# 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

12 

# P ERCENTAGE OF 

# D OMESTIC 

# O&D P ASSENGERS WITH 

# LCC

O PTIONS 

# , 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, CA K), 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 

# N ET 

# P ROFIT



# /(L OSS 

# ) 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 A mer ica, or Sun Country.4 

# C OMPARISON OF 

# F IVE 

# Y EAR 

# A VERAGE 

# R ETURN ON 

# I NVESTED 

# C APITAL 

# (ROIC) VS 

# . C HANGE IN 

# D OMESTIC 

# C APACITY

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 operat ing leases. Return is the sum of Operating Income adjusted for Special Items, Non

- Operating Non

- interest Income and Imputed Interest from Ca pitalized

leases.5 

# S TATES 

# W HERE 

# US A IRWAYS AND 

# A MERICAN 

# H AD AT 

# L EAST A 

# 10 P ERCENT 

# S HARE OF 

# D OMESTIC 

# O&D P ASSENGERS



# 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 . A IRLINE 

# I NDUSTRY 

# B REAK



# - E VEN 

# L OAD 

# F ACTOR VS 

# . A CTUAL


# L OAD 

# F ACTOR 

# , 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 levels7 

# R EAL 

# D OMESTIC 

# F

ARES 

# (A DJUSTED TO 

# 1,000 MILES 

# ), W ITH AND


# W ITHOUT 

# F UEL 

# C OSTS 

# ,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

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 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 research9 

# L EGACY VS 

# . LCC C OSTS PER 

# A VAILABLE 

# S EAT 

# M ILE 

# , 1991

- YE 2013

- Q1

5.99 6.67 12.43

11.02

4 5 6 7 8 9 10 11 12 13 14

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 FYE2013Q1 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



# C HANGE IN 

# ASM S SINCE 

# 2008 Why Airlines 

### Merged Impact of

Mergers 

### on Fares Other



### Impacts Lower relative costs have enabled non

merging 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 

# C HANGE IN 

# A

VERAGE 

# D AILY 

# S EATS 

# , 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 

# C HANGE IN 

# D ELTA 

# ’ S 

# A VERAGE 

# D AILY 

# S EATS 

# , 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 hubs14 

# P ERCENTAGE OF 

# D OMESTIC 

# O&D P ASSENGERS WITH 

# LCC O PTIONS



# 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 

# C URRENT 

# LCC F LEET VS



# . N EW


# A IRCRAFT 

# O RDERS



# 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 

## N EW 

## I NTERNATIONAL 

## R OUTES 

## L AUNCHED 

## B Y 

## L EGACY 

## C ARRIER 

## S INCE 

## 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



# L EGACY 

# C ARRIER 

# A IRCRAFT 

# D ELIVERIES 

# (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 

## 249 243

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

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019


### 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 networks19 

# 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’s20 

# 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