Airline Mergers and Consumers

Before the US DOT Advisory Committee for 

Aviation Consumer Protection

Daniel M. Kasper 

October 29th, 2014
Presentation Overview

1. Key drivers of airline consolidation

a) Relentless expansion by LCCs

b) Unsustainable financial results

c) Network business model required greater market 

ubiquity

2. Impact of mergers on fares and fees

3. Other impacts

4. Conclusions

1
2

PERCENTAGE OF DOMESTIC O&D PASSENGERS WITH LCC 

OPTIONS, 1993-2013

27%

34%

45% 48% 47% 49% 52%

58%

63% 65%

68% 71% 71%

75% 77% 78% 77% 79% 80% 81% 80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Percentage of Passengers with LCC Options

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

In the decade prior to the Delta/Northwest 

merger, LCC market penetration increased 

substantially

Sources: U.S. DOT DB1B; U.S. DOT T100.

Notes: Frontier includes Midwest in 2009. Passengers with LCC options are passengers on routes where an LCC has at least a 5% O&D passenger share. 

Airports in the following domestic metropolitan areas are grouped: Chicago (ORD, MDW), Cincinnati (CVG, DAY), Cleveland (CLE, CAK), Dallas (DFW, 

DAL), Houston (HOU, IAH), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San Francisco/Bay Area (SFO, OAK), 

Washington DC/Baltimore (DCA, IAD, BWI), and Tampa (TPA, PIE). LCCs include Southwest, National, Morris, AccessAir, Pro Air, JetBlue, AirTran, Reno 

Air, Valujet, ATA, Spirit Air, Eastwind, Sun Country, Allegiant, Frontier, Vanguard, Skybus, Virgin America, Western Pacific, Air South, Midway, Kiwi, and 

Independence Air.
3

NET PROFIT/(LOSS)

17.0

-65.7

12.6

2.1 1.7 2.7

-75

-65

-55

-45

-35

-25

-15

-5

5

15

25

1993-2000 2001-2009 2010-2013

Net Profit/Loss ($Billions)

Legacy Carriers LCCs

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

Between 2000-2009, large network carriers 

suffered huge financial losses

Sources: U.S. DOT Form 41; 2013Q3 results from Carriers’ 10-Q SEC filings and Press Releases.

Notes: Mainline operations. Not adjusted for special charges. LCCs include JetBlue, Independence Air, Frontier, AirTran, Allegiant, Valujet, 

Midway, Morris Air Corporation, Kiwi International, National Airlines, Vanguard, Spirit, Reno Air, SkyBus, Sun Country, ATA, Virgin America, 

Western Pacific Airlines, Eastwind Airlines, Midway, Southwest, and Air South. Legacy carriers include American, United/Continental, 

Delta/Northwest, US Airways/America West, Alaska, Hawaiian, Aloha, and TWA. 2013Q3 results do not include Frontier, Virgin America, or Sun 

Country.
4

COMPARISON OF FIVE YEAR AVERAGE RETURN ON INVESTED

CAPITAL (ROIC) VS. CHANGE IN DOMESTIC CAPACITY

American US Airways

Delta

United

Alaska

Southwest

JetBlue

Spirit

Allegiant

-5%

0%

5%

10%

15%

20%

-5% 0% 5% 10% 15% 20% 2008

-2012 ASMs CAGR

2008-2012 Average Return on Invested Capital

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

Carriers that consistently covered their cost of 

capital grew — carriers that did not shrank

Sources: Carriers’ 10-K SEC filings; OAG.

Notes: United includes Continental, US Airways includes America West, Southwest includes Airtran and Delta includes Northwest. Invested 

Capital is the sum of Long-term Debt, Capital Lease Obligations, Shareholder Equity and the Capitalized value of aircraft operating leases. 

Return is the sum of Operating Income adjusted for Special Items, Non-Operating Non-interest Income and Imputed Interest from Capitalized 

leases.
5

STATES WHERE US AIRWAYS AND AMERICAN HAD AT LEAST A

10 PERCENT SHARE OF DOMESTIC O&D PASSENGERS

Pre-Merger US 

Airways

Pre-Merger 

American

Post-Merger 

American/US 

Airways

Why 

Airlines 

Merged

Impact of 

Mergers on 

Fares 

Other 

Impacts

Mergers enabled legacy carriers to create more 

comprehensive networks that offer consumers 

more convenient schedules and travel options

Sources: U.S. DOT DB1B; U.S. DOT T100, YE-2013-Q1

Notes: New York and New Jersey are grouped. Maryland, Virginia and the District of Columbia are grouped. Maps show 

the states in which at least 10% of domestic O&D passengers travel on the respective carrier.
6

U.S. AIRLINE INDUSTRY BREAK-EVEN LOAD FACTOR VS. ACTUAL

LOAD FACTOR, 1990-2013

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

Load Factor

Actual Load Factor Break-Even Load Factor

1990-1992

Industry net loss:

-$10.3 Billion 

2001-2009

Industry net loss:

-$64.0 Billion

1993-2000

Industry net profit:

$19.0 Billion 

2010-2013

Industry net profit:

$15.3 Billion 

Sources: A4A; U.S. DOT Form 41.

