The Airlines: What Free Market?

Did you know that a mega-acquisition in the airline industry was just announced last week? It’s a transaction that will create the fifth largest passenger carrier in the United States.

Under normal circumstances, such an announcement would blast across the headlines. The federal government would launch a massive anti-trust review. And business pundits would rush to opine on the extent to which the transaction would impede market competition.

So why didn’t any of these events occur? Perhaps it is because we aren’t experiencing a normal competitive environment in today’s airline industry. After all, there are now only four mega-carriers left in the market. And according to the Associated Press:

“At 40 of the 100 largest U.S. airports, a single airline controls a majority of the market … (and) at 93 of the top 100, one or two airlines control a majority of the seats,”

Thus, even though last week’s announced acquisition of Virgin America by Alaska Airlines would create America’s fifth largest carrier, the post-acquisition entity would be so much smaller than the Big Four that the transaction would wield very little impact on the market.

In fact, there is so little competition that even the recent collapse in fuel prices has done little or nothing to encourage start-up airlines to begin serving smaller cities. When the major carriers pulled out of numerous mid-sized communities several years ago, they blamed soaring fuel prices for making small airplanes (with their limited ticket selling potential) uneconomical.

One would thus presume that the recent fuel price decline would result in a return to these smaller markets. But given the hammer-lock that the Big Four airlines possess over the flying public, there has been little or no such activity.

So the next time you hear an airline executive praise the virtues of a deregulated economy, you might choose to absorb such comments with a grain of salt. After all, in order to experience the benefits of a free market, one much first establish and maintain a condition of competitive balance. In today’s airline industry, though, competition appears to be in very short supply.