Bigger May Not Be Better as Airline Marketplace Gets Smaller

by Lark Ellen Gould
Last updated: 10:55 AM ET, Tue December 19, 2023

Since the beginning of the 21st century, the United States has watched at least eight commercial airline brands disappear in a series of mergers in the industry.

The result is the surfacing of three dominant carriers: United Airlines, Delta Air Lines, and American Airlines. These mergers, along with the strength of Southwest Airlines, have raised concerns about the benefits for passengers, echoing the oft-raised question of whether we are better off now than we were, say, a decade ago, at least as flying is concerned.

Into that scene comes JetBlue Airways, now seeking to buy Spirit Airlines, which is well-known as the nation’s largest ultra-bargain-seat air carrier. If it passes, that deal would make JetBlue the fifth-largest airline in the country and add another contraction to a notably shrinking industry.

Similarly, the sector recently rattled to another potential shake-up in numbers: that of Alaska Airlines' surprise announcement this month to purchase Hawaiian Airlines for $1.9 billion, including debt. With those two customer-facing brands merged, Alaska would be the fifth largest in the U.S. with a five percent share of seats – or the sixth largest if the JetBlue-Spirit deal goes through.

To that end, 2024 could be a banner year of milestones in mergers and acquisitions for airlines worldwide. In Europe, at least three legacy carriers are also looking to change the airline landscape: Lufthansa hopes to acquire a stake in Italian flag carrier ITA Airways; International Airlines Group (parent company of Aer Lingus, British Airways, Iberia, Level and Vueling) hopes to gain approval for its Air Europa deal to strengthen its Latin American network and Madrid hub: and Air France-KLM is poised to take a stake in Scandinavian Airlines (SAS). And it is reported that TAP Air Portugal has seen interest from a cornucopia of carriers as it moves toward privatization.

For Alaska, such a deal would be the second since 2016 in a mad game of the last Russian doll standing. Alaska acquired Virgin America seven years ago and gives the U.S. Justice Department an additional stack of work to get through these next many months in trying to determine the efficacy of this marriage on the competitive airline industry landscape and what it will mean for consumers in an ever-thinning space.

As the world airline industry pulls out of the pandemic following its second set of bailouts in some dozen years, the wins have been staggering. According to an announcement earlier this month, the International Air Transport Association (IATA) noted net profits of $25.7 billion for the global airline industry, with operating gains reaching a record $49.3 billion. The IATA says North American carriers are set to collect a combined $14.4 billion in profits (up four percent).

Both airline boards have approved the Alaska-Hawaiian acquisition plan and are looking to wrap up in 12 to 18 months, pending regulatory and Hawaiian shareholder approval.

“This combination is an exciting next step in our collective journey to provide a better travel experience for our guests and expand options for West Coast and Hawai‘i travelers,” said Ben Minicucci, Alaska Airlines CEO, in a press release.

What Matters

Alaska's proposed Hawaiian Airlines merger will put to the test whether further airline consolidation should be allowed. The current administration is seeing the DOJ launching lawsuits to prevent the planned $3.8 billion merger between JetBlue and Spirit Airlines, both now competing in the low-cost carrier space, to become one airline.

Hawaiian Airlines plane landing at Los Angeles International Airport

Such a move could, in effect, harm lower-income travelers. In a similar action earlier this year, the DOJ successfully prosecuted a different case that aimed to break up the "Northeast Alliance" partnership between American Airlines and JetBlue, also showing how that deal would hurt competition and flyers’ pockets.

A look back in time reveals that, since 1960, Delta and American have acquired, in total, 26 airlines between them. Detractors will show that airfares have fallen by over 30 percent since 1999, but it is easy to point to a litany of hardy airline profit makers since that time – fees, baggage charges, shrinking seats, etc.

And a shrinking airline landscape has not added operation efficiencies or better destination connectivity per se. The Bureau of Transportation Statistics shows that late arrival numbers have increased to a fifth of domestic flights annually.

The Benefits of Airline Industry Consolidation

Proponents of airline industry consolidation argue that these mergers have led to several positive outcomes:

Improved Financial Stability: By merging with financially struggling airlines, larger carriers have stabilized their operations and enhanced their financial performance. This has resulted in a more sustainable industry that can weather economic downturns and external shocks, such as the recent COVID-19 pandemic.
Operational Efficiencies: Merged airlines can streamline operations, reduce redundant costs, and optimize fleet utilization, leading to improved efficiency and productivity. This, in turn, can result in cost savings that can be passed on to consumers through lower fares.
Global Competitiveness: Mega mergers have enabled U.S. carriers to compete more effectively on the global stage. Through increased scale and network reach, airlines have established strategic partnerships and alliances, expanded international routes, and attracted more international passengers, bolstering the overall competitiveness of the U.S. airline industry.

The Drawbacks of Airline Industry Consolidation

Critics of airline industry consolidation raise valid concerns about the potential negative consequences:

Reduced Competition: The consolidation of major airlines has resulted in a highly concentrated market, raising concerns about reduced competition and the potential for monopolistic behavior. This concentration of market power could lead to higher fares, limited choices for consumers, and diminished service quality.
Loss of Diversity: Consolidation has seen the disappearance of once-iconic airline brands, eroding the diversity and competitiveness of the industry. This loss of competition could stifle innovation and limit consumer options as fewer airlines dominate the market.
Labor Concerns: Mergers often result in workforce reductions and labor-related challenges. Consolidation can lead to job losses, wage stagnation, and diminished employee bargaining power. This can have a significant impact on the livelihoods of airline workers and their communities.
Service Quality: With fewer competitors, airlines may have less incentive to prioritize customer service and invest in passenger amenities. This could potentially result in a decline in overall service quality and a decrease in the passenger experience.

The announcement of the Alaska-Hawaiian merger led to a significant surge in Hawaiian's parent company shares, reflecting the greater market's optimistic view of the deal. And that positive reaction aligns with a broader trend in the airline industry, where smaller carriers seek mergers to stay competitive against the dominant market players.

While airline consolidation has led to the emergence of dominant carriers that control the market, the negative consequences for consumers cannot be ignored. Due to industry mergers, rising prices, shrinking seats, declining service quality, and reliance on government bailouts have become more prevalent.

The hope is that regulatory bodies will prioritize consumer protection and enforce stricter oversight while promoting competition in a balanced and customer-centric approach that benefits all stakeholders involved. As 2024 approaches, however, it’s an upside-down world now and anyone’s game – and guess.

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