Airline Industry
Potential Mergers and Acquisitions Driven by Financial and Competitive Pressures Gao ID: GAO-08-845 July 31, 2008The airline industry is vital to the U.S. economy, generating operating revenues of nearly $172 billion in 2007, amounting to over 1 percent of the U.S. gross domestic product. It serves as an important engine for economic growth and a critical link in the nation's transportation infrastructure, carrying more than 700 million passengers in 2007. Airline deregulation in 1978, led, at least in part, to increasingly volatile airline profitability, resulting in periods of significant losses and bankruptcies. In response, some airlines have proposed or are considering merging with or acquiring another airline. GAO was asked to help prepare Congress for possible airline mergers or acquisitions. This report describes (1) the financial condition of the U.S. passenger airline industry, (2) whether the industry is becoming more or less competitive, (3) why airlines seek to merge with or acquire other airlines, and (4) the role of federal authorities in reviewing proposed airline mergers and acquisitions. To answer these objectives, we analyzed Department of Transportation (DOT) financial and operating data; interviewed agency officials, airline managers, and industry experts; and reviewed Horizontal Merger Guidelines and spoke with antitrust experts. DOT and the Department of Justice (DOJ) provided technical comments, which were incorporated as appropriate.
The U.S. passenger airline industry was profitable in 2006 and 2007 for the first time since 2000, but this recovery appears short-lived because of rapidly increasing fuel costs. Legacy airlines (airlines that predate deregulation in 1978) generally returned to modest profitability in 2006 and 2007 by reducing domestic capacity, focusing on more profitable markets, and reducing long-term debt. Low-cost airlines (airlines that entered after deregulation), meanwhile, continued to be profitable. Airlines, particularly legacy airlines, were also able to reduce costs, especially through bankruptcy- and near-bankruptcy-related employee contract, pay, and pension plan changes. Recent industry forecasts indicate that the industry is likely to incur substantial losses in 2008 owing to high fuel prices. Competition within the U.S. domestic airline industry increased from 1998 through 2006, as reflected by an increase in the number of competitors in city-to-city (city-pair) markets, the presence of low-cost airlines in more of those markets, lower air fares, fewer dominated markets, and a shrinking dominance by a single airline at some of the nation's largest airports. The average number of competitors in the largest 5,000 city-pair markets rose to 3.3 in 2006 from 2.9 in 1998. This growth is attributable to the increased presence of low-cost airlines, which increased nearly 60 percent. In addition, the number of largest 5,000 markets dominated by a single airline declined by 15 percent. Airlines seek to merge with or acquire other airlines with the intention of increasing their profitability and financial sustainability, but must weigh these potential benefits against operational and regulatory costs and challenges. The principal benefits airlines consider are cost reductions--by combining complementary assets, eliminating duplicate activities, and reducing capacity--and increased revenues from higher fares in existing markets and increased demand for more seamless travel to more destinations. Balanced against these potential benefits are operational costs of integrating workforces, aircraft fleets, and systems. In addition, because most airline mergers and acquisitions are reviewed by DOJ, the relevant antitrust enforcement agency, airlines must consider the risks of DOJ opposition. Both DOJ and DOT play a role in reviewing airline mergers and acquisitions, but DOJ's determination as to whether a proposed merger is likely substantially to lessen competition is key. DOJ uses an integrated analytical framework set forth in the Horizontal Merger Guidelines to make its determination. Under that process, DOJ assesses the extent of likely anticompetitive effects in the relevant markets, in this case, airline city-pair markets. DOJ further considers the likelihood that airlines entering these markets would counteract any anticompetitive effects. It also considers any efficiencies that a merger or acquisition could bring--for example, consumer benefits from an expanded route network. Our analysis of changes in the airline industry, such as increased competition and the growth of low-cost airlines, indicates that airline entry may be more likely now than in the past provided recent increases in fuel costs do not reverse these conditions. Additionally, the Horizontal Merger Guidelines have evolved to provide clarity as to the consideration of efficiencies, an important factor in airline mergers.
GAO-08-845, Airline Industry: Potential Mergers and Acquisitions Driven by Financial and Competitive Pressures
This is the accessible text file for GAO report number GAO-08-845
entitled 'Airline Industry: Potential Mergers and Acquisitions Driven
by Financial and Competitive Pressures' which was released on July 31,
2008.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Subcommittee on Aviation Operations, Safety, and
Security, Committee on Commerce, Science, and Transportation, U.S.
Senate:
United States Government Accountability Office:
GAO:
July 2008:
Airline Industry:
Potential Mergers and Acquisitions Driven by Financial and Competitive
Pressures:
GAO-08-845:
GAO Highlights:
Highlights of GAO-08-845, a report to the Subcommittee on Aviation
Operations, Safety, and Security, Committee on Commerce, Science, and
Transportation, U.S. Senate.
Why GAO Did This Study:
The airline industry is vital to the U.S. economy, generating operating
revenues of nearly $172 billion in 2007, amounting to over 1 percent of
the U.S. gross domestic product. It serves as an important engine for
economic growth and a critical link in the nation‘s transportation
infrastructure, carrying more than 700 million passengers in 2007.
Airline deregulation in 1978, led, at least in part, to increasingly
volatile airline profitability, resulting in periods of significant
losses and bankruptcies. In response, some airlines have proposed or
are considering merging with or acquiring another airline.
GAO was asked to help prepare Congress for possible airline mergers or
acquisitions. This report describes (1) the financial condition of the
U.S. passenger airline industry, (2) whether the industry is becoming
more or less competitive, (3) why airlines seek to merge with or
acquire other airlines, and (4) the role of federal authorities in
reviewing proposed airline mergers and acquisitions. To answer these
objectives, we analyzed Department of Transportation (DOT) financial
and operating data; interviewed agency officials, airline managers, and
industry experts; and reviewed Horizontal Merger Guidelines and spoke
with antitrust experts.
DOT and the Department of Justice (DOJ) provided technical comments,
which were incorporated as appropriate.
What GAO Found:
The U.S. passenger airline industry was profitable in 2006 and 2007 for
the first time since 2000, but this recovery appears short-lived
because of rapidly increasing fuel costs. Legacy airlines (airlines
that predate deregulation in 1978) generally returned to modest
profitability in 2006 and 2007 by reducing domestic capacity, focusing
on more profitable markets, and reducing long-term debt. Low-cost
airlines (airlines that entered after deregulation), meanwhile,
continued to be profitable. Airlines, particularly legacy airlines,
were also able to reduce costs, especially through bankruptcy- and near-
bankruptcy-related employee contract, pay, and pension plan changes.
Recent industry forecasts indicate that the industry is likely to incur
substantial losses in 2008 owing to high fuel prices.
Competition within the U.S. domestic airline industry increased from
1998 through 2006, as reflected by an increase in the number of
competitors in city-to-city (city-pair) markets, the presence of low-
cost airlines in more of those markets, lower air fares, fewer
dominated markets, and a shrinking dominance by a single airline at
some of the nation‘s largest airports. The average number of
competitors in the largest 5,000 city-pair markets rose to 3.3 in 2006
from 2.9 in 1998. This growth is attributable to the increased presence
of low-cost airlines, which increased nearly 60 percent. In addition,
the number of largest 5,000 markets dominated by a single airline
declined by 15 percent.
Airlines seek to merge with or acquire other airlines with the
intention of increasing their profitability and financial
sustainability, but must weigh these potential benefits against
operational and regulatory costs and challenges. The principal benefits
airlines consider are cost reductions”by combining complementary
assets, eliminating duplicate activities, and reducing capacity”and
increased revenues from higher fares in existing markets and increased
demand for more seamless travel to more destinations. Balanced against
these potential benefits are operational costs of integrating
workforces, aircraft fleets, and systems. In addition, because most
airline mergers and acquisitions are reviewed by DOJ, the relevant
antitrust enforcement agency, airlines must consider the risks of DOJ
opposition.
Both DOJ and DOT play a role in reviewing airline mergers and
acquisitions, but DOJ‘s determination as to whether a proposed merger
is likely substantially to lessen competition is key. DOJ uses an
integrated analytical framework set forth in the Horizontal Merger
Guidelines to make its determination. Under that process, DOJ assesses
the extent of likely anticompetitive effects in the relevant markets,
in this case, airline city-pair markets. DOJ further considers the
likelihood that airlines entering these markets would counteract any
anticompetitive effects. It also considers any efficiencies that a
merger or acquisition could bring”for example, consumer benefits from
an expanded route network. Our analysis of changes in the airline
industry, such as increased competition and the growth of low-cost
airlines, indicates that airline entry may be more likely now than in
the past provided recent increases in fuel costs do not reverse these
conditions. Additionally, the Horizontal Merger Guidelines have evolved
to provide clarity as to the consideration of efficiencies, an
important factor in airline mergers.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-845] For more
information, contact JayEtta Hecker at (202) 512-2834 or
heckerj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
U.S. Airlines' Financial Condition Has Improved, but It Appears to Be
Short-lived:
Domestic Airline Competition Increased from 1998 through 2006, as Low-
Cost Airlines Expanded:
Airlines Seek to Combine to Increase Profits and Improve Financial
Viability, but Challenges Exist:
The Department of Justice's Antitrust Review Is a Critical Step in the
Airline Merger and Acquisition Process:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Delta and Northwest Merger:
Appendix III: Number and Size of Dominated Markets by Airline in the
Top 5,000 Markets, 2006:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Top Five Markets Where Competition Could Be Reduced from Two
Airlines to One Airline, 2006:
Table 2: Top Five Markets Where Competition Could Be Reduced from Three
Airlines to Two Airlines, 2006:
Table 3: Small Communities (Nonhub Airports) Where Delta and Northwest
Have Service and Where Competition Could Be Reduced as of Third Quarter
2007:
Figures:
Figure 1: Highlights of Domestic Airline Mergers and Acquisitions:
Figure 2: Growth of Industry Capacity and Major Airline Mergers and
Acquisitions, 1979-2006:
Figure 3: Operating Profit or Loss for Legacy and Low-Cost Airlines,
1998-2007:
Figure 4: Revenue Passenger Miles among Legacy and Low-Cost Airlines,
1998-2007:
Figure 5: Domestic Available Seat Miles among Legacy and Low-Cost
Airlines, 1998-2007:
Figure 6: Unit Costs, Excluding Fuel, for Legacy and Low-Cost Airlines,
1998-2007:
Figure 7: Price of U.S. Jet Fuel, 2000--First Quarter 2008:
Figure 8: Markets by Number of Competitors, 1998-2006:
Figure 9: Average Number of Competitors by Distance (in miles), Top
5,000 Markets, 1998-2006:
Figure 10: Industry Share by Legacy and Low-Cost Airlines, 1998 and
2006:
Figure 11: Average Fares by Distance, 1998-2006:
Figure 12: The Number of Dominated and Nondominated Markets, Top 5,000
Markets, 1998-2006:
Figure 13: Change in Passenger Share at Selected Dominated Airports by
Dominant Airline, 1998 and 2006:
Figure 14: Delta Air Lines and Northwest Airlines Domestic (lower 48)
Route Map, February 2008 based on Official Airline Guide (OAG) Schedule
Data:
Figure 15: Delta Air Lines and Northwest Airlines International Route
Map, February 2008 based on OAG Schedule Data:
Figure 16: Number of Nonstop and One-Stop Markets Where Delta and
Northwest Compete, Top 5,000 Markets, 2006:
Abbreviations:
ASM: available seat mile:
BTC: Business Travel Coalition:
CASM: cost per available seat mile:
DOJ: Department of Justice:
DOT: Department of Transportation:
FAA: Federal Aviation Administration:
GDP: gross domestic product:
LCC: low-cost carrier:
PBGC: Pension Benefit Guaranty Corporation:
RPM: revenue per mile:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 31, 2008:
The Honorable John D. Rockefeller, IV:
Chairman:
The Honorable Kay Bailey Hutchison:
Ranking Member:
Subcommittee on Aviation Operations, Safety, and Security:
Committee on Commerce, Science, and Transportation:
United States Senate:
The passenger airline industry is vital to the U.S. economy, with
operating revenues of nearly $172 billion in 2007, equivalent to over 1
percent of the U.S. gross domestic product. It also serves as an
important engine for economic growth and a critical link in the
nation's transportation infrastructure, carrying over 700 million
passengers in 2007. The U.S. airline industry was deregulated in 1978,
allowing market forces, rather than the federal government, to
establish fares and service. Since 1978, the industry has experienced
cyclical financial performance and numerous bankruptcies, mergers, and
acquisitions, as the industry adjusted to an unregulated environment
and changing market conditions.[Footnote 1] In recent years, the
financial condition of legacy, or network, airlines--the largest
segment of the passenger airline industry--deteriorated significantly
even by historical standards.[Footnote 2] From 2001 to 2005, legacy
airlines lost more than $33 billion, while four of them entered and
exited bankruptcy. More recently, in 2006 and 2007 the airline industry
returned to modest profitability only to confront rapidly increasing
fuel costs and the expectation of renewed losses in 2008. These
challenges and structural changes have spurred some airlines to explore
mergers and acquisitions as a potential way to improve their
competitive positions and financial viability--for example, Delta Air
Lines and Northwest Airlines announced plans to merge on April 14,
2008.[Footnote 3] Mergers and acquisitions, however, could also have
anticompetitive effects, such as reduced competition and increased
fares in some markets. Generally, before any airline merger or
acquisition can be consummated, the Department of Justice (DOJ) carries
out its antitrust enforcement responsibilities by evaluating whether
the proposed merger is likely to substantially lessen competition and
may challenge in court those that appear to be anticompetitive.
US Airways' attempt to acquire Delta Air Lines in 2006, the merger
announcement between Delta Air Lines and Northwest Airlines earlier
this year, and the continued focus on potential airline mergers and
acquisitions prompted interest in a broad assessment of the state of
the industry, the factors that are driving continued interest in
mergers and acquisitions, and the process the federal government uses
to assess them. In order to assist Congress in understanding possible
future airline mergers and acquisitions, GAO was asked to describe (1)
the financial condition of the U.S. passenger airline industry, (2)
whether the industry is becoming more or less competitive, (3) why
airlines seek to merge with or acquire other airlines, and (4) the role
of federal authorities in considering airline mergers and acquisitions.
To address these objectives, we conducted analysis using Department of
Transportation (DOT) financial and operating data, reviewed historical
documents and past studies, and conducted interviews. Specifically, to
evaluate the financial condition of the domestic airline industry, we
analyzed airline financial metrics; reviewed financial studies; and
conducted interviews with airline managers, trade associations,
financial analysts, and other industry experts. Our financial analysis
relied on airline financial data reported to DOT by airlines from 1998
through 2007, as these were the most recent and complete annual data
available. To evaluate changes in airline industry competition, we
analyzed data from DOT's Origin and Destination Survey, which includes
fare and itinerary information on every 10th airline ticket sold;
reviewed studies assessing competition; and interviewed current and
former DOT officials and aviation industry experts. Our analysis of DOT
data focused on passenger ticket data for the largest 5,000 domestic
airline markets from 1998 through 2006.[Footnote 4] We excluded tickets
with international, Hawaiian, or Alaskan destinations or origins so
that we could examine changes within contiguous domestic markets. To
assess the reliability of all DOT data used by GAO, we reviewed the
quality control procedures applied by DOT and subsequently determined
that the data were sufficiently reliable for our purposes. To identify
and evaluate the primary factors that airlines consider in deciding
whether to merge with or acquire another airline, we reviewed studies
and reports; assessed past airline mergers and acquisitions; and
conducted interviews with DOT and DOJ officials, airline managers,
financial analysts, academic researchers, and industry experts. In
addition, to understand the government's role in evaluating a proposed
merger or acquisition, we discussed the merger review processes with
DOJ officials and antitrust experts and reviewed available
documentation addressing past mergers and acquisitions. We conducted
this performance audit from May 2007 through July 2008 in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives.
