Have we reached the end of U.S. airline consolidation?

NH-0815By Neil Hammond, Partner

With the announcement of the United/Continental merger in 2012, many experts thought that the dance was over and all the partners had been neatly paired off to shape the future of the U.S. airline industry. Finally corporate programs could take all those decisions off the back burner and move forward with their airline strategies with a clear understanding of the landscape.

When the US Air/American Airlines merger was complete, experts again thought that a neat bow had been tied around the industry consolidation. Even when the recent merger between Alaska and Virgin America was announced, they largely remained unmoved by the move, which represents around 5% of the total domestic market. So is it true, have we really seen the end of U.S. airline mergers?

Current U.S. Landscape

In terms of Revenue Passenger Miles (RPM) we have the new American with 19.9% of the domestic share followed by Southwest (18.2%), Delta (17.0%) and United (14.7%). That amounts to just under 70% of the total market for the top four airlines. We then have a significant gap between those and the next group, which includes JetBlue (5.3%), Alaska (4.5%), and Spirit (2.6%).

Current International Landscape

I cannot think of many other countries where indeed the market is this fragmented. In Canada, Air Canada and WestJet combine to control 80% of the market, whilst in Mexico the top three airlines account for over 70%. In Brazil, two airlines control 75%, India three control 75% of the share. In Europe, all of France, Finland, Portugal, Germany, Greece, Denmark and Norway have their markets dominated by one or two carriers.

Russia and China provide two very explainable exceptions to the rule, with each having their state owned monopolies broken up in the move towards free market competition. Russia’s Aeroflot was scattered into over 400 separate airlines known as “babyflots” in 1994 and the market has undergone a continual reconsolidation with the top three airlines now approaching 50% of the market. China’s airlines were broken up on geographical lines and also included Taiwan and it’s early days on their evolution.

Future U.S. Landscape

Back to the United States… It has always been my opinion that the consolidation of the airline industry creates opportunity from the rationalization of the hubs and networks of the merged carriers, opportunity that the smaller carriers supported by willing consumers take advantage of. It is not unreasonable to assume that there will be further M&A activity among the budget carriers, as some have already been mooted. This will see the emergence of the next carriers that will bridge the market share gap to the top four and stimulate the natural erosion of their 70% share.

United They Stand, Divided Fall?

All that is good and fairly predictable and it leaves things in a nice natural order and a world in which we see no further consolidation among the major carriers. It would take a significant downturn in the economy before eyes turned towards another mega consolidation, as the major airlines make the usual case that further consolidation is the only way for the entire industry to survive.

Despite that, we still have a domestic market which is more fragmented than most with no single carrier having a domestic market share above 20%, so maybe there is still an argument that would pass DOJ approval for two of the big three to combine. (No, I don’t think that Southwest would be a willing partner in this kind of deal – wrong DNA). The consequence of this kind of a merger would be that one of the three main alliances would be without a U.S. partner (really unthinkable) whilst another of the alliances would end up hitting the mother lode.

The Fallout: Food for Thought

Can you imagine the negotiating leverage that two carriers would have in such a venture? It’s only when you think of those possibilities and the opportunity to challenge the entire world order of the three global alliances that the unthinkable becomes, well, thinkable. In fact, if there is a deal that would take you from a member of one of three fairly equal alliances to the clear senior partner of the largest alliance, whilst inflicting a mortal wound to one of the three, then perhaps your thinking may even be… Well, why wouldn’t we? Or perhaps it could come down to the domino effect – if one carrier makes a move, it could spur intense jockeying amongst the other two to ensure they’re not left out.

In any case, it will be very interesting to watch the development of the airline industry for the foreseeable future. After all, although it appears the consolidation shuffle has been neatly tied up with today’s current state, industry analysts have been mistaken before.

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