Is the Airline Industry an Oligopoly?

NEWS ALERT February 7, 2021, 10:08 a.m. EST: On Monday, Spirit Airways and Frontier Airways introduced the 2 corporations would merge in a deal valued at $6.6 billion. As soon as accomplished, the ensuing firm could be the fifth-largest airline within the nation.

The U.S. airline trade immediately is arguably an oligopoly. An oligopoly exists when a market is dominated by a small group of corporations, actually because the boundaries to entry are vital sufficient to discourage potential rivals. Within the U.S. airline trade the boundaries to entry embody excessive startup prices, infrastructure constraints limiting the provision of take-off and touchdown slots, and market incumbents’ massive economies of scale. Whereas 4 U.S. carriers account for practically two-thirds of the home market within the combination, no single airline’s market share reaches 20%. Some have a better market share at explicit airports or on sure routes, nonetheless.

The Main Airline Gamers

As of October 2021, 4 main airways—American Airways, Inc. (AAL), Delta Air Traces, Inc. (DAL), Southwest Airways (LUV), and United Airways Holdings, Inc. (UAL)—had simply over 65% of the home U.S. market share.

American Airways had the biggest market share, at 18.5%, primarily based on home income passenger miles over the earlier 12 months. Southwest was shut behind with 17.7%, whereas Delta and United had 16.3% and 12.7% respectively.

On Feb, 7, 2022 low-cost carriers Frontier Group Holdings Inc. (ULCC) and Spirit Airways Inc. (SAVE) introduced plans for a $2.9 billion acquisition of Spirit Airways by Frontier, the operator of Frontier Airways. The deal would create the fifth-largest U.S. provider with a mixed home market share of 8.7% within the 12 months by means of October 2021.

Air journey declined markedly in 2020 amid journey restrictions prompted by the COVID-19 pandemic. U.S carriers misplaced a mixed complete of $35 billion on an after-tax foundation that yr. The home airline trade returned to profitability within the second quarter of 2021 and posted a mixed after-tax revenue of $2.7 billion on the third quarter of 2021.

From Deregulation to Consolidation

Between 1940 and 1978, the Civil Aeronautics Board (CAB) regulated home air journey within the U.S. as a public utility. The CAB’s approval was required for adjustments to schedules, fares, and routes. The company was notoriously reluctant to approve airways’ requests for brand spanking new routes, elevating the boundaries to market entry for potential rivals.

The Airline Deregulation Act grew to become legislation in 1978. Its impact was to extend competitors, with fare costs reducing within the 20 years following its introduction. In the meantime, the variety of fares elevated from 207.5 million in 1974 to 721.1 million by 2010.

In depth trade consolidation adopted. Excessive-profile mergers have included Delta with Northwest in 2008, United Airways and Continental Airways in 2010, Southwest and AirTran in 2011, and American Airways and US Airways in 2013. The U.S. Division of Justice sued to dam American’s merger with US Airways however finally settled the case, permitting the deal to proceed after American agreed to divest some airport gates and slots.

Fares rose for a couple of years following the 2007-2008 international monetary disaster, however have broadly declined since 2013.

Within the years main as much as the COVID-19 pandemic, the main U.S. airways minimize unprofitable flights, stuffed a better share of seats on planes, and slowed capability development to command larger fares. As well as, since 2008, the airways have charged ancillary charges for providers beforehand included within the airfare.

New Controversies

Some lawmakers and passengers have continued to take the trade to job for alleged anti-competitive practices. “Shoppers are paying sky-high fares and are trapped in an uncompetitive market with a historical past of collusive conduct,” wrote U.S. Sen. Richard Blumenthal, a Democrat from Connecticut, in a 2015 letter to the U.S. Division of Justice.

Related issues prompted the Justice Division’s antitrust unit to launch an airline trade probe in 2015. That probe didn’t produce ample proof to deliver a court docket case, The Wall Road Journal reported in early 2017.

In February 2021 American Airways and low-cost provider JetBlue (JBLU) launched the Northeast Alliance code sharing settlement below which they’re collectively advertising flights, coordinating operations and offering reciprocal advantages for one another’s loyalty packages.

In September 2021, the U.S. Justice Division filed go well with to dam the Northeast Alliance deal on antitrust grounds, alleging it eliminates competitors at New York Metropolis and Boston airports and harms air vacationers nationwide. Regardless of the pending go well with, American and JetBlue have expanded their co-operation below the alliance over the previous yr. The airways have requested a U.S. court docket to dismiss the federal government’s go well with.

The Backside Line

A handful of U.S. airways deal with the majority of home passenger journey however no single provider has a dominant market share. Some airways do function a big share of the flights from sure airports, and competitors on some routes may be restricted. Regardless of excessive boundaries to entry and chronic complaints of collusion by critics, airfares have broadly declined because the airline trade was deregulated in 1978, and since 2013 following a wave of airline mergers.