Results in Brief:
The U.S. passenger airline industry was profitable in 2006 and 2007 for
the first time since 2000, but high fuel prices will likely result in
industry losses in 2008. Legacy airlines, which currently account for
two-thirds of industry market share, realized collective operating
profits of $1.8 billion in 2007, as compared to collective operating
losses of nearly $33 billion from 2001 through 2005 which forced four
legacy airlines into bankruptcy.[Footnote 5] Legacy airlines generally
improved their financial positions and returned to modest operating
profitability in recent years by reducing operating costs and domestic
capacity, while focusing on more profitable international markets. Low-
cost airlines, meanwhile, have continued to maintain modest
profitability since 1998. From 2003 through 2007, the airline industry
experienced a relatively steady increase in passenger traffic--as
measured by revenue passenger miles--growing 14 percent. At the same
time, and unlike in past recoveries, industry capacity--as measured by
available seat miles--increased 9 percent. Legacy airlines were also
able to reduce costs, especially through bankruptcy, which triggered
contract and pay concessions from labor unions and the termination and
transfer of employee pension plans. Although the industry saw profits
in 2007, according to first quarter 2008 financial results and updated
industry forecasts for the rest of the year, the industry is expected
to incur substantial losses in 2008. Rapidly increasing fuel prices are
forcing airlines to cut capacity.
From 1998 through 2006, the U.S. domestic airline industry became more
competitive, as reflected by an increase in the number of competitors
serving city-pair markets[Footnote 6] (e.g., New York-Los Angeles), the
presence of low-cost airlines in more of those markets, lower average
fares, fewer dominated markets, and a shrinking dominance by a single
airline at some of the nation's largest airports. The largest 5,000
city-pair markets--which account for more than 90 percent of passenger
traffic--were serviced by more competitors on average in 2006 than in
1998.[Footnote 7] Overall, average fares have declined 20 percent in
real terms since 1998, and the average number of competitors in the top
5,000 markets rose from 2.9 in 1998 to 3.3 in 2006.[Footnote 8] During
the same period, there was tremendous growth of low-cost airlines. The
number of top 5,000 markets serviced by at least one low-cost airline
increased nearly 60 percent, from approximately 1,300 markets in 1998
to over 2,000 markets in 2006. Further evidence of increased
competition can be seen in the reduced number of dominated markets--
where a single airline carries 50 percent or more of passengers--in the
top 5,000 markets. The number of markets dominated decreased from about
3,500 in 1998 to about 3,000 in 2006. In addition, although legacy
airlines continued to dominate many of the largest airports, carrying
at least 50 percent of airport passenger traffic,[Footnote 9] most saw
a decrease in their share of total passenger traffic as more
competitors--mainly low-cost airlines--moved in or expanded. In 2006,
of the 30 largest airports, 16 were dominated by a single airline, but
at 8 of those airports, the dominant airline had lost some passenger
traffic since 1998.
Airlines consider mergers and acquisitions as a means to increase their
profitability and financial viability, but must consider the
operational and regulatory challenges to consummating a combination.
Intended financial benefits stem from both cost reductions and
increased revenues. Cost reductions may result from the elimination of
duplicative operations--such as those at hubs or maintenance
facilities--or by eliminating redundant city-pair service. On the
revenue side, a merger or acquisition could generate additional
revenues through increased fares on some routes as a result of capacity
reductions or increased market share, although those fare increases may
be transitory because other airlines could enter the affected markets
and drive prices back down. Mergers or acquisitions could also attract
more customers, and thus more revenue, by expanding airline networks to
gain new city-pair combinations (domestically and internationally).
Each merger or acquisition is different from others in terms of the
extent to which cost reductions and revenue increases are factors.
Balanced against these potential benefits are certain operational and
regulatory challenges posed by mergers and acquisitions, which can be
significant. For example, the integration of workforces is often
particularly challenging and costly. New contracts must be negotiated,
pilot seniority lists must be combined, and concessions may be required
to gain labor support for mergers. Other significant operational
challenges often involve the integration of aircraft fleets and
information technology systems and processes. Demonstrating to DOJ, the
relevant antitrust enforcement authority, that a merger or acquisition
is not likely to be anticompetitive may also pose a significant
challenge.
Both DOJ and DOT play a role in reviewing potential mergers and
acquisitions, but DOJ's determination of whether a merger or
acquisition is likely substantially to lessen competition is key. If
DOJ believes the transaction is anticompetitive and would harm
consumers, it may petition a court to prohibit the transaction. For
airlines, and many other industries, DOJ uses an analytical framework
set forth in the Horizontal Merger Guidelines (the Guidelines) to
evaluate merger proposals.[Footnote 10] As part of that framework, DOJ
uses an integrated five-part process that assesses (1) the relevant
market (city-pairs in the case of airlines); (2) the potential
anticompetitive effects resulting from a merger or acquisition; (3) the
likelihood and impact of other airlines possibly entering a market and
counteracting any anticompetitive effects; (4) "efficiencies"
(benefits) that a merger would bring--for example, consumer benefits
from an expanded route network--and (5) whether one of the airlines
proposing to merge would fail and its assets exit the market in the
absence of a merger or acquisition. These considerations allow DOJ to
determine whether it should challenge the merger because it would raise
antitrust concerns. DOT also plays a role in the merger review process,
providing competition data to DOJ, and if DOJ does not challenge the
merger or acquisition, DOT may review the financial and safety standing
of the new combined airline. Our analysis of changes in the airline
industry, prior to the recent spike in fuel prices, indicates that the
likelihood of airline entry increased. Additionally, the Guidelines
have evolved to provide clarity as to the consideration of
efficiencies, an important factor in airline mergers.
We provided a draft of this report to DOT and DOJ for their review and
comment. Both DOT and DOJ officials provided some clarifying and
technical comments that we incorporated where appropriate.
Background:
The U.S. airline industry is principally composed of legacy, low-cost,
and regional airlines, and while it is largely free of economic
regulation, it remains regulated in other respects, most notably
safety, security, and operating standards. Legacy airlines--sometimes
called network airlines--are essentially those airlines that were in
operation before the Airline Deregulation Act of 1978 and whose goal is
to provide service from "anywhere to everywhere."[Footnote 11]
To meet that goal, these airlines support large, complex hub-and-spoke
operations with thousands of employees and hundreds of aircraft (of
various types), with service at numerous fare levels to domestic
communities of all sizes and to international destinations. To enhance
revenues without expending capital, legacy airlines have entered into
domestic (and international) alliances that give them access to some
portion of each others' networks. Low-cost airlines generally entered
the marketplace after deregulation and primarily operate less costly
point-to-point service using fewer types of aircraft. Low-cost airlines
typically offer simplified fare structures, which were originally aimed
at leisure passengers but are increasingly attractive to business
passengers because they typically do not have restrictive ticketing
rules, which make it significantly more expensive to purchase tickets
within 2 weeks of the flight or make changes to an existing itinerary.
Regional airlines generally operate smaller aircraft--turboprops or
regional jets with up to 100 seats--and provide service under code-
sharing arrangements with larger legacy airlines on a cost-plus or fee-
for-departure basis to smaller communities. Some regional airlines are
owned by a legacy parent, while others are independent. For example,
American Eagle is the regional partner for American Airlines, while
independent Sky West Airlines operates on a fee-per-departure agreement
with Delta Air Lines, United Airlines, and Midwest Airlines. [Footnote
12]
The airline industry has experienced considerable merger and
acquisition activity since its early years, especially immediately
following deregulation in 1978 (fig. 1 provides a timeline of mergers
and acquisitions for the eight largest surviving airlines). There was a
flurry of mergers and acquisitions during the 1980s, when Delta Air
Lines and Western Airlines merged, United Airlines acquired Pan Am's
Pacific routes, Northwest acquired Republic Airlines, and American and
Air California merged. In 1988, merger and acquisition review authority
was transferred from DOT to DOJ. Since 1998, and despite tumultuous
financial periods, fewer mergers and acquisitions have occurred. In
2001, American Airlines acquired the bankrupt airline TWA, and in 2005
America West acquired US Airways while the latter was in bankruptcy.
Certain other attempts at merging during that time period failed
because of opposition from DOJ or employees and creditors. For example,
in 2000, an agreement was reached that allowed Northwest Airlines to
acquire a 50 percent stake in Continental Airlines (with limited voting
power) to resolve the antitrust suit brought by DOJ against Northwest's
proposed acquisition of a controlling interest in Continental.[Footnote
13] A proposed merger of United Airlines and US Airways in 2000 also
resulted in opposition from DOJ, which found that, in its view, the
merger would violate antitrust laws by reducing competition, increasing
air fares, and harming consumers on airline routes throughout the
United States. Although DOJ expressed its intent to sue to block the
transaction, the parties abandoned the transaction before a suit was
filed. More recently, the 2006 proposed merger of US Airways and Delta
Air Lines fell apart because of opposition from Delta's pilots and some
of its creditors, as well as its senior management.
Figure 1: Highlights of Domestic Airline Mergers and Acquisitions:
[See PDF for image]
This figure is an illustrated timeline depicting highlights of domestic
airline mergers and acquisitions, as follows:
Airline: Alaska;
Other event: 1934, McGee Airways founded;
Other event: 1937, renamed Star Airlines;
Other event: 1942, renamed Alaska Airlines;
Acquisition or merger: 1968, Alaska Coastal-Ellis, Cordova;
Acquisition or merger: 1986, Horizon Air, Jet America Airlines.
Airline: American;
Other event: 1934, founded;
Acquisition or merger: 1970, Trans Caribbean Airways;
Acquisition or merger: 1986, Air California;
Acquisition or merger: 1990, Eastern Airlines Latin American routes;
Acquisition or merger: 1999, Reno Air;
Acquisition or merger: 2001, TWA.
Airline: Continental;
Other event: 1934, Varney Speed Lines founded;
Other event: 1937, renamed Continental;
Acquisition or merger: 1953, Pioneer Airlines;
Other event: 1968, Air Micronesia subsidiary formed;
Acquisition or merger: 1982, acquired by Texas International Air;
Acquisition or merger: 1986, People Express (Frontier);
Acquisition or merger: 1987, New York Air.
Airline: Delta;
Other event: 1929, founded;
Acquisition or merger: 1953, Chicago and Southern Air Lines;
Acquisition or merger: 1972, Northeast Airlines;
Acquisition or merger: 1987, Western Airlines;
Acquisition or merger: 1991, Pan Am trans-atlantic routes and shuttle;
Acquisition or merger: 2000, ASA and Comair.
Airline: Northwest;
Other event: 1926, founded;
Acquisition or merger: 1986, Republic Airlines.
Airline: Southwest;
Other event: 1971, founded;
Acquisition or merger: 1994, Morris Air.
Airline: United;
Other event: 1934, founded;
Acquisition or merger: 1962, Capital Airlines;
Acquisition or merger: 1986, Pan Am Pacific routes;
Acquisition or merger: 1990, Pan Am London routes;
Acquisition or merger: 1991, Pan Am Latin American routes.
Airline: US Airways;
Other event: 1937, All-American Airways founded;
Other event: 1953, renamed Allegheny Airlines;
Acquisition or merger: 1968, Lake Central Airlines;
Acquisition or merger: 1972, Mohawk;
Acquisition or merger: 1986, Empire Airlines acquired by Piedmont;
Acquisition or merger: 1988, PSA;
Acquisition or merger: 1988, Piedmont;
Acquisition or merger: 2005, America West merger.
Source: Cathay Financial and airline company documents.
[End of figure]
Since the airline industry was deregulated in 1978, its earnings have
been extremely volatile. In fact, despite considerable periods of
strong growth and increased earnings, airlines have at times suffered
such substantial financial distress that the industry has experienced
recurrent bankruptcies and has failed to earn sufficient returns to
cover capital costs in the long run. Many analysts view the industry as
inherently unstable due to key demand and cost characteristics. In
particular, demand for air travel is highly cyclical, not only in
relation to the state of the economy, but also with respect to
political, international, and even health-related events. Yet the cost
characteristics of the industry appear to make it difficult for firms
to rapidly contract in the face of declining demand. In particular,
aircraft are expensive, long-lived capital assets. And as demand
declines, airlines cannot easily reduce flight schedules in the very
near term because passengers are already booked on flights for months
in advance, nor can they quickly change their aircraft fleets. That is,
airplane costs are largely fixed and unavoidable in the near term.
Moreover, even though labor is generally viewed as a variable cost,
airline employees are mostly unionized, and airlines find that they
cannot reduce employment costs very quickly when demand for air travel
slows. These cost characteristics can thus lead to considerable excess
capacity in the face of declining demand. Finally, the industry is also
susceptible to certain external shocks--such as those caused by fuel
price volatility. In 2006 and 2007, the airline industry generally
regained profitability after several very difficult years. However,
these underlying fundamental characteristics of the industry suggest
that it will remain an industry susceptible to rapid swings in its
financial health.
Since deregulation in 1978, the financial stability of the airline
industry has become a considerable concern for the federal government
due to the level of financial assistance it has provided to the
industry through assuming terminated pension plans and other forms of
assistance. Since 1978 there have been over 160 airline bankruptcies.
While most of these bankruptcies affected small airlines that were
eventually liquidated, 4 of the more recent bankruptcies (Delta,
Northwest, United, and US Airways) are among the largest corporate
bankruptcies ever, excluding financial services firms. During these
bankruptcies, United Airlines and US Airways terminated their pension
plans and $9.7 billion in claims were shifted to the Pension Benefit
Guarantee Corporation (PGBC).[Footnote 14] Further, to respond to the
shock to the industry from the September 11, 2001, terrorist attacks,
the federal government provided airlines with $7.4 billion in direct
assistance and authorized $1.6 billion (of $10 billion available) in
loan guarantees to six airlines.[Footnote 15]
Although the airline industry has experienced numerous mergers and
bankruptcies since deregulation, growth of existing airlines and the
entry of new airlines have contributed to a steady increase in
capacity.[Footnote 16] Previously, GAO reported that although one
airline may reduce capacity or leave the market, capacity returns
relatively quickly.[Footnote 17] Likewise, while past mergers and
acquisitions have, at least in part, sought to reduce capacity, any
resulting declines in industry capacity have been short-lived, as
existing airlines have expanded or new airlines have expanded. Capacity
growth has slowed or declined just before and during recessions, but
not as a result of large airline liquidations. Figure 2 shows capacity
trends since 1979 and the dates of major mergers and acquisitions.
Figure 2: Growth of Industry Capacity and Major Airline Mergers and
Acquisitions, 1979-2006:
[See PDF for image]
This figure is a line graph depicting growth of industry capacity and
major airline mergers and acquisitions, 1979-2006, as follows:
Year: 1979, Q1;
Available seat miles (four-quarter moving average, in billions): 76.5.
Year: 1979, Q2;
Available seat miles (four-quarter moving average, in billions): 79.
Year: 1979, Q3;
Available seat miles (four-quarter moving average, in billions): 79.3.
Year: 1979, Q4;
Available seat miles (four-quarter moving average, in billions): 82.1.
Year: 1980, Q1;
Available seat miles (four-quarter moving average, in billions): 84.
Year: 1980, Q2 (recession period);
Available seat miles (four-quarter moving average, in billions): 85.2.
Year: 1980, Q3 (recession period);
Available seat miles (four-quarter moving average, in billions): 88.9.
Year: 1980, Q4;
Available seat miles (four-quarter moving average, in billions): 88.5.
Year: 1981, Q1;
Available seat miles (four-quarter moving average, in billions): 87.2.
Year: 1981, Q2;
Available seat miles (four-quarter moving average, in billions): 86.5.
Year: 1981, Q3;
Available seat miles (four-quarter moving average, in billions): 85.9.
Year: 1981, Q4 (recession period);
Available seat miles (four-quarter moving average, in billions): 85.2.
Year: 1982, Q1 (recession period);
Available seat miles (four-quarter moving average, in billions): 86.
Year: 1982, Q2 (recession period);
Available seat miles (four-quarter moving average, in billions): 86.4.
