A new Big Three scenario September 2000
The odds are lengthening against a United/US Airways merger. This summer has been a bit of a nightmare for US travellers who have faced long delays and cancellations caused partly by a "work to rule" on the part of United’s pilots. This has evoked a fear of big labour — if limited action on the part of one of the Big Six network carriers causes such distress, what would be the impact if one of the propose Big Three went on strike?
This anxiety has been added to almost universal popular concerns about the anti–competitive effects of mergers, to the extent that the only way that United/USAirways will conceivably get through is if US Airways claims to a failing company. There are repercussions in Europe, where the BA/KLM talk continue, as the argument to the EC for allowing this merger would have been stronger had the US carriers embarked on another round of their consolidation process.
Ironically, at least some of the low–cost carriers would appear to welcome mergers among the Majors. For instance, Ryanair (see pages 10–13) sees more opportunities arising from a European consolidation trend.
Moreover, an "informal examination" of the impact of US consolidation (UA/US, DL/CO and AA/NW) by Darryl Jenkins of George Washington University (www.gwu.edu) has questioned the conventional wisdom that consolidation inevitably leads to less competition. He suggests the opposite, noting that when the Majors enter new markets against other majors, there is always bloodletting. One of the more likely of nine post–consolidation scenarios he considered goes as follows.
As the three network carriers emerge and stimulate traffic in small and mid–size communities, new competitors — most notably Southwest — begin to discover new sources of growth. Because Southwest has the most immediately–available resources, it moves into these markets rapidly. Southwest’s crowns in the Midwest become Minneapolis and St. Louis.
Southwest, already the number–two carrier of domestic air passengers, uses its St. Louis and Chicago–Midway hubs for east–west connecting routes and its new quasi–hub in Allentown, PA, to capture a large share of short–haul traffic on the East Coast. It becomes possible to reach virtually any metropolitan area in the US on Southwest with only one connection — and, lo and behold, Southwest has become the fourth network carrier.
This creates enormous competitive pressures as the Big Three fight to protect their existing territories on one hand, and to fend off Southwest.
At the same time, a full–fledged fare war emerges between the other three big network carriers and lasts for three months (by coincidence, the length of the last all–out fare war, back in 1991). After each airline has lost millions, fares finally stabilise at a lower level, providing some profits, and an uneasy cease–fire takes hold.
The fare war is bad news for some small airlines. Those with high costs fade into the sunset; others survive because their costs are low enough to operate in a low–fare environment. These smaller carriers begin their own consolidation, primarily for defensive purposes. The result is more competition from big airlines, Southwest is more powerful than ever, and once small airlines that have metamorphosed into larger airlines.
Its a possible consequence — conventional wisdom rarely predicts the right outcome.