Notes: Losses are net and exclude cargo carriers. Break-even load factor is system-wide.

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

More ubiquitous networks have helped carriers to 

restore load factors above break-even levels
7

REAL DOMESTIC FARES (ADJUSTED TO 1,000 MILES), WITH AND

WITHOUT FUEL COSTS,1991-2013 

$209$200$210

$189$190$184$183$193$183$173$157$144$138$120$106$112$105 $94 $108$108$100$103$108

$35

$31 $27

$23 $22 $25 $23 $17 $20 $32

$26

$23 $26

$34 $47 $49 $51 $68

$37

$48 $64 $63 $59

$2 $3

$2 $3 $3 $3 $6

$11

$12 $11 $11 $11

$244

$232$238

$213$213$211$208$211$205$207

$185

$169$166

$157$155$164$160$167

$156

$168$175$178$178

$0

$50

$100

$150

$200

$250

$300

19911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013

Domestic One-Way Fares Including Bag 

and Change/Cancellation Fees (2013 $)

Fare ex. Fuel Cost Fuel Cost Component of Fare Avg. Bag & Change/Cancellation Fees

Delta & 

Northwe

st

2008

United & 

Continent

al

2010

Southwe

st & 

AirTran

2011

American 

& US 

Airways

2013

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

Fares (controlling for fuel and inflation) have 

remained basically flat—and below 2000 

levels— notwithstanding recent mergers...

Sources: U.S. DOT Form 41; U.S. EIA; A4A; U.S. BLS.

Notes: Domestic. One-Way Fares are stage-length adjusted to 1,000 miles. Total fuel cost is calculated as fuel consumed 

multiplied by average jet fuel price. Excludes taxes and PFCs.
8

Academic Research

“The projected potential 

aggregate fare increases from 

most legacy mergers are thus 

relatively small, and they are 

presumably far overshadowed 

by the potential efficiency gains 

from such mergers.” (pg. 14).

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

... A finding that has been confirmed by 

published academic research
9

LEGACY VS. LCC COSTS PER AVAILABLE SEAT MILE, 1991-YE 2013-Q1

5.99

6.67

12.43

11.02

4

5

6

7

8

9

10

11

12

13

14

1991199219931994199519961997199819992000200120022003200420052006200720082009201020112012FYE2013Q1

Stage Length Adjusted CASM (FY2013Q1 Cents)

LCCs Legacy Carriers

-39.4%

-51.8%

-47.9%

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

LCCs still enjoy a substantial cost advantage 

that disciplines legacy carrier fares

Sources: U.S. DOT Form 41; U.S. BLS.

Notes: Adjusted to a 1,000 mile seat stage length. In FYE2013 cents. Legacy carriers include American, US Airways, 

Delta, United, TWA, Continental, Northwest, Pan Am, and America West. LCCs include Southwest, National, Morris, 

Accessair, Proair, JetBlue, AirTran, Reno Air, Valujet, ATA, Spirit Air, Eastwind, Sun Country, Allegiant, Frontier, Vanguard, 

Skybus, Virgin America, Western Pacific, Air South, Kiwi and Independence Air.
10

CHANGE IN ASMS SINCE 2008

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

Lower relative costs have enabled nonmerging carriers to rapidly expand during the 

period of mergers

Source: OAG.

Notes: Merged carriers include American, Continental, Delta, Northwest, US Airways, United, Southwest and AirTran. Domestic 

and international.
11

CHANGE IN AVERAGE DAILY SEATS, 2010-Q1 VS. 2015-Q1

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

Travelers in most large cities have benefitted 

from increased capacity over the past five 

years

Source: OAG.

Notes: Largest 50 U.S. cities by 2014 average daily seats.
12

CHANGE IN DELTA’S AVERAGE DAILY SEATS, 2010-Q1 VS. 2015-Q1

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

Post-merger, Delta redeployed its fleet to provide 

consumers in many of its non-hub cities—including 

other carriers hubs—with more flight options

Source: OAG.