Year: 1982, Q3 (recession period);
Available seat miles (four-quarter moving average, in billions): 86.6.
Year: 1982, Q4 (recession period);
Available seat miles (four-quarter moving average, in billions): 88.
Year: 1983, Q1;
Available seat miles (four-quarter moving average, in billions): 89.5.
Year: 1983, Q2;
Available seat miles (four-quarter moving average, in billions): 90.7.
Year: 1983, Q3;
Available seat miles (four-quarter moving average, in billions): 92.8.
Year: 1983, Q4;
Available seat miles (four-quarter moving average, in billions): 94.9.
Year: 1984, Q1;
Available seat miles (four-quarter moving average, in billions): 96.3.
Year: 1984, Q2;
Available seat miles (four-quarter moving average, in billions): 99.1.
Year: 1984, Q3;
Available seat miles (four-quarter moving average, in billions): 101.6.
Year: 1984, Q4;
Available seat miles (four-quarter moving average, in billions): 104.5.
Year: 1985, Q1;
Available seat miles (four-quarter moving average, in billions): 107.8.
Year: 1985, Q2;
Available seat miles (four-quarter moving average, in billions): 109.3.
Year: 1985, Q3;
Available seat miles (four-quarter moving average, in billions): 109.8.
Year: 1985, Q4;
Available seat miles (four-quarter moving average, in billions): 111.4.
Year: 1986;
American Airlines acquires AirCal;
Continental Airlines acquires People Express (Frontier);
Northwest Airlines acquires Republic Airlines;
TWA acquires Ozark Airlines.
Year: 1986, Q1;
Available seat miles (four-quarter moving average, in billions): 113.4.
Year: 1986, Q2;
Available seat miles (four-quarter moving average, in billions): 116.2.
Year: 1986, Q3;
Available seat miles (four-quarter moving average, in billions): 120.6.
Year: 1986, Q4;
Available seat miles (four-quarter moving average, in billions): 123.9.
Year: 1987;
Delta Airlines acquires Western Airlines.
Year: 1987, Q1;
Available seat miles (four-quarter moving average, in billions): 125.9.
Year: 1987, Q2;
Available seat miles (four-quarter moving average, in billions): 132.
Year: 1987, Q3;
Available seat miles (four-quarter moving average, in billions): 134.1.
Year: 1987, Q4;
Available seat miles (four-quarter moving average, in billions): 135.
Year: 1988;
UA Airways acquires PSA.
Year: 1988, Q1;
Available seat miles (four-quarter moving average, in billions): 139.8.
Year: 1988, Q2;
Available seat miles (four-quarter moving average, in billions): 137.5.
Year: 1988, Q3;
Available seat miles (four-quarter moving average, in billions): 137.8.
Year: 1988, Q4;
Available seat miles (four-quarter moving average, in billions): 138.4.
Year: 1989;
UA Airways acquires Piedmont and Empire airlines.
Year: 1989, Q1;
Available seat miles (four-quarter moving average, in billions): 136.
Year: 1989, Q2;
Available seat miles (four-quarter moving average, in billions): 135.5.
Year: 1989, Q3;
Available seat miles (four-quarter moving average, in billions): 134.5.
Year: 1989, Q4;
Available seat miles (four-quarter moving average, in billions): 134.
Year: 1990, Q1;
Available seat miles (four-quarter moving average, in billions): 134.2.
Year: 1990, Q2;
Available seat miles (four-quarter moving average, in billions): 135.7.
Year: 1990, Q3;
Available seat miles (four-quarter moving average, in billions): 138.7.
Year: 1990, Q4 (recession period);
Available seat miles (four-quarter moving average, in billions): 141.2.
Year: 1991, Q1 (recession period);
Available seat miles (four-quarter moving average, in billions): 142.8.
Year: 1991, Q2;
Available seat miles (four-quarter moving average, in billions): 141.2.
Year: 1991, Q3;
Available seat miles (four-quarter moving average, in billions): 139.8.
Year: 1991, Q4;
Available seat miles (four-quarter moving average, in billions): 138.6.
Year: 1992, Q1;
Available seat miles (four-quarter moving average, in billions): 137.3.
Year: 1992, Q2;
Available seat miles (four-quarter moving average, in billions): 138.6.
Year: 1992, Q3;
Available seat miles (four-quarter moving average, in billions): 139.2.
Year: 1992, Q4;
Available seat miles (four-quarter moving average, in billions): 140.4.
Year: 1993, Q1;
Available seat miles (four-quarter moving average, in billions): 141.6.
Year: 1993, Q2;
Available seat miles (four-quarter moving average, in billions): 142.6.
Year: 1993, Q3;
Available seat miles (four-quarter moving average, in billions): 143.9.
Year: 1993, Q4;
Available seat miles (four-quarter moving average, in billions): 144.7.
Year: 1994, Q1;
Available seat miles (four-quarter moving average, in billions): 145.3.
Year: 1994, Q2;
Available seat miles (four-quarter moving average, in billions): 145.7.
Year: 1994, Q3;
Available seat miles (four-quarter moving average, in billions): 146.4.
Year: 1994, Q4;
Available seat miles (four-quarter moving average, in billions): 147.6.
Year: 1995, Q1;
Available seat miles (four-quarter moving average, in billions): 149.6.
Year: 1995, Q2;
Available seat miles (four-quarter moving average, in billions): 151.7.
Year: 1995, Q3;
Available seat miles (four-quarter moving average, in billions): 152.9.
Year: 1995, Q4;
Available seat miles (four-quarter moving average, in billions): 153.6.
Year: 1996, Q1;
Available seat miles (four-quarter moving average, in billions): 153.8.
Year: 1996, Q2;
Available seat miles (four-quarter moving average, in billions): 155.
Year: 1996, Q3;
Available seat miles (four-quarter moving average, in billions): 156.8.
Year: 1996, Q4;
Available seat miles (four-quarter moving average, in billions): 158.5.
Year: 1997, Q1;
Available seat miles (four-quarter moving average, in billions): 160.2.
Year: 1997, Q2;
Available seat miles (four-quarter moving average, in billions): 161.3.
Year: 1997, Q3;
Available seat miles (four-quarter moving average, in billions): 162.1.
Year: 1997, Q4;
Available seat miles (four-quarter moving average, in billions): 162.7.
Year: 1998, Q1;
Available seat miles (four-quarter moving average, in billions): 163.4.
Year: 1998, Q2;
Available seat miles (four-quarter moving average, in billions): 163.6.
Year: 1998, Q3;
Available seat miles (four-quarter moving average, in billions): 163.7.
Year: 1998, Q4;
Available seat miles (four-quarter moving average, in billions): 164.
Year: 1999;
American Airlines acquires Reno Air.
Year: 1999, Q1;
Available seat miles (four-quarter moving average, in billions): 165.3.
Year: 1999, Q2;
Available seat miles (four-quarter moving average, in billions): 166.6.
Year: 1999, Q3;
Available seat miles (four-quarter moving average, in billions): 169.
Year: 1999, Q4;
Available seat miles (four-quarter moving average, in billions): 172.7.
Year: 2000, Q1;
Available seat miles (four-quarter moving average, in billions): 175.1.
Year: 2000, Q2;
Available seat miles (four-quarter moving average, in billions): 177.8.
Year: 2000, Q3;
Available seat miles (four-quarter moving average, in billions): 179.7.
Year: 2000, Q4;
Available seat miles (four-quarter moving average, in billions): 180.5.
Year: 2001;
American Airlines acquires TWA.
Year: 2001, Q1 (recession period);
Available seat miles (four-quarter moving average, in billions): 181.5.
Year: 2001, Q2 (recession period);
Available seat miles (four-quarter moving average, in billions): 182.6.
Year: 2001, Q3 (recession period);
Available seat miles (four-quarter moving average, in billions): 184.
Year: 2001, Q4 (recession period);
Available seat miles (four-quarter moving average, in billions): 182.8.
Year: 2002, Q1;
Available seat miles (four-quarter moving average, in billions): 176.9.
Year: 2002, Q2;
Available seat miles (four-quarter moving average, in billions): 172.1.
Year: 2002, Q3;
Available seat miles (four-quarter moving average, in billions): 168.7.
Year: 2002, Q4;
Available seat miles (four-quarter moving average, in billions): 167.5.
Year: 2003, Q1;
Available seat miles (four-quarter moving average, in billions): 170.9.
Year: 2003, Q2;
Available seat miles (four-quarter moving average, in billions): 172.5.
Year: 2003, Q3;
Available seat miles (four-quarter moving average, in billions): 171.9.
Year: 2003, Q4;
Available seat miles (four-quarter moving average, in billions): 172.7.
Year: 2004, Q1;
Available seat miles (four-quarter moving average, in billions): 173.9.
Year: 2004, Q2;
Available seat miles (four-quarter moving average, in billions): 177.3.
Year: 2004, Q3;
Available seat miles (four-quarter moving average, in billions): 181.5.
Year: 2004, Q4;
Available seat miles (four-quarter moving average, in billions): 184.3.
Year: 2005;
US Airways merges with America West.
Year: 2005, Q1;
Available seat miles (four-quarter moving average, in billions): 187.1.
Year: 2005, Q2;
Available seat miles (four-quarter moving average, in billions): 187.9.
Year: 2005, Q3;
Available seat miles (four-quarter moving average, in billions): 189.3.
Year: 2005, Q4;
Available seat miles (four-quarter moving average, in billions): 190.6.
Year: 2006, Q1;
Available seat miles (four-quarter moving average, in billions): 189.6.
Year: 2006, Q2;
Available seat miles (four-quarter moving average, in billions): 188.6.
Year: 2006, Q3;
Available seat miles (four-quarter moving average, in billions): 187.2.
Year: 2006, Q4;
Available seat miles (four-quarter moving average, in billions): 186.4.
Sources: GAO analysis of Form 41 data, National Bureau of Economic
Research, and DOT documents.
[End of figure]
U.S. Airlines' Financial Condition Has Improved, but It Appears to Be
Short-lived:
The U.S. passenger airline industry has generally improved its
financial condition in recent years, but its recovery appears short-
lived because of rapidly increasing fuel prices. The U.S. airline
industry recorded a net operating profit of $2.2 billion and $2.8
billion in 2006 and 2007, respectively,[Footnote 18] the first time
since 2000 that it had earned a profit. Legacy airlines--which lost
nearly $33 billion between 2001 and 2005--returned to profitability in
2006 owing to increased passenger traffic, restrained capacity, and
restructured costs. Meanwhile, low-cost airlines, which also saw
increased passenger traffic, remained profitable overall by continuing
to keep costs low, as compared to costs at the legacy airlines, and
managing their growth. The airline industry's financial future remains
uncertain and vulnerable to a number of internal and external events--
particularly the rapidly increasing costs of fuel.
Both Legacy and Low-Cost Airlines Improved Their Financial Positions in
2006 and 2007:
The airline industry achieved modest profitability in 2006 and
continued that trend through 2007. The seven legacy airlines had
operating profits of $1.1 billion in 2006 and $1.8 billion in 2007,
after losses totaling nearly $33 billion from 2001 through 2005. The
seven low-cost airlines, after reaching an operating profit low of
nearly $55 million in 2004, also saw improvement, posting operating
profits of almost $958 million in 2006 and $1 billion in 2007. Figure 3
shows U.S. airline operating profits since 1998.
Figure 3: Operating Profit or Loss for Legacy and Low-Cost Airlines,
1998-2007 (2007 dollars in billions):
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1998;
Operating profit/loss, legacy airlines: $7.34;
Operating profit/loss, low-cost airlines: $1.23.
Year: 1999;
Operating profit/loss, legacy airlines: $5.78;
Operating profit/loss, low-cost airlines: $1.47.
Year: 2000;
Operating profit/loss, legacy airlines: $4.33;
Operating profit/loss, low-cost airlines: $1.37.
Year: 2001;
Operating profit/loss, legacy airlines: -$8.40;
Operating profit/loss, low-cost airlines: $0.34.
Year: 2002;
Operating profit/loss, legacy airlines: -$9.22;
Operating profit/loss, low-cost airlines: $0.35.
Year: 2003;
Operating profit/loss, legacy airlines: -$5.39;
Operating profit/loss, low-cost airlines: $0.90.
Year: 2004;
Operating profit/loss, legacy airlines: -$5.75;
Operating profit/loss, low-cost airlines: $0.05.
Year: 2005;
Operating profit/loss, legacy airlines: -$4.11;
Operating profit/loss, low-cost airlines: $0.02.
Year: 2006;
Operating profit/loss, legacy airlines: $1.13;
Operating profit/loss, low-cost airlines: $0.96.
Year: 2007;
Operating profit/loss, legacy airlines: $1.76;
Operating profit/loss, low-cost airlines: $1.03.
Source: GAO analysis of DOT data.
Note: Following their merger in 2005, US Airways and America West 2006-
2007 data are included with the legacy airlines. America West's data
from 1998 to 2005 are included with the low-cost airlines.
[End of figure]
Increased Passenger Traffic and Capacity Restraint Have Improved
Airline Revenues:
An increase in passenger traffic since 2003 has helped improve airline
revenues. Passenger traffic--as measured by revenue passenger miles
(RPM)--increased for both legacy and low-cost airlines, as illustrated
by figure 4.[Footnote 19] Legacy airlines' RPMs rose 11 percent from
2003 through 2007, while low-cost airlines' RPMs grew 24 percent during
the same period.
Figure 4: Revenue Passenger Miles among Legacy and Low-Cost Airlines,
1998-2007:
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1998;
Billions of revenue passenger miles, legacy airlines: 59;
Billions of revenue passenger miles, low-cost airlines: 354.
Year: 1999;
Billions of revenue passenger miles, legacy airlines: 69;
Billions of revenue passenger miles, low-cost airlines: 365.
Year: 2000;
Billions of revenue passenger miles, legacy airlines: 80;
Billions of revenue passenger miles, low-cost airlines: 375.
Year: 2001;
Billions of revenue passenger miles, legacy airlines: 86;
Billions of revenue passenger miles, low-cost airlines: 346.
Year: 2002;
Billions of revenue passenger miles, legacy airlines: 95;
Billions of revenue passenger miles, low-cost airlines: 347.
Year: 2003;
Billions of revenue passenger miles, legacy airlines: 108;
Billions of revenue passenger miles, low-cost airlines: 339.
Year: 2004;
Billions of revenue passenger miles, legacy airlines: 123;
Billions of revenue passenger miles, low-cost airlines: 361.
Year: 2005;
Billions of revenue passenger miles, legacy airlines: 132;
Billions of revenue passenger miles, low-cost airlines: 366.
Year: 2006;
Billions of revenue passenger miles, legacy airlines: 120;
Billions of revenue passenger miles, low-cost airlines: 379.
Year: 2007;
Billions of revenue passenger miles, legacy airlines: 134;
Billions of revenue passenger miles, low-cost airlines: 375.
Source: GAO analysis of DOT data.
Note: Following their merger in 2005, US Airways and America West 2006-
2007 data are included with the legacy airlines. America West's data
from 1998 to 2005 are included with the low-cost airlines.
[End of figure]
Airline revenues have also improved owing to domestic capacity
restraint. Some past airline industry recoveries have been stalled
because airlines grew their capacity too quickly in an effort to gain
market share, and too much capacity undermined their ability to charge
profitable fares. Total domestic capacity, as measured by available
seat miles (ASM), increased 9 percent, from 696 billion ASMs in 2003 to
757 billion ASMs in 2007.[Footnote 20] However, legacy airlines' ASMs
declined 18 percent, from 460 billion in 2003 to 375 billion in 2007,
as illustrated by figure 5. Industry experts and airline officials told
us that legacy airlines reduced their domestic capacity, in part, by
shifting capacity to their regional airline partners and to
international routes. Even the faster growing low-cost airline segment
saw a decline in ASMs in 2006 and 2007.
