Published Tuesday, August 20, 2013 at 1:00 am / Updated at 4:23 pm
Joe Nocera: Blocking airline merger unrealistic

Hey, wait a minute. Wasn’t airline deregulation supposed to bring lower prices and increased competition?

So how is it that, 35 years after the law was passed that deregulated the airline industry, we stand today with two megacarriers, United and Delta, while a third proposed megamerger — of American and US Airways — was all but done before the Justice Department sued to block it this week? In the past few years especially, ticket prices have skyrocketed and consumer choice has diminished.

As for what it’s like to fly these days, well, the less said, the better.

The answer, in part, is that deregulation worked all too well at first, and then it didn’t work well at all. The natural tendency of companies to seek monopoly power took over, and nobody tried to stop it until now, when it is really too late.

Remember those early years after deregulation? Everybody seemed to be starting up an airline. The legacy carriers like United and American expanded into dozens of new markets. The number of people who flew increased geometrically.

Indeed, with the rise of discount tickets, flying became something many Americans could finally afford, at least once in a while. Supporters of deregulation could proudly say that it had worked as envisioned: It had brought about lower prices and greater consumer choice.

The only problem was that the competition was ruinous for airline profitability. This, in fact, has been the eternal struggle of the industry. Just a few months ago, Warren Buffett described airlines as “a death trap for investors.” As the big airlines fought fiercely to hold on to their turf — losing money in the process — many of the smaller startups went out of business. Even large airlines like Eastern and Pan Am failed. Others entered bankruptcy proceedings and engaged in protracted battles with their unions to lower their employee costs.

The first decade of this century was, if anything, even tougher. First came 9/11, which caused people to stop flying. Then came volatile fuel prices — between 2000 and 2012, fuel costs for the industry rose from $16.8 billion to more than $50 billion. Then came the Great Recession. Over the past decade, according to Robert Mann, an airline consultant, “the industry has destroyed about $70 billion in capital.”

The airlines responded to these problems by doing exactly what you would expect. They began consolidating. There have been four major mergers since 2005, when AmericaWest and US Airways joined forces. After the merged airline cut some routes and streamlined, its stock went through the roof.

Then others followed suit: Delta bought Northwest in 2008, Southwest bought AirTran three years ago, and that same year, United merged with Continental. Delta and United are now the largest airlines in the country, with a global network that appeals to the big corporate customers who are the lifeblood of the industry.

What did consolidation give the airlines? Pricing power, as it’s called. As the number of airlines dwindled, so did the number of routes and flights, as the airlines concluded that their health depended on cutting back the number of seats they offered. That’s why when you fly today, the plane is likely to be full; there are simply fewer flights available. And that’s also why airlines have been able to raise prices: Demand hasn’t slackened nearly as much as supply has. Thus, says Mann, “Every month in 2010 and 2011, there was a bump” in the price of airline tickets. Even Southwest Airlines, long a low-cost airline, began raising prices.

What the U.S. airline industry is today is an oligopoly, with two dominant carriers. (Southwest is No. 3.) And oligopolies, by their very nature, are anti-competitive. But it’s a little late to be complaining about oligopolies. The government could have attempted to prevent such an outcome when the Delta and United mergers were announced. Instead, it stood passively by and let the industry consolidate.

Will consumers be further harmed if American and US Airways merge? It’s certainly possible, especially since they have so many overlapping routes. But just about every industry analyst says that prices will continue to rise regardless, and limiting the supply of seats will continue to be central to the airlines’ strategies.

Analysts also say that American, which counted on this merger to emerge from bankruptcy, will struggle to compete successfully with United and Delta if it can’t establish that same kind of global network those two have put together. (US Airways, which is extremely well run, is a different story. It makes money consistently.)

“We learned what happened to competition in prior acquisitions,” said Bill Baer, the Justice Department’s antitrust chief, according to the Wall Street Journal. Indeed, we did: Competition dwindled. Prices went up. Consumer choice went down.

Blocking the American-US Airways deal is a little like closing the barn door after the horses are long gone.

Oil industry ad campaign mocks Nebraska cowboys who protested Keystone XL pipeline
In Omaha, bus tour calls for hourly minimum wage over $10
Fremont police searching for missing 56-year-old man
Prosecutor: Baby might be alive if day care employer had spoken up
NRA seeks universal gun law at national meeting
Beau McCoy calls Pete Ricketts a 'convenient conservative' for immigration stance
Omaha senator seeks minimum wage ballot measure
Agreement reached to end dog racing at Bluffs Run at end of 2015
Police probe bank robbery
Man accused of trying to open flying plane's door pleads not guilty
Ben Sasse shifts tactics, calls ad by Shane Osborn 'hypocritical'
Forecast on the upswing after Thursday's rain
EB Harney Street lane closed
Ex-UNMC student loses appeal; claimed program didn't make accommodations for his depression
Grace: Your older self has a request — use sunscreen
At NU's helm, J.B. Milliken built the university by building relationships with state leaders
City's Personnel Board is behind ‘ban-the-box’ proposal
Kelly: Started at a dining room table, Home Instead thriving at 20 with $1B in annual revenue
Richard Paul Dreier, 90, was wounded in attack during WWII
Police issue arrest warrant in teen's shooting death
Kelly: Huskers' glory days of '80s live on — on the small screen and on stage
New public employee pay data: Douglas, Lancaster, Sarpy Counties, plus utilities
Database: How much did Medicare pay your doctor?
Construction to start in May on West Broadway apartment/retail structure
3 Nebraska Board of Education candidates call for high standards
< >
Breaking Brad: 117-mph riding lawnmowers and 12-scoop banana splits
The Chicago White Sox are selling a 12-scoop banana split inside a full-size batting helmet for $17. You know what you'd call someone in Chicago who'd eat this? "Health nut."
Breaking Brad: Walmart beats Russia, stakes a claim on the moon
Russia is claiming it owns a section of the moon. If you follow the news, you know this probably doesn't end well.
Kelly: Started at a dining room table, Home Instead thriving at 20 with $1B in annual revenue
The idea that Paul Hogan had studied and then hatched at his mother's table was that older people, rather than moving in with relatives or to an assisted-living center, would much prefer to stay home instead.
Kelly: Huskers' glory days of '80s live on — on the small screen and on stage
The 1984 NFL draft was unusual for the Nebraska Cornhuskers, and these days it's remembered in the name of a rock band, the 1984 Draft. Tonight, the band is featured on the NFL Network.
Breaking Brad: Nebraska GOP candidates unified against naked squirrels
Some of these Nebraska campaigns are tilting pretty far right. At a recent forum, there was a consensus that we need to ban public dancing and clothe naked squirrels in public parks.
Deadline Deal thumbnail
7M Grill
Half Off Delicious Comfort Fusion Food & Drinks!
Buy Now
< >
Omaha World-Herald Contests
Enter for a chance to win great prizes.
OWH Store: Buy photos, books and articles
Buy photos, books and articles
Travel Snaps Photo
Going on Vacation? Take the Omaha World-Herald with you and you could the next Travel Snaps winner.
Click here to donate to Goodfellows
The 2011 Goodfellows fund drive provided holiday meals to nearly 5,000 families and their children, and raised more than $500,000 to help families in crisis year round.
Want to get World-Herald stories sent directly to your home or work computer? Sign up for's News Alerts and you will receive e-mails with the day's top stories.
Can't find what you need? Click here for site map »