Lack of competition in the airline industry stems from antitrust law enforcement. That’s what former Delta and Northwest CEO Richard Anderson suggested on the Airlines Confidential podcast this week, when he joined ex-Wall Street Journal airline reporter Scott McCartney and ex-American Airlines CEO Doug Parker.
Spirit Airlines is in bankruptcy. They’ve already said they’re giving up half their fleet. The whole thing was going to be flying if they’d been acquired by JetBlue, but the government stopped that. The Biden Administration said they wanted those planes all flying under an ultra-low cost model, and that’s why they blocked the JetBlue merger that would have saved Spirit.
It’s hard to know whether more Spirit Airlines planes or more of the JetBlue product is better for consumers. But the Biden DOJ replaced consumer judgment through their ticket purchase behavior with thier own judgment through the legal process. And it looks like they’re going to get the opposite of what they intended.
Richard Anderson makes an interesting point about antitrust and counterfactuals.
- American West took over US Airways and then American Airlines
- Delta took over Northwest
- Continental took over United
And that left us with three large network carriers. But the Clinton Justice Department sued to stop Northwest from combining with Continental in 1998. And if Northwest and Continental had been allowed to combine, Anderson argues, we’d have four large network carriers today:
- Northwest/Continental
- And Delta couldn’t have merged with Northwest
- United wouldn’t have merged with Continental
- American, arguably in conjunction with US Airways
The only way you had consolidation was the failing carrier doctrine. So the only consented merger between 1987 and the Delta Northwest merger closed in whatever, 2010. The only ones that occurred were either bankruptcy auctions, Eastern and Pan Am, and then Doug’s transaction with US Air and America West, which started the ball rolling.
We tried to do a transaction in 98 at Northwest. We bought David Bonderman’s interest in Continental. and the Justice Department sued. And so everything kind of got put on a back burner.
Oddly enough, if we would have gotten that transaction done, there’d probably be four of them spoke carriers today, not three. But that’s how the hand of government works. So consolidation was really important.
The large network carriers were allowed to reach scale, which they needed to become profitable. The ultra-low cost and lower-cost segments were denied that same opportunity, which would have spread fixed costs over more flights and seats.
Right now the ultra-low cost sector is struggling because
- their costs are rising
- they haven’t had the partnerships, route networks or products that consumers have increasingly wanted to buy (either directly or through credit card cobrand rewards) and
- the big network carriers have consolidated, run more efficient operations, and compete better than they used to.
It’s ultimately antitrust that meant to protect low cost flying but wound up disadvantaging low cost flying. There’s an important lesson about trying to plan the market. Does anyone remember when Microsoft was going to rule the world by controlling the desktop browser? The U.S. Department of Justice and 20 state attorneys general filed the antitrust case against Microsoft on May 18, 1998 – less than four months before the launch of Google.
And Google was controlling the world, the federal government filed its antitrust suit against them in late 2020, just two years before ChatGPT publicly launched (and that happened to years before the Google antitrust verdict).
So, the FTC denies a merger… and you blame lack of competition on anti-trust enforcement? Gary, that’s counter-intuitive. Inherently, mergers (and further consolidation of any market) often lead to less, not more, competition. I get it, many of us were looking forward to jetBlue-Spirit, or whatever, but, you’re drawing the wrong conclusion here. We’ve agreed in the past on the problems of monopolization, regulator capture, barring of new entrants, etc. And, within aviation, the real issues today are proper funding of workers, new technology, and better regulations to ensure workers’ rights and consumer protections.
The real issue is that other than a handful of niche airlines, no airline in the US can make money by flying. Without cc income they’d all be sucking wind.
What that means is that alternate sources of high margin revenue support lots of excess capacity. It’s a barrier to entry and it’s why Spirit and Frontier don’t have a very bright future.
When, and if, airlines like Allegiant, Breeze, Avelo begin to grow beyond their niche markets in the current environment they too will be squashed like a bug on a cockpit window. After low served markets are tapped out if an airline wants to continue to grow then it’s onto LGA/ORD, DFW/DCA and ATL/LAX type routes. Sun Country for now has stayed in it’s lane and one reason the airline is doing reasonably well.
This is a very informative episode. I hope people take the time to listen to it themselves instead of relying only on second hand information.