Figure 5: Domestic Available Seat Miles among Legacy and Low-Cost
Airlines, 1998-2007:
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1998;
Billions of available seat miles, legacy airlines: 90;
Billions of available seat miles, low-cost airlines: 497.
Year: 1999;
Billions of available seat miles, legacy airlines: 100;
Billions of available seat miles, low-cost airlines: 520.
Year: 2000;
Billions of available seat miles, legacy airlines: 114;
Billions of available seat miles, low-cost airlines: 523.
Year: 2001;
Billions of available seat miles, legacy airlines: 124;
Billions of available seat miles, low-cost airlines: 498.
Year: 2002;
Billions of available seat miles, legacy airlines: 137;
Billions of available seat miles, low-cost airlines: 488.
Year: 2003;
Billions of available seat miles, legacy airlines: 152;
Billions of available seat miles, low-cost airlines: 460.
Year: 2004;
Billions of available seat miles, legacy airlines: 168;
Billions of available seat miles, low-cost airlines: 477.
Year: 2005;
Billions of available seat miles, legacy airlines: 177;
Billions of available seat miles, low-cost airlines: 464.
Year: 2006;
Billions of available seat miles, legacy airlines: 160;
Billions of available seat miles, low-cost airlines: 468.
Year: 2007;
Billions of available seat miles, legacy airlines: 135;
Billions of available seat miles, low-cost airlines: 375.
Source: GAO analysis of DOT data.
Note: Following their merger in 2005, US Airways and America West 2006-
2007 data are included with the legacy airlines. America West's data
from 1998 to 2005 are included with the low-cost airlines.
[End of figure]
Since 2004, legacy airlines have shifted portions of their domestic
capacity to more profitable international routes. From 1998 through
2003, the legacy airlines maintained virtually the same 30/70 percent
capacity allocation split between international and domestic capacity.
However, during the period from 2004 to 2007, legacy airlines increased
their international capacity by 7 percentage points to a 37/63 percent
split between international and domestic capacities. International
expansion has proven to be a source of substantial new revenues for the
legacy airlines because they often face less competition on
international routes. Moreover, international routes generate
additional passenger flow (and revenues) through their domestic
networks, helping to support service over routes where competition from
low-cost airlines has otherwise reduced legacy airlines' domestic
revenues.
Cost Reduction and Bankruptcy Restructuring Efforts Have Also Improved
Airline Financial Positions:
The airlines have also undertaken cost reduction efforts--much of which
occurred through the bankruptcy process--in an attempt to improve their
financial positions and better insulate themselves from the cyclical
nature of the industry. Excluding fuel, unit operating costs for the
industry, typically measured by cost per available seat mile,[Footnote
21] have decreased 16 percent since reaching peak levels around 2001. A
number of experts have pointed out that the legacy airlines have likely
made most of the cost reductions that can be made without affecting
safety or service; however, as figure 6 illustrates, a significant gap
remains between legacy and low-cost airlines' unit costs. A recent
expert study examining industry trends in competition and financial
condition found similar results, also noting that the cost gap between
legacy and low-cost airlines still exists.[Footnote 22]
Figure 6: Unit Costs, Excluding Fuel, for Legacy and Low-Cost Airlines,
1998-2007 (costs in 2007 dollars):
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1998;
Cost per available seat mile, legacy airlines: 0.082;
Cost per available seat mile, low-cost airlines: 0.117.
Year: 1999;
Cost per available seat mile, legacy airlines: 0.079;
Cost per available seat mile, low-cost airlines: 0.117.
Year: 2000;
Cost per available seat mile, legacy airlines: 0.083;
Cost per available seat mile, low-cost airlines: 0.117.
Year: 2001;
Cost per available seat mile, legacy airlines: 0.082;
Cost per available seat mile, low-cost airlines: 0.125.
Year: 2002;
Cost per available seat mile, legacy airlines: 0.073;
Cost per available seat mile, low-cost airlines: 0.121.
Year: 2003;
Cost per available seat mile, legacy airlines: 0.069;
Cost per available seat mile, low-cost airlines: 0.121.
Year: 2004;
Cost per available seat mile, legacy airlines: 0.073;
Cost per available seat mile, low-cost airlines: 0.124.
Year: 2005;
Cost per available seat mile, legacy airlines: 0.072;
Cost per available seat mile, low-cost airlines: 0.121.
Year: 2006;
Cost per available seat mile, legacy airlines: 0.070;
Cost per available seat mile, low-cost airlines: 0.115.
Year: 2007;
Cost per available seat mile, legacy airlines: 0.058;
Cost per available seat mile, low-cost airlines: 0.115.
Source: GAO analysis of DOT data.
Note: Following their merger in 2005, US Airways and America West 2006-
2007 data are included with the legacy airlines. America West's data
from 1998 to 2005 are included with the low-cost airlines.
[End of figure]
Many airlines achieved dramatic cuts in their operational costs by
negotiating contract and pay concessions from their labor unions and
through bankruptcy restructuring and personnel reductions. For example,
Northwest Airlines pilots agreed to two pay cuts--15 percent in 2004
and an additional 23.9 percent in 2006, while in bankruptcy--to help
the airline dramatically reduce operating expenses. Bankruptcy also
allowed several airlines to significantly reduce their pension
expenses, as some airlines terminated and shifted their pension
obligations to PBGC. Legacy airlines in particular reduced personnel as
another means of reducing costs. The average number of employees per
legacy airline has decreased 26 percent, from 42,558 in 1998 to 31,346
in 2006. Low-cost airlines, on the other hand, have added personnel;
however, they have done so in keeping with their increases in capacity.
In fact, although total low-cost airline labor costs (including
salaries and benefits) steadily increased from 1998 through 2007--from
$2.8 billion to $5.0 billion--labor costs have accounted for roughly
the same percentage (33 percent) of total operating expenses (including
fuel) throughout the time period.
Although cost restructuring--achieved both through Chapter 11
bankruptcy reorganizations and outside of that process--has enabled
most legacy airlines to improve their balance sheets in recent years,
it still leaves the industry highly leveraged. Legacy airlines have
significantly increased their total cash reserves from $2.7 billion in
1998 to $24 billion in 2007, thereby strengthening their cash and
liquidity positions.[Footnote 23] Low-cost airlines also increased
their total cash reserves. Industry experts we spoke with stated that
this buildup of cash reserves is a strategic move to help the airlines
withstand future industry shocks, as well as to pay down debts or
return value to stockholders. Experts, however, also agreed that debt
is still a problem within the industry, particularly for the legacy
airlines. For example, legacy airlines' assets-to-liabilities ratio (a
measure of a firm's long-term solvency) is still less than 1 (assets
less than liabilities). In 1998, legacy airlines' average ratio was
0.70, which improved only slightly to 0.74 in 2007. In contrast, while
low-cost airlines have also added significant liabilities owing to
their growth, their assets-to-liabilities ratio remains better than
that of legacy airlines, increasing from 0.75 in 1998 to 1 in 2007.
Airlines' Financial Turnaround May Be Short-lived:
Because the financial condition of the airline industry remains
vulnerable to external shocks--such as the rising cost of fuel,
economic downturns, or terrorist attacks--the near-term and longer-term
financial health of the industry remains uncertain. In light of
increased fuel prices and softening passenger demand, the profit and
earnings outlook has reversed itself, and airlines may incur record
losses in 2008. Although the industry saw profits in 2007 and some were
predicting even larger profits in 2008, experts and industry analysts
now estimate that the industry could incur significant losses in 2008.
In fact, although estimates vary, one analyst recently projected $2.8
billion in industry losses, while another analyst put industrywide
losses between $4 billion and $9 billion for the year, depending on
demand trends. More recently, the airline trade association, the Air
Transport Association, estimated losses of between $5 billion and $10
billion this year, primarily due to escalating fuel prices. For the
first quarter of 2008, airlines reported net operating losses of more
than $1.4 billion.
Fuel Costs Are Increasing and Other Costs May Increase:
Many experts cite rising fuel costs as a key obstacle facing the
airlines for the foreseeable future. The cost of jet fuel has become an
ever-increasing challenge for airlines, as jet fuel climbed to over
$2.85 per gallon in early 2008, and has continued to increase. By
comparison, jet fuel was $1.11 per gallon in 2000, in 2008 dollars
(Fig. 7 illustrates the increase in jet fuel prices since 2000). Some
airlines, particularly Southwest Airlines, reduced the impact of rising
fuel prices on their costs through fuel hedges;[Footnote 24] however,
most of those airlines' hedges are limited or, in the case of
Southwest, will expire within the next few years and may be replaced
with new but more expensive hedges. In an attempt to curtail operating
losses linked to higher fuel costs, most of the largest airlines have
already announced plans to trim domestic capacity during 2008, and some
have added baggage and other fees to their fares. Additionally, nine
airlines have already filed for bankruptcy or ceased operations since
December 2007, with many citing the significant increase in fuel costs
as a contributing factor.[Footnote 25]
Figure 7: Price of U.S. Jet Fuel, 2000--First Quarter 2008:
[See PDF for image]
This figure is a line graph depicting the following data:
Year: 2000;
Cost per Gallon (in 2008 dollars): $1.11.
Year: 2001;
Cost per Gallon (in 2008 dollars): $0.89.
Year: 2002;
Cost per Gallon (in 2008 dollars): $0.86.
Year: 2003;
Cost per Gallon (in 2008 dollars): $0.99.
Year: 2004;
Cost per Gallon (in 2008 dollars): $1.36.
Year: 2005;
Cost per Gallon (in 2008 dollars): $1.88.
Year: 2006;
Cost per Gallon (in 2008 dollars): $2.07.
Year: 2007;
Cost per Gallon (in 2008 dollars): $2.22.
Year: January-February 2008;
Cost per Gallon (in 2008 dollars): $2.85.
Source: AIr Transport Association data.
[End of figure]
In addition to rising fuel costs, other factors may strain airlines'
financial health in the coming years. Labor contract issues are
building at several of the legacy airlines, as labor groups seek to
reverse some of the financial sacrifices that they made to help the
airlines avoid or emerge from bankruptcy. Additionally, because
bankruptcies required the airlines to reduce capital expenditures in
order to bolster their balance sheets, needed investments in fleet
renewal, new technologies, and product enhancements were delayed.
Despite their generally sound financial condition as a group, some low-
cost airlines may be facing cost increases as well. Airline analysts
told us that some low-cost airline cost advantages may diminish as low-
cost airlines begin to face cost pressures similar to those of the
legacy airlines, including aging fleets--and their associated increased
maintenance costs--and workforces with growing experience and seniority
demanding higher pay.
Industry Faces Challenging Revenue Environment from Economic Downturns
and Consumer Fare Expectations:
The recent economic downturn and the long-term downward trend in fares
create a challenging environment for revenue generation. Macroeconomic
troubles--such as the recent tightening credit market and housing
slump--have generally served as early indicators of reduced airline
passenger demand. Currently, airlines are anticipating reduced demand
by the fall of 2008. Additionally, domestic expansion of low-cost
airline operations, as well as an increased ability of consumers to
shop for lower fares more easily in recent years, has not only led to
lower fares in general, but has also contributed to fare "compression"-
-that is, fewer very high-priced tickets are sold today than in the
past. The downward pressure on ticket prices created by the increase of
low-cost airline offerings is pervasive, according to a recent study
and DOT testimony. Experts we spoke with explained that the increased
penetration of low-fare airlines, combined with much greater
transparency in fare pricing, has increased consumer resistance to
higher fares.
Domestic Airline Competition Increased from 1998 through 2006, as Low-
Cost Airlines Expanded:
Competition within the U.S. domestic airline market increased from 1998
through 2006 as reflected by an increase in the average number of
competitors in the top 5,000 city-pair markets,[Footnote 26] the
presence of low-cost airlines in more of these markets, lower fares,
fewer dominated city-pair markets, and a shrinking dominance by a
single airline at some of the nation's largest airports. The average
number of competitors has increased in these markets from 2.9 in 1998
to 3.3 in 2006.[Footnote 27] The number of these markets served by low-
cost airlines increased by nearly 60 percent, from nearly 1,300 to
approximately 2,000 from 1998 through 2006. Average round trip fares
fell 20 percent, after adjusting for inflation, during the same period.
Furthermore, approximately 500 fewer city-pair markets (15 percent) are
dominated by a single airline. Similarly, competition has increased at
the nation's 30 largest airports.
Average Number of Competitors and Low-Cost Airline Penetration Has
Increased in the Top 5,000 Markets:
The average number of competitors in the largest 5,000 city-pair market
has increased since 1998. Overall, the average number of effective
competitors--any airline that carries at least 5 percent of the traffic
in that market--in the top 5,000 markets rose from 2.9 in 1998 to 3.3
in 2006. As figure 8 shows, the number of single airline (monopoly)
markets decreased to less than 10 percent of the top 5,000 markets,
while the number of markets with three or more airlines grew to almost
70 percent in 2006. Monopoly markets are generally the smallest city-
pair markets, which lack enough traffic to support more than one
airline.
Figure 8: Markets by Number of Competitors, 1998-2006:
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1998;
Percentage of markets, 1 competitor: 13%;
Percentage of markets, 2 competitors: 30%;
Percentage of markets, 3 competitors: 56%.
Year: 1999;
Percentage of markets, 1 competitor: 12%;
Percentage of markets, 2 competitors: 29%;
Percentage of markets, 3 competitors: 60%.
Year: 2000;
Percentage of markets, 1 competitor: 12%;
Percentage of markets, 2 competitors: 28%;
Percentage of markets, 3 competitors: 60%.
Year: 2001;
Percentage of markets, 1 competitor: 10%;
Percentage of markets, 2 competitors: 25%;
Percentage of markets, 3 competitors: 65%.
Year: 2002;
Percentage of markets, 1 competitor: 11%;
Percentage of markets, 2 competitors: 26%;
Percentage of markets, 3 competitors: 64%.
Year: 2003;
Percentage of markets, 1 competitor: 11%;
Percentage of markets, 2 competitors: 22%;
Percentage of markets, 3 competitors: 68%.
Year: 2004;
Percentage of markets, 1 competitor: 9%;
Percentage of markets, 2 competitors: 22%;
Percentage of markets, 3 competitors: 69%.
Year: 2005;
Percentage of markets, 1 competitor: 9%;
Percentage of markets, 2 competitors: 21%;
Percentage of markets, 3 competitors: 69%.
Year: 2006;
Percentage of markets, 1 competitor: 9%;
Percentage of markets, 2 competitors: 22%;
Percentage of markets, 3 competitors: 69%.
Source: GAO analysis of DOT data.
Note: This figure includes only passengers carried by an airline with
at least 5 percent of the passengers in a city-pair market; therefore
an unknown number of passengers in each market were not counted.
[End of figure]
Longer-distance markets are more competitive than shorter-distance
markets. For example, among the top 5,000 markets in 2006, longer-
distance markets (greater than 1,000 miles) had on average 3.9
competitors, while routes of less than 250 miles had on average only
1.7 competitors (fig. 9). The difference exists in large part because
longer-distance markets have more viable options for connecting over
more hubs. For example, a passenger on a long-haul flight from
Allentown, Pennsylvania, to Los Angeles, California--a distance of over
2,300 miles--would have options of connecting through 10 different
hubs, including Cincinnati, Chicago, and Detroit. By comparison, a
passenger from Seattle to Portland, Oregon--a distance of just under
300 miles--has no connection options, nor would connections be as
attractive to passengers in short-haul markets.
Figure 9: Average Number of Competitors by Distance (in miles), Top
5,000 Markets, 1998-2006:
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1998;
Average number of competitors, less than 250 miles: 1.5;
Average number of competitors, less than 500 miles: 2.2;
Average number of competitors, less than 750 miles: 2.7;
Average number of competitors, less than 1,000 miles: 2.9;
Average number of competitors, greater than 1,000 miles: 3.5.
Year: 1999;
Average number of competitors, less than 250 miles: 1.5;
Average number of competitors, less than 500 miles: 2.2;
Average number of competitors, less than 750 miles: 2.8;
Average number of competitors, less than 1,000 miles: 3;
Average number of competitors, greater than 1,000 miles: 3.7.
