Travel Tuesday: The Supply Risk of Market Consolidation and Air Travel – US Airways and United

As I got ready for a trip to Philadelphia this week and investigated my travel options, three choices emerged with any regular frequency -- United, US Airways and Southwest. All the tickets, about a week in advance, were about $500 and change, or roughly 2X what I've paid in the not-so-distant past (a sign certain routes are headed up in cost). I suspect if the rumored on-again, off-again merger between United and US Airways goes through, we'll continue to see upward, sustained pressure on fares. But eventual rising prices on fares is only one of the potential risk elements for travelers and businesses dependent on both airlines.

In the above-linked post, travel writer Ed Perkins opines that a merger between the two would bring about "no effect in the short term, higher fares in the long term, and chaos in the event of a strike." He gets straight to the Spend Management point when he notes, "the primary objectives of giant mergers are to reduce competition, reduce capacity, and increase prices." I have no doubt based on watching how US Airways and others have long gouged travelers in hub airports when competition does not exist on key routes -- not just overall competition, but now a lack of time-based (e.g., 6:00 AM flight) competition as well -- on a consistent basis. Living through US Airways' near monopoly of the Pittsburgh airport when I was at FreeMarkets taught me this.

But fare increases are only one drawback business travelers might face in a merger situation. Strikes are another (major) one. Consider that "Today, among the six giant lines, United's share of their domestic passengers is roughly 13 percent and US Airways' is about 12 percent. A shutdown of either line, separately, would seriously impact nationwide travel. A shutdown of the combined line, with something like a quarter of the total domestic giant-line passengers, would have a disastrous effect. Those of us with long memories remember the chaos of United's 1985 strike; a similar strike in a combined line would be far worse."

The now very real prospect of having a single airline with the same labor unions controlling 25% of domestic travel capacity should give travel managers pause when it comes to supply risk in their travel spend. Business travelers and travel managers worried about the dangers of consolidating their travel spend with a combined United / US Airways entity should think seriously about developing a dual-source strategy, potentially with Southwest Airlines, where overlap between the discount and legacy carriers exists. Given that we've still not seen a major rebound in travel spending, now might be as good as time as any to put in place contracts, discounts and rebate programs based on a dual source model.

- Jason Busch

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