The process of consolidation among air carriers.
A wave of mergers, or consolidations, hit the airline industry in the 1980’s, caused in part by the end of government regulation. From 1938 until the passage of the Airline Deregulation Act of 1978, the Civil Aeronautics Board (CAB) had regulated the industry. The CAB oversaw airline fares, determined routes, and ensured that no major airline went out of business. Any mergers had to be approved by the CAB. During the era of regulation, a significant wave of consolidation eliminated some independent airlines. In 1952, Western Air Lines took over Inland Airways, and Braniff acquired Mid-Continent Airlines. Chicago & Southern merged with Delta in 1953. Continental bought Pioneer Airlines in 1955. Eastern obtained Colonial Airlines in 1956. In 1961, United Air Lines acquired Capital Airlines, thereby becoming the largest airline in the United States.
Congress passed the Airline Deregulation Act of 1978, disbanding the CAB and giving its authority to review airline industry practices to the Department of Transportation. The review process, including the ability to approve proposed mergers, passed to the Department of Justice’s Antitrust Division on January 1, 1989.
Consolidation swept the airline industry after deregulation, with twenty major airline mergers occurring in the first eight years of deregulation. The high point of consolidation activity was in the mid 1980’s. In 1985, Southwest Airlines bought Muse Air, taking over a Dallas rival. A number of large mergers took place in 1986: Delta bought Western Airlines; Northwest took over Republic Airlines; Frank Lorenzo’s Texas Air Group bought Eastern Air Lines; TWA bought Ozark; United Air Lines took over Pan American’s Pacific routes. The mergers continued into 1987, when American Airlines bought Air Cal and USAir took over Pacific Southwest Airlines (PSA). USAir also purchased Piedmont. By 1987, there were ten airline holding companies operating nationally: Texas Air, United, American, Delta, Northwest, TWA, Pan American, USAir, Piedmont, and Southwest Airlines. These airlines controlled about 95 percent of the market in the United States.
Several factors explain the wave of airline consolidations in the 1980’s. One is the lack of antitrust enforcement by the Reagan administration. Critics of this perspective point out that consolidation swept through many other industries in the United States during the 1980’s. Had the airline industry not been regulated until 1978, the consolidations would have taken place earlier. Airline holding companies were seeking critical mass in order to cope with increased costs and the decreased profits caused by fare wars. Economic pressures encouraged smaller regional airlines to merge into larger units.
A further wave of mergers struck the airline industry in the late 1990’s. By 2001, only five major airlines, American, United, Delta, Northwest, and Continental, plus the discount airline Southwest, remained. Since the end of regulation, more than fifty airlines were acquired or merged. American Airlines bought TWA in 2001, saving the troubled carrier from bankruptcy. Also in 2001, the proposed acquisition of US Airways by United was frustrated by concerns that the combined airline would control up to 95 percent of the departure gates at East Coast airports.
The fresh wave of mergers caused U.S. lawmakers to consider a moratorium on airline mergers. Representative Louis Slaughter, a Democrat from New York, and Representative Peter DeFazio, a Democrat from Oregon, introduced the Airline Merger Moratorium Act of 2001 in the 107th Congress (2001-2002). The bill would have made it unlawful, for a one-year period, for a major air carrier to acquire assets or voting securities of another major airline carrier. In a press release announcing the bill’s introduction, Representative DeFazio identified the problem when he stated, “The airline industry should focus on improving customer service and increasing consumer choices, rather than rushing to gobble each other up.”
The intent of airline deregulation was to make the airline industry susceptible to the effects of a free-market economy. The intended goal was to increase competition among the airlines. This competition caused massive consolidation as some airlines failed under economic pressure and poor management and were acquired by stronger airlines. Consumer groups have noted that customer service has suffered because of the numerous mergers, as airlines try to remain profitable to protect themselves from acquisition. In some parts of the country, travelers are not able to choose among airlines, forcing them to pay higher airfares. Mergers also significantly affect airline employees’ morale, as a newly merged airline lays off employees to recognize the cost savings of combining two corporations.
Airline consolidation has spread beyond the United States. Particularly in the newly united Europe, national airlines are seeking alliances with each other and with American carriers. Because federal law prevents a foreign carrier from having a controlling interest in a U.S. airline, most of the relationships are in the form of alliances. The oneworld Alliance is an effort by thirty-one airlines traveling to 550 destinations in 130 countries. American Airlines is the major U.S. carrier in the alliance. With the restrictions on foreign ownership of U.S. airlines, these alliances could be the future of airline consolidation.
Hawkins, Chuck. “You’ll Buy Tickets, Airlines Will Buy Each Other.” Business Week no. 2980 (January 12, 1987). Brief analysis of the wave of airline mergers in 1986. Offers predictions for the industry. Mann, Paul. “Airline Daggers Drawn in Merger Convulsion.” Aviation Week & Space Technology 154, no. 7 (February 12, 2001). This article discusses some of the challenges faced by the airline industry as a result of the decrease in airline competition. Peterson, Barbara Sturken, and James Glab. Rapid Descent: Deregulation and the Shakeout in the Airlines. New York: Simon & Schuster, 1994. An excellent examination of the changes in the airline industry caused by deregulation. Includes illustrations and bibliography. Petzinger, Thomas. Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos. New York: Times Books, 1995. Critical analysis of the challenges facing airlines as the industry consolidates.
Airline Deregulation Act
Airline industry, U.S.
Delta Air Lines
Trans World Airlines
United Air Lines