Year: 2000;
Average number of competitors, less than 250 miles: 1.5;
Average number of competitors, less than 500 miles: 2.2;
Average number of competitors, less than 750 miles: 2.8;
Average number of competitors, less than 1,000 miles: 3;
Average number of competitors, greater than 1,000 miles: 3.7.
Year: 2001;
Average number of competitors, less than 250 miles: 1.6;
Average number of competitors, less than 500 miles: 2.3;
Average number of competitors, less than 750 miles: 3;
Average number of competitors, less than 1,000 miles: 3.2;
Average number of competitors, greater than 1,000 miles: 3.9.
Year: 2002;
Average number of competitors, less than 250 miles: 1.6;
Average number of competitors, less than 500 miles: 2.3;
Average number of competitors, less than 750 miles: 2.9;
Average number of competitors, less than 1,000 miles: 3.1;
Average number of competitors, greater than 1,000 miles: 3.7.
Year: 2003;
Average number of competitors, less than 250 miles: 1.6;
Average number of competitors, less than 500 miles: 2.4;
Average number of competitors, less than 750 miles: 3;
Average number of competitors, less than 1,000 miles: 3.2;
Average number of competitors, greater than 1,000 miles: 3.8.
Year: 2004;
Average number of competitors, less than 250 miles: 1.7;
Average number of competitors, less than 500 miles: 2.4;
Average number of competitors, less than 750 miles: 3;
Average number of competitors, less than 1,000 miles: 3.2;
Average number of competitors, greater than 1,000 miles: 3.8.
Year: 2005;
Average number of competitors, less than 250 miles: 1.7;
Average number of competitors, less than 500 miles: 2.4;
Average number of competitors, less than 750 miles: 3.1;
Average number of competitors, less than 1,000 miles: 3.3;
Average number of competitors, greater than 1,000 miles: 3.9.
Year: 2006;
Average number of competitors, less than 250 miles: 1.7;
Average number of competitors, less than 500 miles: 2.4;
Average number of competitors, less than 750 miles: 3.1;
Average number of competitors, less than 1,000 miles: 3.3;
Average number of competitors, greater than 1,000 miles: 3.9.
Source: GAO analysis of DOT data.
Note: This figure includes only passengers carried by an airline with
at least 5 percent of passengers in a city-pair market; therefore an
unknown number of passengers in each market were not counted.
[End of figure]
Low-Cost Airlines Have Increased Their Presence among the Top 5,000
Markets:
Low-cost airlines have increased the number of markets and passengers
served and their overall market share since 1998. The number of the top
5,000 markets served by a low-cost airline jumped from approximately
1,300 to over 2,000 from 1998 through 2006, an increase of nearly 60
percent. Most of that increase is the result of low-cost airlines
expanding their service into longer-haul markets than they typically
served in 1998. Specifically, the number of markets served by low-cost
airlines that were longer than 1,000 miles has increased by nearly 45
percent since 1998. For example, in 1998 Southwest Airlines served
about 360 markets over 1,000 miles, and by 2006 it served over 670 such
markets.
Low-cost airlines' expansion increased the extent to which they
competed directly with legacy airlines. In 1998, low-cost airlines
operated in 25 percent of the top 5,000 markets served by legacy
airlines and provided a low-cost alternative to approximately 60
percent of passengers.[Footnote 28] By 2006, low-cost airlines were
competing directly with legacy airlines in 42 percent of the top 5,000
markets (an additional 756 markets) and provided a low-cost alternative
to approximately 80 percent of passengers.
In all, the growth of low-cost airlines into more markets and providing
service to more passengers contributed to the shift in passenger
traffic between legacy and low-cost airlines. Overall, low-cost
airlines' share of passenger traffic increased from 25 percent in 1998
to 33 percent in 2006, while legacy airlines' domestic share of
passenger traffic fell from 70 percent to 65 percent from 1998 through
2006 (see fig. 10). Low-cost airlines carried 78 million passengers in
1998 and 125 million in 2006--an increase of 59 percent.[Footnote 29]
Figure 10: Industry Share by Legacy and Low-Cost Airlines, 1998 and
2006:
[See PDF for image]
This figure contains two pie-charts depicting the following data:
Industry Share by Legacy and Low-Cost Airlines, 1998:
Legacy airlines: 70%;
Low-cost airlines: 25%;
Other: 5%.
Industry Share by Legacy and Low-Cost Airlines, 2006:
Legacy airlines: 65%;
Low-cost airlines: 33%;
Other: 2%.
Source: GAO analysis of DOT data.
Note: These figures include only passengers carried by airlines with at
least 5 percent of passengers in a city-pair market; therefore an
unknown number of passengers in each market were not counted. The
legacy airline category also includes regional airline passengers. The
category "other" includes airlines not classified as legacy or low-cost
airlines such as Hawaiian Airlines, Aloha Airlines, and Allegiant Air.
[End of figure]
Average Fares Have Declined for Both Legacy and Low-Cost Airlines:
Airfares in the top 5,000 markets, one of the key gauges of
competition, have fallen in real terms since 1998. From 1998 through
2006, the round-trip average airfare fell from $198 to $161 (in 2006
dollars), a decrease of nearly 20 percent. As figure 11 shows, average
fares have fallen across all distances. In 1998, average fares ranged
from $257 for trips longer than 1,000 miles to $129 for trips of 250
miles or less. Since that time, however, fares have fallen considerably
on the longest trips, and as of 2006, averaged just $183, a drop of 29
percent since 1998. Average fares for the shortest trips have not
fallen as much. For trips of 250 miles or less, average fares as of
2006 have fallen 6 percent, to $121.
Figure 11: Average Fares by Distance, 1998-2006 (2006 dollars):
[See PDF for image]
This figure is a multiple line graph depicting the following data:
Year: 1998;
Average fare, less than 250 miles: $129;
Average fare, less than 500 miles: $138.1;
Average fare, less than 750 miles: $185;
Average fare, less than 1,000 miles: $200.1;
Average fare, greater than 1,000 miles: $256.9.
Year: 1999;
Average fare, less than 250 miles: $129;
Average fare, less than 500 miles: $139;
Average fare, less than 750 miles: $182.7;
Average fare, less than 1,000 miles: $199.1;
Average fare, greater than 1,000 miles: $250.4.
Year: 2000;
Average fare, less than 250 miles: $139;
Average fare, less than 500 miles: $147.3;
Average fare, less than 750 miles: $190.1;
Average fare, less than 1,000 miles: $201.2;
Average fare, greater than 1,000 miles: $251.9;
Year: 2001;
Average fare, less than 250 miles: $125.3;
Average fare, less than 500 miles: $131.7;
Average fare, less than 750 miles: $172.8;
Average fare, less than 1,000 miles: $179.9;
Average fare, greater than 1,000 miles: $217.9.
Year: 2002;
Average fare, less than 250 miles: $118.9;
Average fare, less than 500 miles: $127.4;
Average fare, less than 750 miles: $161.2;
Average fare, less than 1,000 miles: $168.2;
Average fare, greater than 1,000 miles: $201.3.
Year: 2003;
Average fare, less than 250 miles: $120.7;
Average fare, less than 500 miles: $130.7;
Average fare, less than 750 miles: $161.7;
Average fare, less than 1,000 miles: $166.4;
Average fare, greater than 1,000 miles: $195.
Year: 2004;
Average fare, less than 250 miles: $117.4;
Average fare, less than 500 miles: $126.3;
Average fare, less than 750 miles: $154.3;
Average fare, less than 1,000 miles: $158.9;
Average fare, greater than 1,000 miles: $180.6.
Year: 2005;
Average fare, less than 250 miles: $117.6;
Average fare, less than 500 miles: $123.4;
Average fare, less than 750 miles: $150.6;
Average fare, less than 1,000 miles: $155;
Average fare, greater than 1,000 miles: $180.2.
Year: 2006;
Average fare, less than 250 miles: $121;
Average fare, less than 500 miles: $127.3;
Average fare, less than 750 miles: $156.9;
Average fare, less than 1,000 miles: $160.6;
Average fare, greater than 1,000 miles: $183.2.
Source: GAO analysis of DOT data.
Note: This figure includes only passengers carried by an airline with
at least 5 percent of passengers in a city-pair market, therefore an
unknown number of passengers in each market were not counted.
[End of figure]
Average fares tend to be lower in markets where low-cost airlines are
present. Prior studies have shown that the presence of low-cost
airlines in a market is associated with lower fares for all passengers
in that market. In 1998, over 1,300 of the top 5,000 markets had a low-
cost airline present, with an average fare of $167, as opposed to the
3,800 markets without low-cost competition, where the average fares
averaged around $250. This same relationship was maintained in 2006,
when low-cost airlines' presence grew to over 2,000 markets, and the
average fare in these markets was $153, while the average fare in 2006
legacy airline-only markets was $194.[Footnote 30]
Fewer Markets Are Dominated by a Single Airline:
The number of the top 5,000 markets dominated by a single airline has
declined. Since 1998, the number of dominated markets--markets with one
airline with more than 50 percent of passengers--declined as
competitors expanded into more markets. The number of dominated markets
declined by approximately 500 markets, from 3,500 to 3,000 (or 15
percent) from 1998 through 2006, while the number of nondominated
markets correspondingly rose by approximately 500, from approximately
1,400 to 1,900 markets (or 37 percent). (See fig. 12.)
Figure 12: The Number of Dominated and Nondominated Markets, Top 5,000
Markets, 1998-2006:
[See PDF for image]
This figure is a combination vertical bar and line graph depicting the
following data:
Year: 1998;
Nondominated markets: 1440;
Dominated markets: 3559;
Year: 1999;
Nondominated markets: 1536;
Dominated markets: 3463.
Year: 2000;
Nondominated markets: 1572;
Dominated markets: 3428.
Year: 2001;
Nondominated markets: 1816;
Dominated markets: 3184.
Year: 2002;
Nondominated markets: 1776;
Dominated markets: 3224.
Year: 2003;
Nondominated markets: 1859;
Dominated markets: 3141.
Year: 2004;
Nondominated markets: 1875;
Dominated markets: 3125;
Year: 2005; 3035
Nondominated markets: 1965;
Dominated markets: 3035.
Year: 2006;
Nondominated markets: 1985;
Dominated markets: 3028.
Source: GAO analysis of DOT data.
Note: This figure includes only passengers carried by an airline with
at least 5 percent of passengers in a city-pair market; therefore an
unknown number of passengers in each market were not counted.
[End of figure]
Although there are fewer dominated markets among the top 5,000 markets,
further analysis shows that low-cost airlines have increased their
share of dominated markets while legacy airlines lost share. In 1998
legacy airlines dominated approximately 3,000 of the top 5,000 markets,
but in 2006 that number fell to approximately 2,400. At the same time,
low-cost airlines increased their share of dominated markets from about
300 markets in 1998 to approximately 500 markets. Appendix III shows
the number of dominated markets by airline in 2006. Low-cost airlines
tend to operate in larger dominated markets than legacy airlines. For
example, in 2006, legacy airlines carried an average of 55,000
passengers per dominated market, while low-cost airlines carried an
average of 165,000 passengers per dominated market.[Footnote 31] This
difference reflects the low-cost airlines' targeting of high-density
markets and the nature of hub-and-spoke networks operated by legacy
airlines.
Competition Has Increased at the Nation's Largest Airports:
Competition has generally increased at the nation's largest airports.
Airline dominance at many of the largest domestic airports in the
United States has decreased as competition has increased in the
industry. Although legacy airlines have a dominant position--carrying
at least 50 percent of passenger traffic--at 16 of the nation's 30
largest airports.[Footnote 32] One-half of these 16 dominated airports
saw a decline in passenger traffic from 1998 through 2006 (see app.
III). Of the 16 airports dominated by a single airline, 14 were
dominated by legacy airlines. At 9 of these airports, the second
largest airline carried less than 10 percent of passenger traffic,
while at the other 5 airports a low-cost airline carried 10 percent or
more of passenger traffic.
Figure 13: Change in Passenger Share at Selected Dominated Airports by
Dominant Airline, 1998 and 2006:
[See PDF for image]
This figure contains a map of the continental United States with the
following information depicted:
Change in Passenger Share at Selected Dominated Airports by Dominant
Airline, 1998 and 2006:
Airport: Atlanta;
Dominant airline: Delta;
Change in Passenger Share, 1998 and 2006: 83% - 71%.
Airport: Baltimore-Washington;
Dominant airline: Southwest;
Change in Passenger Share, 1998 and 2006: less than 50% - 55%.
Airport: Charlotte;
Dominant airline: US Airways;
Change in Passenger Share, 1998 and 2006: 92% - 87%.
Airport: Chicago-Midway;
Dominant airline: Southwest;
Change in Passenger Share, 1998 and 2006: 53% - 74%.
Airport: Cincinnati;
Dominant airline: Delta;
Change in Passenger Share, 1998 and 2006: 95% - 93%.
Airport: Dallas-Fort Worth;
Dominant airline: American;
Change in Passenger Share, 1998 and 2006: 70% - 85%.
Airport: Denver;
Dominant airline: United;
Change in Passenger Share, 1998 and 2006: 71% - 54%.
Airport: Detroit;
Dominant airline: Northwest;
Change in Passenger Share, 1998 and 2006: 71% - 76%.
Airport: Houston-Intercontinental;
Dominant airline: Continental;
Change in Passenger Share, 1998 and 2006: 84% - 87%.
Airport: Miami;
Dominant airline: American;
Change in Passenger Share, 1998 and 2006: 59% - 72%.
Airport: Minneapolis;
Dominant airline: Northwest;
Change in Passenger Share, 1998 and 2006: 81% - 78%.
Airport: Newark;
Dominant airline: Continental;
Change in Passenger Share, 1998 and 2006: 61% - 68%.
Airport: Philadelphia;
Dominant airline: US Airways;
Change in Passenger Share, 1998 and 2006: 67% - 59%.
Airport: Salt Lake City;
Dominant airline: Delta;
Change in Passenger Share, 1998 and 2006: 74% - 71%.
Airport: San Francisco;
Dominant airline: United;
Change in Passenger Share, 1998 and 2006: 58% - 54%.
Airport: Washington-Dulles;
Dominant airline: United;
Change in Passenger Share, 1998 and 2006: 51% - 57%.
Source: GAO analysis of DOT data; map (MapInfo).
[End of figure]
Airlines Seek to Combine to Increase Profits and Improve Financial
Viability, but Challenges Exist:
Airlines seek mergers and acquisitions as a means to increase
profitability and long-term financial viability, but must weigh those
potential benefits against the operational and regulatory costs and
challenges posed by combinations. A merger's or acquisition's potential
to increase short-term profitability and long-term financial viability
stems from both anticipated cost reductions and increased revenues.
Cost reductions may be achieved through merger-generated operating
efficiencies--for example, through the elimination of duplicative
operations. Cost savings may also flow from adjusting or reducing the
combined airline's capacity and adjusting its mix of aircraft. Airlines
may also seek mergers and acquisitions as a means to increase their
revenues through increased fares in some markets--stemming from
capacity reductions and increased market share in existing markets--and
an expanded network, which creates more market pairs both domestically
and internationally. Nonetheless, increased fares in these markets may
be temporary because other airlines could enter the affected markets
and drive fares back down. Mergers and acquisitions also present
several potential challenges to airline partners, including labor and
other integration issues--which may not only delay (or even preclude)
consolidation, but also offset intended gains. DOJ antitrust review is
another potential challenge, and one that we discuss in greater detail
in the next section.