Maybe we shouldn’t be too upset when ULCCs fail. If there is an opportunity for a ULCC to capture a portion of the market, three or four will enter, almost all of which will fail. The remaining ULCC will either stay as a ULCC or become a “pseudo-legacy” carrier, which is how I see Southwest, especially in the last few months. The challenge is, from the perspective of the customer, the failures of ULCCs come at random. By purchasing a ticket for $50, they are gambling that the airline will continue to operate and honour the contract. Should there be some sort of protection for consumers in this case? Will such protection create moral hazard for ULCCs? Should ULCCs be banned from flying internationally, so that the State Department does not have to face stranded Americans when a ULCC fails? Interesting questions. But I don’t think that permitting mergers is the best way to prevent ULCC failures, if they need to be prevented at all.
@DesertGhost — You’re not wrong. It’s about an hour and half long. Perfect for a listen on a shorter flight. They discuss a decent overview of the commercial aviation industry, from air-mail, to regulation, to post-deregulation, to consolidation, etc. Even if I somewhat disagree with Anderson’s ‘hot take,’ I do like the way he speaks, respect his experience in aviation (and with choo-choos.) He’s a businessman! (He’ll run the country… like a business!)
But would we have 4? By Anderson’s calculation he is saying United would be a standalone carrier.
Did they have the financial strength to remain independent? If so what was the urgency at the time to merge?
Maybe he thinks it would have been…
NW+CO
UA+pre-HP US (this was attempted in 2000, shot down just before 9/11)
AA+TW+?
DL+?
And that also might have assumed Alaska and Hawaiian being absorbed along the way as well
Funny how the airlines are all for competition…until they’re not. Seems like just earlier this year that the airlines were screaming bloody murder over the UA-B6 partnership that is designed to increase competition.When F9 and NK considered merger their competitors moved to block it.
Mr. Anderson’s crocodile tears are a waste time.
It’s funny how CEOs love to take full credit for successes at their businesses but are the first to blame the government for their failures.
It is an interesting listen but there is very much a “look what we did, bro” revision of history or at least failure to recognize that other airlines were much more influential in the industry than was said on this podcast.
The actual leaders in on-time and cancellation rates in the first decade post 9/11 were largely LCCs and ULCCs including WN. But DL, even before the NW merger, ranked higher in on-time than NW.
NW did have a lower cancellation rate and better baggage handling than other legacy carriers but the discussion would have you believe that NW led the WHOLE industry – and that is just not factually accurate.
DOT data is still available for all of this decade.
As for the discussion about consolidation, it is absolutely true that the government imposed hardship imposed restrictions on airlines – perhaps more than any industry – post 9/11 and during covid and then manipulated the outcome of the industry including by failing to allow failing carriers to fail.
It is far from certain that NW and CO would have resulted in a 4th carrier and that AA, DL and UA would have not figured out how to find dance partners.
DL did look seriously at UA during UA’s bankruptcy post 9/11 but chose NW because NW was smaller and DL was much more confident they could get NW non-pilot employees to vote out their unions -and they were right.
It does speak to NW that they were as sought after as they were; AA looked seriously at them, CO wanted them, but DL ultimately got them.
And Anderson is right that DL, the airline he once ran, has set the cost structure that has made it impossible for low cost carriers to create the revenue to cover high labor costs.
We are very likely in the final chapter of consolidation because no one can keep propping up perpetually failing airlines and the costs are too high for start ups to work.
Interesting podcast but a little too much Richard and Doug back patting
What’s missing from this debate is that competition in the U.S. airline market isn’t just undermined by mergers, but by common ownership and multimarket contact among the carriers. The largest shareholders of Delta, United, Southwest, and American are the same institutional investors: BlackRock, Vanguard, and State Street. This means that all four airlines effectively answer to the same financial overlords. Studies have shown that when these common owners’ stakes rise, fares on overlapping routes rise too, even without formal coordination. Add to that the ‘capacity discipline’ signaling airlines make on earnings calls, and you get a textbook case of tacit collusion hiding in plain sight. The issue isn’t that regulators blocked too many mergers, it’s that they never modernized antitrust policy to deal with 21st-century forms of coordinated market behavior.