Don't Believe the Hype - Airfares Aren't Going Up

When the first rumblings of the merger between US Airways and American Airlines began many in the media, and even some in the travel blogging world, worried that prices would skyrocket. The prevailing argument was that as the number of airlines decreased, the prices of flights would increase because of a lack of competition. In fact an article in today's Wall Street Journal that popped up after I had already written the first draft of this article argued that mergers are bad for frequent flyers.

But I completely disagree with that notion. From 2000-2013 there have been 12 major airline mergers and acquisitions and many other small companies that have joined forces. This includes major mergers like American Airlines and TWA, US Airways and America West, Delta and Northwest and, of course, Continental and United. So the natural reaction would be that over the past 12 years the prices of airline tickets have continued to climb over and over to the highest levels out there. But that's simply not true.

A study from the Department of Transportation's Bureau of Transportation Statistics Research and Innovative Technology Administration (say that three times fast) has found that airfare in the United States decreased by an average of 16.7 percent from 2000-2012 and 0.2 percent from 2011-2012. The average airfare in 2000 was $449 and in 2012 it was $374 in 2012 dollars. The observation was domestic round-trip itineraries and it included the total price of the ticket, including all taxes and fees.

The study also focused on the prices for the top 100 airports in the United States and it found that only 14 out of 100 airports saw an actual increase in prices from 2000 to 2012. The most shocking of those airports was Dallas Love Field and Chicago Midway, which saw an 8.6 and 4.4 percent increase in prices respectively. What is unique about these airports is that they are dominated by Southwest, which is know as one of the leading low cost carriers. I don't know that this necessarily means that Southwest is increasing their prices overall, but there could be an argument that in this case the lack of competition did result in increased prices.

But for the remaining 86 airports, they all saw a decrease in prices. The range was -0.3 decrease for Sacramento to a -47.5 decrease for Atlantic City.

I believe that this runs counter to the idea that airline mergers automatically mean an increase in airfare. The fact still stands that there are major airlines competing with each other. How many times a week do we see fare wars between the major carriers and the lower cost carriers trying to undercut them all, while offering their own levels of service.

The fact is travelers have started to adapt to the airline market that they live in. You will find that most people who are "average travelers" are alright sticking with their low cost carrier and could not care less if they have to take Southwest, Spirit or Frontier. People that fly more often may also prefer a low cost carrier, but most are quite loyal and would rather build up their loyalty with a legacy carrier who offers a few more perks. The economic preferences of travelers truly comes out in these situations. It is to the benefit of airlines to charge less for their flights to get the traveler who will pay for the cheapest ticket they can find and also attract the business traveler or savvy traveler who builds loyalty to get them on board as well.

But I think the bigger message for fliers of American Airlines and US Air is that they shouldn't worry about higher prices. There is a chance of course that I could be wrong, but the data over the past 12 years seems to disagree. We also have to remember that just 12....yes 12 out of nearly 900...routes overlap for US and AA. This means that they are not going to have to consolidate routes or try to compete against each other. The service levels can remain mostly the same with a few tweaks to get rid of old routes that went through old hubs that are covered in other areas.

The greater proof in the pudding is the data from United/Continental hubs over the past 12 years which saw the following changes in airfare:

Continental Hubs 

Cleveland                   -0.5 percent
Houston                     -6.3 percent
Newark                      -19.9 percent

United Hubs

Denver                       -42.0 percent
Washington Dulles    -23.6 percent
Los Angeles              -13.5 percent
Chicago O'Hare        -27.6 percent
San Francisco           -29.9 percent

The total reduction works out to an average of -20.41 percent.

There is a need to be worried about airline consolidation and there have been cases of price increases in the recent future as airlines try to compete in new markets and fly as efficiently as possible.  We know that if the industry continues to merge and we end up with only a few airlines airlines there will be a monopoly on prices, but right now there is nothing to worry about as the long-term trend is still on the side of the flyer.
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