Award Winning Blog

Monday, December 8, 2014

Telecom Policy Lessons From Recent Aviation Mergers

         During this sabbatical year, I have had more opportunities for air travel. While I still marvel at the opportunity to be somewhere on the other side of the globe in a day, I cannot believe how even doubly diminished expectations are not achieved.

            Acquiring companies United, Delta and American swore how buying out a competitor would promote competition and help airlines become more financially stable so they could compete better.  Right, so they can spend up to $35,000 per business class seat and concentrate on the high margin customer even as they install cheaper, smaller and more numerous seats in economy.

            Rather than become more robust competitors it has become easier for the airlines to siphon consumer surplus by raising rates.  The survivors have less incentives to concentrate on consumer service, what with all the new opportunities to extract higher revenues, particularly from ancillary services like charging $300 for a change in an itinerary.

            Even former mavericks have come to realize that they have more to gain by joining the consensus than by offering a better value proposition.  Both Southwestern and Jet Blue have implemented some of the new fees the other carriers charge and neither typically offer the lowest fare anymore.  The smaller group of airlines can engage in consciously parallel pricing—some might call it price fixing—and get away with it, because no one wants to buck the trend of ever rising prices.

            If these mergers were supposed to make the airlines better competitors, why aren’t prices dropping, particularly in light of a 30-40% drop in fuel prices?  Most international flights from the U.S. have sizeable fuel surcharges, a term creating the impression that this billing item might drop, or evaporate if fuel prices decline.  This has not happened.  Why part with as much as $615 per trip if no other carrier reduces the surcharge?

            Fundamental economics suggests that if incumbent gouge and get too greedy, they create ever larger incentives for market entry.  Okay, where is the market entry?  It cannot happen when incumbents control all available takeoff and landing slots.  Even with low interest rates, what bank would loan millions to a startup airline boldly willing to jump high barriers to market entry?

            Of course the incumbents have every incentive to exploit their survivorship and to incur the lobbying and campaign investments necessary to sustain the status quo and their upper hand in the marketplace.  Congress is not about to force a reallocation of landing slots to market entrants any more than they would enact a law earmarking radio spectrum for competitive bidding only by non-incumbents. 
            It has become easier from incumbent airlines to pursue a strategy of reducing the value proposition of flight and to unbundle elements so that the sum of the line charges well exceeds the former single fare.  While much of this affects the economy class traveler United Airlines CEO Jeff Smisek even bragged how replacing whole cashews with pieces in business class would save the airline money without any fallout.  This miserly airline does not offer a free glass of wine in coach, even though US Airways does having previously tried to charge for water.

            Tweaks to frequent flier programs and a variety of line items, like that one sees on their cable television and wireless bills, make incumbents not much different than so-called low cost carriers.  These carriers do not look and act much different than carriers like Ryanair or Spirit. 

            So the thought has crossed my mind many times of late whether Comcast and AT&T have anything to offer other than higher stock prices from their proposed $100+ billion acquisitions.

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