals, smiling stewardesses and planes where everybody knows your name."I still enjoy friendships with Delta folks," he says, "and feel a little bit of guilt."

He's flown more than 2 million miles on Delta but doesn't plan to re-board anytime soon. Those golden days of air travel make for fond memories but don't help the travel budget. Lyle hasn't forgotten the thousands of miles he logged on his car driving to other airports in the desperate hunt for lower fares.

And he usually found them more than 70 miles away at Newport News/Williamsburg International Airport. On AirTran.