In the early part of the last decade while network airlines were restructuring their costs through b

Last week, the US Government Accountability Office (GAO) sent Gerald L. Dillingham, Ph.D, its director of physical infrastructure issues, to testify before the Senate Subcommittee on Aviation Operations, Safety, and Security on issues arising from the proposed merger of American Airlines and US Airways. In his testimony , Dillingham performed an analysis of the merger southwest airlines vacation packages and made several conclusions regarding its effects on the US aviation market. The following is a response to Dillingham's analysis prepared by Aspire Aviation s US-based analyst Vinay Bhaskara, which quote portions of Dillingham's testimony and include Aspire Aviation's response. The analysis below has been forwarded to Dillingham's office per his request on the GAO report.
Dillingham starts by providing an overview of the history of consolidation in the US airline industry, as well as the financial difficulties faced by US airlines culminating southwest airlines vacation packages in the slew of bankruptcies in the 2000s. However, an important factor may have been overlooked when the effects of the consolidation on industry-wide capacity are being analysed.
Although the airline industry has experienced numerous mergers and bankruptcies since deregulation, growth of existing airlines and the entry of new airlines have contributed to a steady increase in capacity, as measured by available southwest airlines vacation packages seat miles. Previously, we reported that although one airline may reduce capacity or leave the market, capacity returns relatively quickly through new airline entry and expansion of the remaining airlines. However, in recent years this dynamic may be changing. southwest airlines vacation packages Domestic capacity growth stalled in 2008 owing to the recession and high fuel prices and has not rebounded despite a strengthening economy and demand for air travel (see fig. 2). In recent years, a key factor limiting capacity growth has been high fuel prices, according to industry analysts.
Indeed, increased fuel prices have played a meaningful role in the reduction of capacity growth since 2008, most notably in that particular year when oil prices spiked to as high as US$147 per barrel. Carriers responded by cutting marginal southwest airlines vacation packages routes that had been rendered unprofitable by the skyrocketing oil prices. Thereafter, demand has not recovered sufficiently to enable resumption of these routes on a large scale owing to a sluggish economy. Lately, several carriers, most notably Delta Air Lines with its recent build-up of routes in the competitive New York City and Los Angeles markets, have begun to resume some of their previous aggressions. Nevertheless, capacity growth as measured in available seat miles (ASMs) following the global financial crisis (GFC) has not followed its typical growth rate of real gross domestic product (GDP) plus 2%. But this is not entirely attributable to the stubbornly high oil prices. In fact, oil prices, currently at US$94.89 per barrel, are more than 40% off their 2008 peak when adjusted for inflation and has remained below US$100 per barrel for the most part since the end of the recession in 2009. These fuel price levels did not stop Europe's aviation market, southwest airlines vacation packages the other market hit hardest by the global financial crisis, from recovering capacity in line with the historical trend, which has witnessed a similar degree, if not greater, of consolidation than the United States during the period.
The major driver behind the trimming of capacity is a paradigm shift in the mindset of US airline network planners. southwest airlines vacation packages In the last four years, network planners at the major US airlines have recognised the inherent southwest airlines vacation packages value in maintaining capacity discipline, southwest airlines vacation packages although some trimmings have been necessitated by changing market realities. Since the 1978 deregulation, US airlines have been notorious for chasing southwest airlines vacation packages market southwest airlines vacation packages share that focuses on growing top-line revenue and passenger growth in lieu of sustained profitability and generating shareholder returns. Remarkably, the financial markets at the very least tolerated southwest airlines vacation packages this strategy especially during the early 2000s, southwest airlines vacation packages in part due to an unduly emotional approach from investors towards airlines, and also due to their willingness to sacrifice profits for growth. But following the global financial crisis, southwest airlines vacation packages investors grew more focused on profitability, which exerted pressure on network planners to contain growth to maintain revenues and the bottom line. The relationship between capacity control and profits is best explained in a supply/demand framework, where capacity southwest airlines vacation packages is the equivalent supply of a perishable product. As supply decreases, airfare increases while holding southwest airlines vacation packages air travel demand constant, allowing airlines to better recoup their costs. This capacity discipline is evident as every US network carrier has committed to keeping 2013 capacity growth at a near or below zero rate.
