Airline Merger Mania Could Blunt Effects Of Reduced Fares

True believers of competition have always questioned why airlines must still be national businesses regulated by agreements between countries. These 'bilaterals,' as they are known, regulate everything from the number of flights per week, to the airports they fly to, and sometimes they even have limits on what type of passengers they can carry.

Richard Branson who has seen the seamy side of this business — the high entry barriers and the special efforts established carriers will make to keep newcomers out — has always argued for open skies.

Last week he got exactly that when the EU US open skies treaty was ratified by the EU. This means increased competition as European airlines will be allowed to fly from any airport in Europe to any airport in America. Previously they could fly only from their home countries. Virgin of course is delighted and plans to connect New York to Paris, Frankfurt, Amsterdam and Madrid.

The good news is the obvious — with increased competition there will be a drop in fares. But smaller European carriers will find it hard to compete. I wonder what will happen to airlines like TAP Air Portugal, Finnair, SAS, Sabena and other small carriers that lack the heft to take on bigger more established rivals? They will either merge or be acquired and that is bad news for consumers.

So my guess is that while there will be a steep decline in fares (especially in economy class) between larger cities the inevitable flurry of mergers could mean reduced, or even worse, no competition between smaller cities. So airlines could end up making a killing when they are the only operator between two small cities. A few years ago the Air France-KLM merger saw reduced competition on routes between France and the Netherlands.

I wonder if regulators will come up with a revised set of guidelines on mergers to deal with such a possibility. So far I haven't seen any. The existing competition laws may not be enough.

Add New Comment

0 Comments