Airline Mergers and Acquisitions Aim to Increase Profitability by
Reducing Costs and Increasing Revenues:
A merger or acquisition may produce cost savings by enabling an airline
to reduce or eliminate duplicative operating costs. Based on past
mergers and acquisitions and experts we consulted, a range of potential
cost reductions can result, such as the elimination of duplicative
service, labor, and operations--including inefficient (or redundant)
hubs or routes--and operational efficiencies from the integration of
computer systems, and similar airline fleets. Other cost savings may
stem from facility consolidation, procurement savings, and working
capital and balance sheet restructuring, such as renegotiating aircraft
leases. According to US Airways officials and analyst reports, for
example, the merger of America West and US Airways generated $750
million in cost savings through the integration of information
technology, combined overhead operations, and facilities closings.
Airlines may also pursue mergers or acquisitions to more efficiently
manage capacity--both to reduce operating costs and to generate
revenue--in their networks. A number of experts we spoke with stated
that given recent economic pressures, particularly increased fuel
costs, one motive for mergers and acquisitions is the opportunity to
lower costs by reducing redundant capacity. Experts have said that
industry mergers and acquisitions could lay the foundation for more
rational capacity reductions in highly competitive domestic markets and
could help mitigate the impact of economic cycles on airline cash flow.
In addition, capacity reductions from a merger or acquisition could
also serve to generate additional revenue through increased fares on
some routes; over the long-term, however, those increased fares may be
brought down because other airlines, especially low-cost airlines,
could enter the affected markets and drive prices back down. In the
absence of mergers and acquisitions and facing ongoing cost pressures,
airlines have already begun to reduce their capacity in 2008.
Airlines may also seek to merge with or acquire an airline as a way to
generate greater revenues from an expanded network, which serves more
city-pair markets, better serves passengers, and thus enhances
competition. Mergers and acquisitions may generate additional demand by
providing consumers more domestic and international city-pair
destinations. Airlines with expansive domestic and international
networks and frequent flier benefits particularly appeal to business
traffic, especially corporate accounts. Results from a recent Business
Traveler Coalition (BTC) survey indicate that about 53 percent of the
respondents were likely to choose a particular airline based upon the
extent of its route network.[Footnote 33] Therefore, airlines may use a
merger or acquisition to enhance their networks and gain complementary
routes, potentially giving the combined airline a stronger platform
from which to compete in highly profitable markets.
Mergers and acquisitions can also be used to generate greater revenues
through increased market share and fares on some routes. For example,
some studies of airline mergers and acquisitions during the 1980s
showed that prices were higher on some routes from the airline's hubs
after the combination was completed.[Footnote 34] At the same time,
even if the combined airline is able to increase prices in some
markets, the increase may be transitory if other airlines enter the
markets with sufficient presence to counteract the price increase. In
an empirical study of airline mergers and acquisitions up to 1992,
Winston and Morrison suggest that being able to raise prices or stifle
competition does not play a large role in airlines' merger and
acquisition decisions.[Footnote 35] Numerous studies have shown,
though, that increased airline dominance at an airport results in
increased fare premiums, in part because of competitive barriers to
entry.[Footnote 36] Several recent merger and acquisition attempts
(United and US Airways in 2000, Northwest and Continental in 1998) were
blocked because of opposition by DOJ because of concerns about
anticompetitive impacts. Ultimately, however, each merger and
acquisition differs in the extent to which cost reductions and revenue
increases are factors.
Cost reductions and the opportunity to obtain increased revenue could
serve to bolster a merged airline's financial condition, enabling the
airline to better compete in a highly competitive international
environment. For example, officials from US Airways stated that as a
result of its merger with America West, the airline achieved a
significant financial transformation, and they cited this as a reason
why airlines merge. Many industry experts believe that the United
States will need larger, more economically stable airlines to be able
to compete with the merging and larger foreign airlines that are
emerging in the global economy. The airline industry is becoming
increasingly global; for example, the Open Skies agreement between the
United States and the European Union became effective in March 2008.
[Footnote 37] Open Skies has eliminated previous government controls on
these routes (especially to and from London's Heathrow Airport),
presenting U.S. and European Union airlines with great opportunities as
well as competition. In order to become better prepared to compete
under Open Skies, global team antitrust immunity applications have
already been filed with DOT.[Footnote 38] Antitrust immune alliances
differ from current code-share agreements or alliance group
partnerships because they allow partners not only to code-share but
also to jointly plan and market their routes and schedules, share
revenue, and possibly even jointly operate flights.[Footnote 39]
According to one industry analyst, this close global cooperation may
facilitate domestic consolidation as global alliance partners focus on
maximizing synergies for both increasing revenues and reducing costs
with their global alliance teams.
Potential Challenges to Mergers and Acquisitions Include Integration
Issues and Regulatory Challenges:
We identified a number of potential barriers to consummating a
combination, especially in terms of operational challenges that could
offset a merger's or acquisition's intended gains. The most significant
operational challenges involve the integration of workforces,
organizational cultures, aircraft fleets, and information technology
systems and processes. Indeed, past airline mergers and acquisitions
have proven to be difficult, disruptive, and expensive, with costs in
some cases increasing in the short term as the airlines integrate.
Airlines also face potential challenges to mergers and acquisitions
from DOJ's antitrust review, discussed in the next section.
Workforce integration is often particularly challenging and expensive,
and involves negotiation of new labor contracts. Labor groups--
including pilots, flight attendants, and mechanics--may be able to
demand concessions from the merging airlines during these negotiations,
several experts explained, because labor support would likely be
required in order for a merger or acquisition to be successful. Some
experts also note that labor has typically failed to support mergers,
fearing employment or salary reductions. Obtaining agreement from each
airline's pilots' union on an integrated pilot seniority list--which
determines pilots' salaries, as well as what equipment they can fly--
may be particularly difficult. According to some experts, as a result
of these labor integration issues and the challenges of merging two
work cultures, airline mergers have generally been unsuccessful. For
example, although the 2005 America West-US Airways merger has been
termed a successful merger by many industry observers, labor
disagreements regarding employee seniority, and especially pilot
seniority, remain unresolved. More recently, labor integration issues
derailed merger talks--albeit temporarily--between Northwest Airlines
and Delta Air Lines in early 2008, when the airlines' labor unions were
unable to agree on pilot seniority list integration. Recently, the
Consolidated Appropriations Act of 2008 included a labor protective
provision that applies to the integration of employees of covered air
carriers, and could affect this issue.[Footnote 40] Furthermore, the
existence of distinct corporate cultures can influence whether two
firms will be able to merge their operations successfully. For example,
merger discussions between United Airlines and US Airways broke down in
1995 because the employee-owners of United feared that the airlines'
corporate cultures would clash.
The integration of two disparate aircraft fleets may also be costly.
Combining two fleets may increase costs associated with pilot training,
maintenance, and spare parts. For example, a merger between Northwest
and Delta would result in an airline with 10 different aircraft types.
These costs may, however, be reduced post-merger by phasing out certain
aircraft from the fleet mix. Pioneered by Southwest and copied by other
low-cost airlines, simplified fleets have enabled airlines to lower
costs by streamlining maintenance operations and reducing training
times. If an airline can establish a simplified fleet, or "fleet
commonality"--particularly by achieving an efficient scale in a
particular aircraft--then many of the cost efficiencies of a merger or
acquisition may be set in motion by facilitating pilot training, crew
scheduling, maintenance integration, and inventory rationalization.
Finally, integrating information technology processes and systems can
also be problematic and time-consuming for a merging airline. For
example, officials at US Airways told us that while some cost
reductions were achieved within 3 to 6 months of its merger with
America West, the integration of information technology processes has
taken nearly 2 ½ years. Systems integration issues are increasingly
daunting as airlines attempt to integrate a complex mix of modern in-
house systems, dated mainframe systems, and outsourced information
technology. The US Airways-America West merger highlighted the
potential challenges associated with combining reservations systems, as
there were initial integration problems.
The Department of Justice's Antitrust Review Is a Critical Step in the
Airline Merger and Acquisition Process:
The DOJ's review of airline mergers and acquisitions is a key step for
airlines hoping to consummate a merger. The Guidelines provide a five-
part integrated process under which mergers and acquisitions are
assessed by DOJ. In addition, DOT plays an advisory role for DOJ and,
if the combination is consummated, may conduct financial and safety
reviews of the combined entity under its regulatory authority. Public
statements by DOJ officials and a review of the few airline mergers and
acquisitions evaluated by DOJ over the last 10 years also provide some
insight into how DOJ applies the Guidelines to the airline industry.
While each merger and acquisition review is case specific, our analysis
shows that changes in the airline industry, such as increased
competition in international and domestic markets, could lead to entry
being more likely than in the past. Additionally, the Guidelines have
evolved to provide clarity as to the consideration of efficiencies, an
important factor in airline mergers.
The Department of Justice Uses the Guidelines to Identify Antitrust
Concerns:
Most proposed mergers or acquisitions must be reviewed by DOJ. In
particular, under the Hart-Scott-Rodino Act, an acquisition of voting
securities and/or assets above a set monetary amount must be reported
to DOJ (or the Federal Trade Commission for certain industries) so the
department can determine whether the merger or acquisition poses any
antitrust concerns.[Footnote 41] To analyze whether a proposed merger
or acquisition raises antitrust concerns--whether the proposal will
create or enhance market power or facilitate its exercise[Footnote 42]-
-DOJ follows an integrated five-part analytical process set forth in
the Guidelines.[Footnote 43] First, DOJ defines the relevant product
and geographic markets in which the companies operate and determines
whether the merger is likely to significantly increase concentration in
those markets. Second, DOJ examines potential adverse competitive
effects of the merger, such as whether the merged airlines will be able
to charge higher prices or restrict output for the product or service
it sells. Third, DOJ considers whether other competitors are likely to
enter the affected markets and whether they would counteract any
potential anticompetitive effects that the merger might have posed.
Fourth, DOJ examines the verified "merger specific" efficiencies or
other competitive benefits that may be generated by the merger and that
cannot be obtained through any other practical means. Fifth, DOJ
considers whether, absent the merger or acquisition, one of the firms
is likely to fail, causing its assets to exit the market. The
commentary to the Guidelines makes clear that DOJ does not apply the
Guidelines as a step-by-step progression, but rather as an integrated
approach in deciding whether the proposed merger or acquisition would
create antitrust concerns.
DOJ first assesses competitive effects at a city-pair market level. In
its review of past airline mergers and acquisitions, DOJ defined the
relevant market as scheduled airline service between individual city-
pair markets because, according to DOJ, that is the where airlines
compete for passengers.[Footnote 44]
Second, DOJ assesses likely potential adverse competitive effects---
specifically, whether a merged airline is likely to exert market power
(maintain prices above competitive levels for a significant period of
time) in particular city-pair markets. Generally, a merger or
acquisition raises anticompetitive concerns to the extent it eliminates
a competitor from the markets that both airlines competed in[Footnote
45]. When United Airlines and US Airways proposed merging in 2000, DOJ
concluded that the proposed merger would create monopolies or duopolies
in 30 markets with $1.6 billion in revenues, lead to higher fares, and
harm consumers on airline routes throughout the United States and on
some international routes. The department was particularly concerned
about reduced competition in certain markets--nonstop city-pair markets
comprising the two airlines' hub airports, certain other nonstop
markets on the East Coast that were served by both airlines, some
markets served via connecting service by these airlines along the East
Coast, and certain other markets previously dominated by one or both of
these airlines. DOJ estimated that the merger would have resulted in
higher air fares for businesses and millions of customers. Similarly,
in 2000 DOJ sought divestiture by Northwest Airlines of shares in
Continental Airlines after the airline had acquired more than 50
percent of the voting interest in Continental. DOJ argued that the
acquisition would particularly harm consumers in 7 city-pair markets
that linked Northwest and Continental airport hubs, where the two
airlines had a virtual duopoly. DOJ also pointed to potential
systemwide effects of removing a large competitor. Although DOJ
objected to the proposed merger of United and US Airways and the
acquisition of Continental by Northwest, it did not challenge a merger
between America West and US Airways in 2005 because it found little
overlap between city-pair markets served by the two airlines.
DOJ, under the Guidelines' third element, assesses whether new entry
would counter the increased market power of a merged airline. If DOJ
determines that the merger is likely to give the merging airlines the
ability to raise prices or curtail service in a city-pair market, DOJ
assesses whether a new entrant would likely begin serving the city-pair
in response to a potential price increase to replace the lost
competition and deter or counter the price increase. For such entry to
resolve concerns about a market, the Guidelines require that it be
"timely, likely, and sufficient" to counteract the likely
anticompetitive effects presented by the merger. According to DOJ, the
inquiry considers an entry time horizon of 2 years and is fact specific
rather than based on theory.[Footnote 46] Some factors that may be
considered in assessing likelihood of entry include whether a potential
entrant has a hub in one of the cities in a city-pair market of concern
so that the potential entrant is well placed to begin service, whether
there are constraints (such as slot controls or shortage of gates) that
could limit effective entry, and whether the potential entrant would be
able to provide the frequency of service that would be required to
counteract the merged firm's presence. For example, if the merging
parties operate the only hubs at both end points of a market, it is
unlikely that a new entrant airline would find it profitable to offer
an effective level of service. In its complaint challenging Northwest
Airlines' attempted acquisition of a controlling interest in
Continental, DOJ alleged that significant entry barriers limited new
competition for the specific city-pair markets of issue. For example,
the complaint alleged that airlines without a hub at one of the end
points of the affected hub-to-hub markets were unlikely to enter due to
the cost advantages of the incumbents serving that market. In city-pair
markets where the merging airlines would have a large share of
passengers traveling on connecting flights, DOJ asserted that other
airlines were unlikely to enter due to factors such as the light
traffic on these routes and the proximity of Northwest's and
Continental's hubs to the markets as compared to other airlines' more
distant hubs.
Fourth, DOJ considers whether merger-specific efficiencies are
"cognizable," that is, whether they can be verified and do not arise
from anticompetitive reductions in output or services. Cognizable
efficiencies, while not specifically defined under the Guidelines,
could include any consumer benefit resulting from a merger--including
enhanced service through an expanded route network and more seamless
travel--as well as cost savings accruing to the merged airline (for
example, from reducing overhead or increased purchasing power that may
ultimately benefit the consumer).[Footnote 47] Because efficiencies are
difficult to quantify and verify, DOJ requires merger partners to
substantiate merger benefits. DOJ considers only those efficiencies
likely to be accomplished by the proposed merger and unlikely to be
achieved through practical, less restrictive alternatives, such as code-
sharing agreements or alliances. For example, in its October 2000
complaint against Northwest Airlines for its acquisition of a
controlling interest in Continental, DOJ noted that Northwest had not
adequately demonstrated that the efficiencies it claimed from the
merger could not be gained from other, less anticompetitive means,
particularly their marketing alliance, which DOJ did not challenge.
Finally, DOJ considers the financial standing of merger partners--if
one of the partners is likely to fail without the merger and its assets
were to exit the market. According to the Guidelines, a merger isn't
likely to create or enhance market power or facilitate its exercise if
imminent failure of one of the merging firms would cause the assets of
that firm to exit the relevant market. For instance, the acquisition of
TWA by American Airlines in 2001 was cleared because TWA was not likely
to emerge from its third bankruptcy and there was no less
anticompetitive purchaser.
In making its decision as to whether the proposed merger is likely
anticompetitive--whether it is likely to create or enhance market power
or facilitate its exercise--DOJ considers the particular circumstances
of the merger as it relates to the Guidelines' five-part inquiry. The
greater the potential anticompetitive effects, the greater must be the
offsetting verifiable efficiencies for DOJ to clear a merger. However,
according to the Guidelines, efficiencies almost never justify a merger
if it would create a monopoly or near monopoly. If DOJ concludes that a
merger threatens to deprive consumers of the benefits of competitive
air service, then it will seek injunctive relief in a court proceeding
to block the merger from being consummated. In some cases, the parties
may agree to modify the proposal to address anticompetitive concerns
identified by DOJ--for example, selling airport assets or giving up
slots at congested airports--in which case DOJ ordinarily files a
complaint along with a consent decree that embodies the agreed-upon
changes.