In the early part of the last decade while network airlines were restructuring their costs through bankruptcy, low cost airlines like Southwest and JetBlue expanded owing to lower costs, especially for labour. As a result, while in 2002, network airlines offered 67% of domestic seat capacity versus 23%  for low-cost airlines, by October southwest airlines vacation packages 2012, network airlines share of domestic seats had fallen to 52% and low-cost airline's share had risen to 33%. However, the expansion of low-cost airlines in recent years may have slowed owing to higher fuel costs that diminished their relative cost advantage over network airlines. With fuel costs consuming a greater proportion of airline operating costs for all airlines, any cost advantage southwest airlines vacation packages that low-cost airlines had with respect to labour costs over network airlines is diluted.
In fact, there has also been a large degree of strategic and revenue convergence between airlines that used to be classified as "low cost," and so-called network carriers. The two carriers Dillingham mentioned, JetBlue Airways and Southwest Airlines, have in fact shifted their strategies to match those of network airlines such as American, Delta, United, Alaska, and Hawaiian Air. JetBlue operates two full-fledged connecting complexes at New York John F. Kennedy southwest airlines vacation packages (JFK) and Boston, with more than 110 flights per day each, as well as several regional north-south connecting complexes at Orlando, Fort Lauderdale which is destined to be expanded, and San Juan. Even Southwest Airlines, formerly a champion of point-to-point southwest airlines vacation packages airline operations, southwest airlines vacation packages now regularly connects more than 40% of its passengers network-wide. And its largest operation at Chicago-Midway, with over 220 daily departures, is composed of close to 55% connecting passengers.
For all intents and purposes, Southwest and JetBlue, southwest airlines vacation packages as well as Virgin America, can be lumped in with the other network carriers, with the only difference being the lack of a short-haul premium cabin, although JetBlue southwest airlines vacation packages will soon have a premium offering on transcontinental sectors. The true distinction is that between the aforementioned network carriers and a new wave of so-called ultra low-cost carriers (ULCCs). The latter group, consisting southwest airlines vacation packages of carriers such as Allegiant Air, Spirit Airlines and Frontier Airlines, features mostly unbundled products almost every part of the product is purchased separately, e.g. more legroom, drinks, meals, and customers can mix and match which service options they want in an a-la-carte manner. This has profound implications from an anti-trust perspective, which makes the long-held belief that giving legacy southwest airlines vacation packages LCCs Southwest, Virgin southwest airlines vacation packages America and JetBlue airport slots will preserve competition and keep prices relatively stable. This is highlighted by the government response to the slot swap between Delta Air Lines and US Airways at LaGuadia and Washington Reagan National.
Crucially, the government s responses to the pending American Airlines/US Airways merger should be focused southwest airlines vacation packages on expanding access for ULCCs, insofar as the goal of such measures is to keep fares down following the merger.
At the same time, capacity reductions in certain markets from a merger or acquisition could also serve to generate additional revenue through increased fares on some routes. Some studies of airline mergers and acquisitions during the 1980s showed that prices southwest airlines vacation packages were higher on some routes from the airline's hubs soon after the combination was completed. Several studies have also shown that increased airline dominance at an airport results in increased fare premiums, in part, because that dominance creates competitive barriers to entry. At the same time, though, even if the combined airline is able to increase prices in some markets, the increase may be transitory if other airlines enter the markets with sufficient presence to counteract the price increase. In an empirical study of airline mergers and acquisitions up to 1992, Winston and Morrison suggest that being able to raise prices or stifle competition does not play a large role in airlines' merger and acquisition decisions.
Much has changed since 1992. Thanks to increased consolidation and product bifurcation between network carriers and ULCCs, meaningful competition to the dominant legacy carrier at fortress hubs has all but evaporated. Today, one of the key synergies that arises from a merger is the capacity reduction that can be achieved by eliminating redundant seats and flights. The primary form this takes is by eliminating, or weakening weaker southwest airlines vacation packages hubs that suffer from a great degree of overlap.
southwest airlines vacation packages For example, following southwest airlines vacation packages the merger between Delta and Northwest Airlines, Delta's once massive hub in Cincinatti which at its peak in 2004 had 595 daily departures was quickly de-emphasised in favour of the larger and more lucrative hub at Detroit, southwest airlines vacation packages with peak day departures dropping to just 113. Some of the connections lost at Cincinnati were replaced with capacity up-gauges at Detroit, but much of the capacity was simply allowed to lapse. A lot of the connectivity on transcontinental and Midwest-destined itineraries was lost and fares on these routings rose commensurately. Fares also jumped for Cincinnati origin and destination (O D) traffic, in what w