In April, United Continental Holdings Inc (NYSE:UAL) increased the infamous change fee by $50 from $150 to $200, a move quickly matched by US Airways Group, Inc. (NYSE:LCC). By early May, American Airlines and Delta Air Lines, Inc. (NYSE:DAL) had joined the change fee party and bumped their fees by $50 as well.
Why would airlines think they can get away with this move almost universally detested by passengers? Well, it’s a lesson in oligopoly and the limited choice that accompanies it. Both investors and travelers have seen the names Northwest Airlines and Continental Airlines largely disappear from view. Unlike what has happened so often in the airline industry, these carriers did not disappear because of a bankruptcy. Quite the contrary: they were merged with Delta Air Lines and United Airlines, respectively, in two mergers that have helped to strengthen the hand of airlines.
Three big players
First and foremost, airlines are businesses. They do not exist to fulfill a public good or provide you with extra legroom or a bag of peanuts. And like any other for-profit business, a reduction in competition is a boost to the bottom line. Over the last several years, we have seen the number of U.S. based major carriers reduced to four and soon to be three.
|Year of merger||Acquiring airline||Acquired airline||New company|
|2008||Delta Air Lines||Northwest Airlines||Delta Air Lines|
|2010||United Airlines||Continental Airlines||United Continental Holdings Inc (NYSE:UAL)|
|2013*||US Airways Group, Inc. (NYSE:LCC)||American Airlines||American Airlines|
*merger still pending regulatory approval
Note: The acquiring airline listed is the acquiring airline as far as the exchange of shares goes in the corporate sense of a merger. In all three situations, the acquiring airline kept some parts of the acquired airline intact.
As we have seen this reduction in carriers we have also seen capacity cuts, fare increases, fee increases, and economies of scale which are expected to benefit these mega-carriers over the coming years. Due to the relatively short period of time since the latest wave of mergers began, it is difficult to measure the long-term effects of airline integration on airline earnings. What has been seen so far is large integration expenses, especially in focus at United Continental Holdings Inc (NYSE:UAL). However, the majority of these expenses are one-time occurrences and will not affect future earnings.