The Department of Transportation Also Reviews Proposed Mergers to
Ensure That They Are in the Public Interest:
DOT conducts its own analyses of airline mergers and acquisitions.
While DOJ is responsible for upholding antitrust laws, DOT will conduct
its own competitive analysis and provide it to DOJ in an advisory
capacity. In addition, presuming the merger moves forward after DOJ
review, DOT can undertake several other reviews if the situation
warrants it. Before commencing operations, any new, acquired, or merged
airlines must obtain separate authorizations from DOT--"economic"
authority from the Office of the Secretary and "safety" authority from
the Federal Aviation Administration (FAA). The Office of the Secretary
is responsible for deciding whether applicants are fit, willing, and
able to perform the service or provide transportation. To make this
decision, the Secretary assesses whether the applicants have the
managerial competence, disposition to comply with regulations, and
financial resources necessary to operate a new airline. FAA is
responsible for certifying that the aircraft and operations conform to
the safety standards prescribed by the Administrator, for instance,
that the applicants' manuals, aircraft, facilities, and personnel meet
federal safety standards. Also, if a merger or other corporate
transaction involves the transfer of international route authority, DOT
is responsible for assessing and approving all transfers to ensure that
they are consistent with the public interest. DOT is responsible for
approving such matters to ensure that they are consistent with the
public interest.[Footnote 48] Finally, DOT also reviews the merits of
any airline merger or acquisition and submits its views and relevant
information in its possession to the DOJ. DOT also provides some
essential data that DOJ uses in its review.
Changes in the Airline Industry and in the Guidelines May Affect the
Factors Considered in DOJ's Merger Review Process:
Changes in the airline industry's structure and in the Guidelines may
affect the factors considered in DOJ's merger review process. DOJ's
review is not static, as it considers both market conditions and
current antitrust thinking at the time of the merger review. According
to our own analysis and other studies, the industry has grown more
competitive in recent years, and if that trend is not reversed by
increased fuel prices, it will become more likely that market entry by
other airlines, and possibly low-cost airlines, will bring fares back
down in markets in which competition is initially reduced due to a
merger. In addition, the ongoing liberalization of international
markets and, in particular, cross-Atlantic routes under the U.S.-
European Union Open Skies agreement, has led to increased competition
on these routes. Finally, as DOJ and the Federal Trade Commission have
evolved in their understanding of how to integrate merger-specific
efficiencies into the evaluation process, the Guidelines have also
changed.
Increased Competition Indicates That Airline Entry May Be More Likely
than in the Past:
A variety of characteristics of the current airline marketplace
indicate that airline entry into markets vacated by a merger partner
may be more likely than in the past, unless higher fuel prices
substantially alter recent competitive trends in the industry. First,
as we have noted, competition on airline routes--spurred by the growth
and penetration of low-cost airlines--has increased, while the
dominance of legacy airlines has been mitigated in recent years.
According to our study, about 80 percent of passengers are now flying
routes on which at least one low-cost airline is present. Moreover,
some academic studies suggest that low-cost carrier presence has become
a key factor in competition and pricing in the industry in recent
years. Two articles suggest that the presence of Southwest Airlines on
routes leads to lower fares and that even their presence--or entry into
end-point airports of a market pair--may be associated with lower
prices on routes.[Footnote 49] Another recent study found that fare
differentials between hub and nonhub airports--once measured to be
quite substantial--are not as great as they used to be, which suggests
a declining relevance of market power stemming from airline hub
dominance.[Footnote 50] The study did find, however that when there is
little presence of low-cost airlines at a major carrier's hub airport,
the hub premium continues to remain substantial. However, our
competition analysis and these studies predate the considerable
increase in fuel prices that has occurred this year and, if permanent,
could affect competition and airlines' willingness to expand into new
markets.
In some past cases, DOJ rejected the contention that new entry will be
timely, likely, and sufficient to counter potential anticompetitive
effects. For example, in 2000, when DOJ challenged Northwest Airline's
proposed acquisition of a controlling interest in Continental Airlines,
a DOJ official explained that the department considered it unrealistic
to assume that the prospect of potential competition--meaning the
possibility of entry into affected markets by other airlines--would
fully address anticompetitive concerns, given network airline hub
economics at the time.[Footnote 51]
Merger Guidelines Have Evolved to Reflect Federal Antitrust
Authorities' Greater Understanding of Efficiencies:
The Guidelines have been revised several times over the years, and
particularly the most recent revision, in 1997, reflects a greater
understanding by federal antitrust authorities in how to assess and
weigh efficiencies. In 1968, the consideration of efficiencies was
allowed only as a defense in exceptional circumstances. In 1984, the
Guidelines were revised to incorporate efficiencies as part of the
competitive effects analysis, rather than as a defense. However, the
1984 Guidelines also required "clear and convincing" evidence that a
merger will achieve significant net efficiencies. In 1992, the
Guidelines were revised again, eliminating the "clear and convincing"
standard. The 1997 revision explains that efficiencies must be
"cognizable," that is, merger-specific efficiencies that can be
verified and are net of any costs and not resulting solely from a
reduction in service or output. In considering the efficiencies, DOJ
weighs whether the efficiencies may offset the anticompetitive effects
in each market.[Footnote 52] According to the Guidelines, in some
cases, merger efficiencies are not strictly in the relevant market, but
are so inextricably linked with it that a partial divestiture or other
remedy could not feasibly eliminate the anticompetitive effect in the
relevant market without sacrificing the efficiencies in other
markets.[Footnote 53] Under those circumstances, DOJ will take into
account across-the-board efficiencies or efficiencies that are realized
in markets other than those in which the harm occurs. According to DOJ
and outside experts, the evolution of the Guidelines reflects an
attempt to provide clarity as to the consideration of efficiencies, an
important factor in the merger review process.
Agency Comments:
We provided a draft of this report to DOT and DOJ for their review and
comment. Both DOT and DOJ officials provided some clarifying and
technical comments that we incorporated where appropriate.
We provided copies of this report to the Attorney General, the
Secretary of Transportation, and other interested parties and will make
copies available to others upon request. In addition, this report will
be available at no charge on our Web site at [hyperlink,
http://www.gao.gov].
If you or your staff have any questions on matters discussed in this
report, please contact me on (202) 512-2834 or at heckerj@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. Key contributors
to this report can be found in appendix IV.
Signed by:
JayEtta Z. Hecker:
Director, Physical Infrastructure Issues:
[End of section]
Appendix I: Scope and Methodology:
To review the financial condition of the U.S. airline industry, we
analyzed financial and operational data, reviewed relevant studies, and
interviewed industry experts. We analyzed DOT Form 41 financial and
operational data submitted to DOT by airlines between the years 1998
through 2007. We obtained these data from BACK Aviation Solutions, a
private contractor that provides online access to U.S. airline
financial, operational, and passenger data with a query-based user
interface. To assess the reliability of these data, we reviewed the
quality control procedures used by BACK Aviation and DOT and
subsequently determined that the data were sufficiently reliable for
our purposes. We also reviewed government and expert data analyses,
research, and studies, as well as our own previous studies. The expert
research and studies, where applicable, were reviewed by a GAO
economist or were corroborated with additional sources to determine
that they were sufficiently reliable for our purposes. Finally, we
conducted interviews with government officials, airlines and their
trade associations, credit and equity analysts, industry experts, and
academics. The analysts, experts, and academics were identified and
selected based on literature review, prior GAO work, and
recommendations from within the industry.
To determine if and how the competitiveness of the U.S. airline
industry has changed since 1998, we obtained and stratified DOT
quarterly data on the 5,000 largest city-pair markets for calendar
years 1998 through 2006. These data are collected by DOT based on a 10
percent random sampling of tickets and identify the origin and
destination airports. These markets accounted for about 90 percent of
all passengers in 2006. We excluded tickets with interlined flights--a
flight in which a passenger transfers from one to another unaffiliated
airline--and tickets with international, Alaskan, or Hawaiian
destinations. Since only the airline issuing the ticket is identified,
regional airline traffic is counted under the legacy parent or partner
airline. To assess the reliability of these data, we reviewed the
quality control procedures DOT applies and subsequently determined that
the data were sufficiently reliable for our purposes. To analyze
changes in competition based on the size of the passenger markets, we
divided the markets into four groupings. Each group is composed of one-
quarter of the total passenger traffic in each year. To stratify these
markets by the number of effective competitors operating in a market,
we used the following categories: one, two, three, four, and five or
more effective competitors, where a airline needed to have at least a 5
percent share of the passengers in the city-pair market to be
considered an effective competitor in that market. To stratify the data
by market distance, we obtained the great circle distance for each
market using the DOT ticket data via BACK Aviation and then grouped the
markets into five distance categories: up to 250 miles, 251-500 miles,
501-750 miles, 751-1,000 miles, and 1,001 miles and over. For the
purposes of this study, we divided the airline industry into legacy and
low-cost airlines. While there is variation in the size and financial
condition of the airlines in each of these groups, there are more
similarities than differences for airlines in each group. Each of the
legacy airlines predate the airline deregulation of 1978, and all have
adopted a hub-and-spoke network model, can be more expensive to operate
than a simple point-to-point service model. Low-cost airlines have
generally entered interstate competition since 1978,[Footnote 54] are
smaller, and generally employ a less costly point-to-point service
model. Furthermore, the seven low-cost airlines (Air Tran, America
West, ATA, Frontier, JetBlue, Southwest, and Spirit)[Footnote 55] had
consistently lower unit costs than the seven legacy airlines (Alaska,
American, Continental, Delta, Northwest, United, and US Airways). For
this analysis, we continued to categorize US Airways as a legacy
airline following its merger with America West in 2005, and included
the data for both airlines for 2006 and 2007 with the legacy airlines
and between 1998 through 2005 we categorized America West as a low-cost
airline.
To determine if competition has changed at the 30 largest airports, we
analyzed DOT T-100 enplanement data for 1998 and 2006 to examine the
changes in passenger traffic among the airlines at each airport. The T-
100 database includes traffic data (passenger and cargo), capacity
data, and other operational data for U.S. airlines and foreign airlines
operating to and from the United States. The T-100 and T-100(f) data
files are not based on sampled data or data surveys, but represent a
100 percent census of the data. To assess the reliability of these
data, we reviewed the quality control procedures DOT applies and
subsequently determined that the data were sufficiently reliable for
our purposes.
To determine the potential effects on competition between the merger of
Delta Air Lines and Northwest Airlines explained in appendix II, we
examined whether the merger might reduce competition within given
airline markets. We defined an effective competitor as an airline that
has a market share of at least 5 percent. To examine the potential loss
of competition under the merger, we determined the extent to which each
airline's routes overlap by analyzing 2006 data from DOT on the 5,000
busiest domestic city-pair origin and destination markets. To determine
the potential loss of competition in small communities, we analyzed
origin and destination data (OD1B) for the third quarter of 2007 to
determine the extent to which airlines' routes overlap. We defined
small communities as those communities with airports that are defined
as "nonhubs" by statute in 49 U.S.C. § 47102(13).[Footnote 56]
To identify the key factors that airlines consider in deciding whether
to merge with or acquire another airline, we reviewed relevant studies
and interviewed industry experts. We reviewed relevant studies and
documentation on past and prospective airline mergers in order to
identify the factors contributing to (or inhibiting) those
transactions. We also met with DOT and Department of Justice (DOJ)
officials, airline executives, financial analysts, academic
researchers, and industry consultants to discuss these factors and
their relative importance.
To understand the process and approach used by federal authorities in
considering airline mergers and acquisitions, we reviewed past and
present versions of the Guidelines, DOT statutes and regulations, and
other relevant guidance. We also analyzed legal documents from past
airline mergers and published statements by DOT and DOJ officials to
provide additional insight into how DOJ and DOT evaluate merger
transactions. Finally, we discussed the merger review process with DOJ
and DOT officials and legal experts. We conducted this performance
audit from May 2007 through July 2008 in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
[End of section]
Appendix II Delta and Northwest Merger:
Figure 14: Delta Air Lines and Northwest Airlines Domestic (lower 48)
Route Map, February 2008 based on Official Airline Guide (OAG) Schedule
Data:
[See PDF for image]
Illustration contains Delta Air Lines and Northwest Airlines routes.
Source: GAO analysis of OAG data; may (MapInfo).
Note: Route map excludes Alaska and Hawaii routes.
[End of figure]
Figure 15: Delta Air Lines and Northwest Airlines International Route
Map, February 2008 based on OAG Schedule Data:
[See PDF for image]
Illustration contains Delta Air Lines and Northwest Airlines routes.
Source: GAO analysis of DOT data; may (MapInfo).
[End of figure]
Figure 16: Number of Nonstop and One-Stop Markets Where Delta and
Northwest Compete, Top 5,000 Markets, 2006:
[See PDF for image]
This figure is a vertical bar graph depicting the following data:
Change in competition: 2 to 1;
Number of markets subject to a loss of competition due to merger: 34;
Change in competition: 3 to 2;
Number of markets subject to a loss of competition due to merger: 301;
Change in competition: 4 to 3;
Number of markets subject to a loss of competition due to merger: 513;
Change in competition: 5 to 4;
Number of markets subject to a loss of competition due to merger: 374;
Change in competition: 6 to 5;
Number of markets subject to a loss of competition due to merger: 158;
Change in competition: 7 to 6;
Number of markets subject to a loss of competition due to merger: 69;
Change in competition: 8 to 7;
Number of markets subject to a loss of competition due to merger: 6.
Source: GAO analysis of DOT data.
[End of figure]
Table 1: Top Five Markets Where Competition Could Be Reduced from Two
Airlines to One Airline, 2006:
Market (city-pair): Cincinnati, OH-Minneapolis, MN;
Passengers: 54,240;
Percentage of total: 13.5%.
Market (city-pair): Fort Walton Beach, FL-Washington, DC;
Passengers: 31,050;
Percentage of total: 7.8%.
Market (city-pair): Cincinnati, OH-Detroit. MI;
Passengers: 28,870;
Percentage of total: 7.2%.
Market (city-pair): Cincinnati, OH-Manchester, NH;
Passengers: 23,070;
Percentage of total: 5.8%.
Market (city-pair): Panama City, FL-Washington, DC;
Passengers: 17,480;
Percentage of total: 4.3%.
Market (city-pair): Subtotal top five;
Passengers: 154,710;
Percentage of total: 38%.
Market (city-pair): Remaining 29 markets;
Passengers: 247,230;
Percentage of total: 62%.
Source: GAO analysis of DOT data.
Note: Passengers are included only if carried by an airline that was
considered an effective competitor with at least 5 percent of the
passengers in a city-pair market; therefore an unidentifiable number of
passengers in each is not represented.
[End of table]
Table 2: Top Five Markets Where Competition Could Be Reduced from Three
Airlines to Two Airlines, 2006:
Market (city-pair): Atlanta, GA-Detroit, MI;
Combined Market share: 78%;
Second largest competitor: AirTran;
Second largest competitor Market share: 20%.
Market (city-pair): Atlanta, GA-Minneapolis, MN;
Combined Market share: 79%;
Second largest competitor: AirTran;
Second largest competitor Market share: 18%.
Market (city-pair): Atlanta, GA-Memphis, TN;
Combined Market share: 67%;
Second largest competitor: AirTran;
Second largest competitor Market share: 33%.
Market (city-pair): Memphis, TN-Orlando, FL;
Combined Market share: 80%;
Second largest competitor: AirTran;
Second largest competitor Market share: 12%.
Market (city-pair): Memphis, TN-Tampa, FL;
Combined Market share: 82%;
Second largest competitor: AirTran;
Second largest competitor Market share: 10%.
Source: GAO analysis of DOT data.
Note: Passengers are included only if carried by an airline that was
considered an effective competitor with at least 5 percent of the
passengers in a city-pair market; therefore an unidentifiable number of
passengers in each is not represented.
[End of table]
Table 3: Small Communities (Nonhub Airports) Where Delta and Northwest
Have Service and Where Competition Could Be Reduced as of Third Quarter
2007:
Change in competition: 2 to 1;
Panama City, FL;
Tupelo, MS.