Notes: Largest 50 U.S. cities by 2014 average daily seats.
13

New LCC Routes Launched

New LCC Routes Launched to/from 

Delta and Northwest Hubs Since Merger

Memphis

Atlanta

Cincinnati

New York

Detroit

New LCC Routes Launched to/from 

United and Continental Hubs Since 

Merger

Minneapolis

Los Angeles

Houston

New York

Cleveland

Chicago

Denver

Source: OAG.

Notes: A destination is considered served if it is served by at least 8 flights in one month. LCCs include Southwest, JetBlue, AirTran, 

Frontier, Spirit, Sun Country, ATA, Allegiant, National, Vanguard, Access Air, Eastwind, Pro Air, Reno, Air South, Virgin America, and 

Midway. Frontier includes Midwest.

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

In addition, there has been substantial entry 

by LCCs at merged carrier hubs
14

PERCENTAGE OF DOMESTIC O&D PASSENGERS WITH LCC OPTIONS

1997 2007 FYE-2013-Q1

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

LCCs have greatly expanded their geographic 

reach 

Sources: U.S. DOT DB1B and DB1A; U.S. DOT T100.

Notes: Domestic Passengers with LCC options defined as passengers traveling in city-pairs where at least one LCC has at least a 

5% O&D share. LCCs include ATA, Southwest, AirTran, Allegiant, Frontier, JetBlue, Spirit, Sun Country and Virgin America. New 

York and New Jersey are grouped. District of Columbia, Virginia, and Maryland are grouped. New York and New Jersey are 

grouped. District of Columbia, Virginia, and Maryland are grouped.
15

CURRENT LCC FLEET VS. NEW

AIRCRAFT ORDERS

58

55

53

199

677

113

80

40

187

512

0 100 200 300 400 500 600 700 800

Spirit Airlines

Frontier Airlines

Virgin America

JetBlue Airways

Southwest Airlines

Number of Aircraft

Current Fleet New Aircraft Firm Orders and Options

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

New aircraft orders suggest LCCs will continue 

to expand and enter more new markets

Sources: Ascend; Spirit Presentation, Citi 2014 Industrials Conference, September 23, 2014.
16

NEW INTERNATIONAL ROUTES LAUNCHED BY LEGACY CARRIER SINCE 2010

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

Legacy carriers have launched over 140 

new international routes since 2010 

Source: OAG

Notes: Routes represent airport-pairs that were served at least 20 times by legacy carriers in 2014 and not served in 2010.
17

LEGACY CARRIER AIRCRAFT DELIVERIES (2000-2019)

188 204

84

31 19 24 10 9

53 69 61

31

59

103 89

203 208 222

184

108

61 39

25

16

10 3

8 10

2

11

6

0

8

15

11

22

31

34

32

27

249243

109

47

29 27 18 19

55

80

67

31

67

118

100

225

239

256

216

135

0

50

100

150

200

250

300

20002001200220032004200520062007200820092010201120122013201420152016201720182019

Narrowbody Widebody

Orders/Options

Why 

Airlines 

Merged

Impact of 

Mergers 

on Fares 

Other 

Impacts

And after a decade long hiatus, legacy carriers 

are finally renewing and upgrading their fleets

Source: Ascend.

Notes: Orders includes firm orders, options, and letters of intent. Legacy Carriers include Delta, Northwest, American, US Airways,

TWA, America West, United and Continental.
18

Closing Thoughts

Consumers benefit from competitive prices and 

better network options

• Recent airline mergers are part of the natural 

evolution of the post-deregulated industry

• With higher costs and fragmented networks, 

legacy carrier were ultimately unable to 

compete successfully against LCCs in the 

domestic U.S. market

• Bankruptcies reduced costs & mergers 

strengthened legacy networks
19

Closing Thoughts, II

Consumers today can chose from the widest 

array of price and service options in airline 

history

• Legacy carriers provide ubiquitous global 

networks with the most schedule and product 

options 

• Competition from LCCs has broadened to 

include “higher-end” LCCs such as JetBlue 

and Virgin America and several “ultra-LCCs” 

such as Spirit and Allegiant whose costs are 

even lower than Southwest’s
20

Closing Thoughts, III

Improved profitability has enabled legacy 

carriers to increase investments in aircraft, 

products & services that benefit consumers 

in both domestic and international markets

• For the first time in recent memory, legacy 

carriers are covering their cost of capital, 

enabling them to invest in new products 

and services that benefit consumers