Air Transport World

Consolidation: is it threat to the industry? Arguments fall close to the pro or anti deregulation lines as Washington begins to notice airlines disappearing.

Consolidation: Is it a threat to the industry?

It appears that Piedmont Airlines is buying Empire Airlines. People Express has just moved to take over Frontier Airlines. These are two of the latest in a growing number of mergers, acquisitions and disappearances in the U.S. airline industry that could be lending credence to the theory that deregulation would cause consolidation in the industry.

The airlines who feared for their lives in a free-market world--and therefore opposed deregulation--are beginning to see ominous signs that their worst fears might be realized. What they feared was a wave of consolidation that would leave only a few giant airlines surviving with perhaps a few smaller carriers serving special markets. Their biggest fear was that they would not be one of these survivors.

During the 1970s debate over competition, opponents of deregulation warned that the upshot of economic freedom would be a few big airlines dominating the industry. Proponents, those favoring deregulation, rarely confirmed or denied the consolidation threat. Mostly, the deregulators insisted that the freedom to enter markets and undercut prices would keep potential oligopolists honest.

Recession pain

Deregulation was barely in place before the recession hit. Many new airlines were born in the first five years of freedom, but not as many as there might have been without the economic downturn. People Express succeeded but several others floundered: Air One, Pacific Express, Midway and Muse Air, among others.

In the meantime, the incumbents weren't all performing well, either. Republic, Eastern, Pan Am and Western were on the very-sick list. Continental and Braniff went bankrupt. Others muddled through the downturn in varying degrees of financial health.

Despite the losses, two airlines, United and American, were beginning to demonstrate their strategy for maximizing the new no-holds-barred policy. That strategy, heavily linked to their computer reservations systems, Apollo and Sabre, didn't really make itself felt until it was already so powerful it left other airlines, including other CRS vendors, in the dust. United and American apparently had set the stage for exactly the kind of environment predicted by the opponents of deregulation earlier.

Now the air is filled with charges of "concerntration,' i.e., power residing in only a few carriers, and foretelling of "consolidation,' or reduction in the absolute numbers of airlines. Are these fears justified?

Wall Street is talking about consolidation. An airline lawyer says he expects the next 24 months to be "a phenomenal period of consolidation. …

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