Change in competition: 3 to 2;
Alexandria, LA;
Appleton, WI;
Bloomington, IL;
Casper, WY;
Charlottesville, VA;
Erie, PA;
Evansville, IN;
Fort Smith, AR;
Lafayette, LA;
Tri City, TN.
Change in competition: 4 to 3;
Asheville, NC;
Binghamton, NY;
Bozeman, MT
Charleston, WV;
Jackson, WY;
Kalamazoo, MI;
Monroe, LA;
Montgomery, AL;
Peoria, IL;
Rapid City, SD;
Roanoke, VA;
Sioux Falls, SD;
Traverse City, MI.
Change in competition: 5 to 4;
Great Falls, MT;
Missoula, MT.
Source: GAO analysis of DOT data.
Note: Passengers are included only if carried by an airline that was
considered an effective competitor with at least 5 percent of the
passengers in a city-pair market; therefore an unidentifiable number of
passengers in each are not represented.
[End of table]
[End of section]
Appendix III: Number and Size of Dominated Markets by Airline in the
Top 5,000 Markets, 2006:
Airline: Southwest;
Number of markets: 407;
Passengers: 55,065,710.
Airline: Delta;
Number of markets: 643;
Passengers: 21,433,770.
Airline: American;
Number of markets: 325;
Passengers: 18,297,130.
Airline: Northwest;
Number of markets: 464;
Passengers: 15,530,460.
Airline: Continental;
Number of markets: 201;
Passengers: 11,211,870.
Airline: US Airways;
Number of markets: 444;
Passengers: 11,133,960.
Airline: United;
Number of markets: 266;
Passengers: 8,820,110.
Airline: Alaska;
Number of markets: 92;
Passengers: 7,248,730.
Airline: AirTran;
Number of markets: 60;
Passengers: 2,991,470.
Airline: Midwest;
Number of markets: 29;
Passengers: 2,314,120.
Airline: Allegiant;
Number of markets: 52;
Passengers: 1,817,930.
Airline: jetBlue;
Number of markets: 9;
Passengers: 1,650,210.
Airline: Frontier;
Number of markets: 15;
Passengers: 1,086,580.
Airline: Spirit;
Number of markets: 9;
Passengers: 905,410.
Airline: All;
Number of markets: 3,028;
Passengers: 159,916,720.
Source: GAO analysis of DOT data.
[End of table]
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
JayEtta Hecker (202) 512-2834 or heckerj@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Paul Aussendorf, Assistant
Director; Amy Abramowitz; Lauren Calhoun; Jessica Evans; Dave Hooper;
Delwen Jones; Mitchell Karpman; Molly Laster; Sara Ann Moessbauer; Nick
Nadarski; and Josh Ormond made key contributions to this report.
[End of section]
Related GAO Products:
Airline Deregulation: Reregulating the Airline Industry Would Likely
Reverse Consumer Benefits and Not Save Airline Pensions. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-06-630]. Washington, D.C.: June
9, 2005.
Commercial Aviation: Bankruptcy and Pension Problems Are Symptoms of
Underlying Structural Issues. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-945]. Washington, D.C.: Sept. 30, 2005.
Private Pensions: The Pension Benefit Guaranty Corporation and Long-
Term Budgetary Challenges. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-772T]. Washington, D.C.: June 9, 2005.
Private Pensions: Government Actions Could Improve the Timeliness and
Content of Form 5500 Pension Information. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-05-294]. Washington, D.C.: June
3, 2005.
Private Pensions: Recent Experiences of Large Defined Benefit Plans
Illustrate Weaknesses in Funding Rules. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-05-294]. Washington, D.C.: May
31, 2005.
Commercial Aviation: Legacy Airlines Must Further Reduce Costs to
Restore Profitability. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-04-836]. Washington, D.C.: August 11, 2004.
Private Pensions: Publicly Available Reports Provide Useful but Limited
Information on Plans' Financial Condition. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-04-395]. Washington, D.C.: March
31, 2004.
Private Pensions: Multiemployer Plans Face Short-and Long-Term
Challenges. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-423].
Washington, D.C.: March 26, 2004.
Private Pensions: Timely and Accurate Information Is Needed to Identify
and Track Frozen Defined Benefit Plans. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-04-200R]. Washington, D.C.:
December 17, 2003.
Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance
Program Faces Significant Long-Term Risks. [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-04-90]. Washington, D.C.: October
29, 2003.
Commercial Aviation: Air Service Trends at Small Communities since
October 2000. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-
432]. Washington, D.C.: March 29, 2002.
[End of section]
Footnotes:
[1] Mergers generally refer to the combination of two companies into
one company by mutual consent, while acquisitions (also called
takeovers) refer to one company's purchase of assets or equity in
another company on friendly or hostile terms.
[2] The seven legacy airlines (Alaska Airlines, American Airlines,
Continental Airlines, Delta Air Lines, Northwest Airlines, United
Airlines, and US Airways) all predated industry deregulation in 1978,
while the seven low-cost airlines (AirTran Airways, America West
Airlines, ATA, Frontier Airlines, JetBlue Airways, Southwest Airlines,
and Spirit Airlines) entered interstate service after 1978. In 2005,
America West and US Airways merged under the name US Airways.
[3] See appendix II for information on the Delta Air Lines and
Northwest Airlines merger.
[4] These were the most recent data available at the time of our
review.
[5] Seven legacy airlines accounted for these losses from 2001 to 2005.
The four airlines filing for bankruptcy were Delta Air Lines, Northwest
Airlines, United Airlines, and US Airways. In general, the legacy
airlines were unprofitable at this time as a result of reduced demand
following the September 11, 2001, terrorist attacks (and other external
shocks), increased competition from low-cost airlines, and high cost
structures.
[6] Air service markets are usually defined in terms of scheduled
service between a point of origin and a point of destination. We refer
to these markets as city-pair markets. The markets in our report
include airlines providing both nonstop and connecting service.
[7] We defined an effective competitor as an airline with at least 5
percent of passengers within a city-pair market.
[8] Fares were inflation adjusted in 2006 dollars.
[9] Passenger traffic is measured by enplanements.
[10] The Guidelines were jointly developed by DOJ's Antitrust Division
and the Federal Trade Commission (FTC) and describe the inquiry process
agencies follow in analyzing proposed mergers. The most current version
of the Guidelines was issued in 1992; Section 4, relating to
efficiencies, was revised in 1997.
[11] Pub. L. No. 95-504, Oct. 24, 1978.
[12] Both American Eagle and American Airlines are subsidiaries of AMR
Corporation.
[13] GAO, Aviation Competition: Issues Related to the Proposed United
Airlines-US Airways Merger, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-01-212] (Washington, D.C.: Dec. 15, 2000) p. 10,
footnote 6.
[14] PBGC was established under the Employee Retirement Income Security
Act of 1974 (ERISA) and set forth standards and requirements that apply
to defined benefit plans. PBGC was established to encourage the
continuation and maintenance of voluntary private pension plans and to
insure the benefits of workers and retirees in defined benefit plans
should plan sponsors fail to pay benefits. PGBC operations are
financed, for example, by insurance premiums paid by sponsors of
defined benefit plans, investment income, assets from pension plans
trusted by PBGC, and recoveries from the companies formerly responsible
for the plans.
[15] The six airlines receiving loan guarantees were Aloha, World,
Frontier, US Airways, ATA, and America West.
[16] Capacity is defined as available scheduled airline seats.
[17] GAO, Commercial Aviation: Bankruptcy and Pensions Problems Are
Symptoms of Underlying Structural Issues, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-05-945] (Washington, D.C.: Sept.
30, 2005).
[18] Unless otherwise noted, all dollar amounts in this section have
been adjusted to 2007 dollars.
[19] Revenue passenger miles are the number of miles paying passengers
are transported and are an indicator of passenger traffic.
[20] Available seat miles are the number of seats offered by an airline
multiplied by the number of scheduled miles flown. This is a typical
measure of capacity in the airline industry.
[21] Cost per available seat mile (CASM) is calculated as operating
expenses divided by total available seat miles. Calculating CASM allows
comparisons across different sizes of airlines.
[22] See Randy Bennett, Patrick Murphy, and Jack Schmidt, "A
Competitive Analysis of an Industry in Transition: The U.S. Scheduled
Passenger Airline Industry." Gerchick-Murphy Associates (Washington,
D.C.) July 2007.
[23] Liquidity is a measure of a firm's ability to meet short-term
liabilities with cash or marketable securities.
[24] Fuel hedging allows an airline to lock in on fuel purchase prices
in advance of future delivery, thus protecting against anticipated
increases in the price of fuel.
[25] The airlines recently filing for bankruptcy or ceasing operations
include Air Midwest, Aloha Airlines, ATA Airlines, Big Sky Air,
Champion Air, EOS Airlines, Frontier Airlines, MAXjet Airways, and
Skybus Airlines.
[26] The top 5,000 city-pair markets we analyzed accounted for 90
percent of all domestic passenger traffic in 2006.
[27] We defined an effective competitor to be an airline that carried
at least 5 percent of passengers within a city-pair market.
[28] These figures include only passengers carried by airlines with at
least 5 percent of passengers in a city-pair market; therefore an
unknown number of passengers in each market were not counted.
[29] In 2006, Southwest Airlines accounted for two-thirds of the
passengers carried by low-cost airlines.
[30] Because the markets that had low-cost airlines differed in 1998
and 2006, other factors that changed during that time frame, such as
average distances flown, may also account for the price differences
across the groupings of routes with and without low-cost competitors.
[31] These figures include only passengers carried by an airline with
at least 5 percent of passengers in a city-pair market; therefore an
unknown number of passengers in each market were not counted.
[32] Large hub airports are those defined in 49 U.S.C. § 40102 as
commercial service airports having at least 1 percent of passenger
boardings. See also 49 U.S.C. § 47102.
[33] Respondents were travel managers responsible for negotiating and
managing their firms' corporate accounts.
[34] See Severin Borenstein, "Airline Mergers, Airport Dominance, and
Market Power," American Economic Review, Vol 80, May 1990, and Steven
A. Morrison, "Airline Mergers: A Longer View," Journal of Transport
Economics and Policy, September 1996; and Gregory J. Werden, Andrew J.
Joskow, and Richard L. Johnson, "The Effects of Mergers on Price and
Output: Two Case Studies from the Airline Industry," Managerial and
Decision Economics, Vol. 12, October 1991.
[35] See Steven A. Morrison, and Clifford Winston, "The Remaining Role
for Government Policy in the Deregulated Airline Industry."
Deregulation of Network Industries: What's Next? Sam Peltzman and
Clifford Winston, eds. Washington, D.C., Brookings Institution Press,
2000. pp. 1-40.
[36] See Severin Borenstein, 1989, "Hubs and High Fares: Dominance and
Market Power in the U.S. Airline Industry," RAND Journal of Economics,
20, 344-365; GAO, Airline Deregulation: Barriers to Entry Continue to
Limit Competition in Several Key Markets, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-97-4] (Washington, D.C.:
Oct. 18, 1996); GAO, Airline Competition: Effects of Airline and Market
Concentration and Barriers to Entry on Airfares, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-91-101] (Washington, D.C.:
Apr. 16, 1991).
[37] Open Skies seeks to enable greater access of U.S. airlines to
Europe, including expanded rights to pick up traffic in one country in
Europe and carry it to another European or third country (referred to
as fifth freedom rights). Additionally, the United States will expand
EU airlines' rights to carry traffic from the United States to other
countries.
[38] Applications, filed in summer 2007 by SkyTeam members Air France,
Alitalia, CSA Czech, Delta, KLM, and Northwest, were approved in 2008.
In December 2006, DOT approved the addition of three members (Swiss
International, LOT Polish, and TAP Air Portugal) to the Star Alliance's
already approved immunized alliance team of Austrian, Lufthansa,
German, Scandanavian, and United.
[39] Code-sharing is a marketing arrangement in which an airline places
its designator code on a flight operated by another airline and sells
and issues tickets for that flight.
[40] Pub. L. No. 110-161, Section 117, Dec. 26, 2007.
[41] See 15 U.S.C. § 18a(d)(1). Both DOJ and the Federal Trade
Commission have antitrust enforcement authority, including reviewing
proposed mergers and acquisitions. DOJ is the antitrust enforcement
authority charged with reviewing proposed mergers and acquisitions in
the airline industry. Additionally, under the Hart-Scott-Rodino Act,
DOJ has 30 days after the initial filing to notify companies that
intend to merge whether DOJ requires additional information for its
review. If DOJ does not request additional information, the firms can
close their deal (15 U.S.C. § 18a(b)). If more information is required,
however, the initial 30-day waiting period is followed by a second 30-
day period, which starts to run after both companies have provided the
requested information. Companies often attempt to resolve DOJ
competitive concerns, if possible, prior to the expiration of the
second waiting period. Any restructuring of a transaction--e.g.,
through a divestiture--is included in a consent decree entered by a
court, unless the competitive problem is unilaterally fixed by the
parties prior to the expiration of the waiting period (called a "fix-it
first").
[42] Market power is the ability to maintain prices profitably above
competitive levels for a significant period of time.
[43] United States Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines (Washington, D.C., rev. Apr. 8, 1997).
[44] More specifically, the relevant market has been defined as
scheduled airline service between a point of origin and a point of
destination. This is often, but not always, defined as a city-pair, but
in some cases involving cities with multiple airports, the relevant
market has been defined as an airport pair. In addition, DOJ has
recognized that nonstop service between cities may be an important
market because business travelers are less likely than leisure
travelers to regard connecting service as a reasonable alternative.
Thus, DOJ may see a transaction as competitively problematic because of
its impact in a nonstop city-pair market.
[45] It is conceivable that a merger could also increase competition in
some markets where both airlines had negligible presence before a
merger, but combined the merged airlines created a stronger competitor
in those markets.
[46] Remarks by J. Bruce McDonald, Deputy Assistant Attorney General,
Antitrust Division, Department of Justice, presented to the Regional
Airline Association President's Council Meeting, Washington, D.C.,
November 3, 2005.
[47] Cost savings cannot just be from a reduction in output or service.
[48] 49 U.S.C. § 41105. DOT must specifically consider the transfer of
certificate authority's impact on the financial viability of the
parties to the transaction and on the trade position of the United
States in the international air transportation market, as well as on
competition in the domestic airline industry.
[49] See Steven A. Morrison, "Actual, Adjacent, and Potential
Competition: Estimating the Full Effects of Southwest Airlines,"
Journal of Transport Economics and Policy, Vol. 35, part 2, May 2001,
and Austan Goolsbee and Chad Syverson, "How Do Incumbents Respond to
the Threat of Entry? Evidence from the Major Airlines," Quarterly
Journal of Economics, forthcoming.
[50] See Severin Borenstein, "U.S. Domestic Airline Pricing, 1995-
2004," University of California at Berkeley, Competition Policy Center
Working Papers, working paper No. CPC05-48, January 2005.
[51] Statement of John M. Nannes, Deputy Assistant Attorney General
Antitrust Division, before the Committee on Judiciary,U.S. House of
Representatives, Concerning Airline Hubs and Mergers, June 14, 2000.
[52] The evolution in the Guidelines' consideration of efficiencies is
thoroughly explained in a paper by two former DOJ officials in 2003,
see William J. Kolasky and Andrew R. Dick, "The Merger Guidelines and
the Integration of Efficiencies into Antitrust Review of Horizontal
Mergers," Antitrust Law Journal 71, 1 (2003): 207-251.
[53] See footnote 36, p. 31 of the Horizontal Merger Guidelines
(Revised April 8, 1997).
[54] Southwest operated within the state of Texas prior to
deregulation.
[55] Since 2008, ATA has filed for bankruptcy under Chapter 11 and
plans to liquidate and Frontier has filed to reorganize under Chapter
11.
[56] A nonhub is a commercial service airport that has less than 0.05
percent of the passenger boardings.
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office:
441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
