By AirlineFinancials.com LLC
This week, under some of the most incredulous accusations ever foisted against the airline industry, the US Attorney General Eric Holder with support from a handful of state Attorneys General blocked what should have been the -one-- airline merger that was a no brainer to approve.
Ten years ago American Airlines:
- Was the largest of six major network carriers. Today, of the four that remain, American is by far the financially weakest and the distant third largest network carrier
- Was the largest airline employer with over 100,000 employees. Today, American only has 64,000 employees (mainline operations)
- Operated over 2,700 flights per day. Today, American operates only 1,800 flights per day (mainline operations)
Most important to recognize is that all of the above occurred -without-- American merging with another carrier. Furthermore until the DOJ's actions this week, American was on track to exit their ongoing bankruptcy and merge with the industry's smallest network carrier, US Airways.
To in any way compare the -current-- airline industry to what the industry was in 2001 and before the 911 tragedy is ludicrous. 911 was the direct cause of airline bankruptcies, billions in financial losses, tens of thousands of jobs lost, and the loss of passenger demand. Just as the industry was bailing out of its 911 demise, it was hit with skyrocketing fuel increases soon followed by the economic collapse of 2008.
Contrary to the Attorney General's accusations, the loss of capacity, airline jobs, and higher air fares had nothing to do with airline mergers.
Here's what the Attorney General left out from his outrageous vote pandering actions to stop the American and US Airways merger.
- Starting with year 2001 through year 2005, Delta, Northwest, American, United, Continental, and US Airways lost money -every-- year. In fact, excluding $billions in additional bankruptcy losses, the major network airlines above accumulated $33 billion in losses over those five years!
Since year 2000, excluding relatively small profits in 2006 and 2007, American has lost money every year and has accumulated over $12 billion in NET losses over that time period. That loss excludes several $billion more in losses that will be accounted for when American exits their ongoing bankruptcy.
Since year 2000 and through year 2012 and after accounting for the last three profitable years, no major network airline to date has a NET profit. In fact all six of the major network airlines noted above had an accumulated NET loss of $30 billion as they started this year.
Southwest's profit margins since the 2008 Delta/Northwest merger averaged a depressing 2.4%. As low as that was for Southwest, they led the industry in profit margins over the past five years. For some perspective, Southwest's profit margins for the five years prior to 911 averaged 9.1%.
- By any credible analyst's accounting, it was only due to the recent mergers that the year-after-year industry loss of $billions finally stopped. While several airlines were able to achieve record profits over the past couple of years, their profit margins were in the low single digits which would be financially unacceptable for most business sectors.
- In 2012, excluding special items, Delta had the network carriers' -highest-- profit margin with a paltry 4.2%. US Airways margin was 3.9%. Southwest Airlines margin was a dismal 2.4%. Once again, American had another loss and reported a negative .5% margin. Note that Delta's network leading margin was less than half of what it was in the later 1990's.
- In 2008, Delta (NYSE:DAL) and Northwest skated through their merger. In 2012, Delta controlled 25% of the industry's* capacity
- In 2010, in order to compete with a significantly larger merged Delta, United merged with Continental and once again, there were no DOJ objections. In 2012, United/Continental controlled 27% of the industry's* capacity
- In 2011, Southwest Airlines (NYSE:LUV) was losing market share to their much lower cost competitor Air Tran. Once again, the DOJ allowed the Southwest-Air Tran merger to sail through with no objections. In 2012, Southwest/Air Tran had the industry's highest domestic market share (Air Tran operates a small amount of routes to the Caribbean and Mexico). It's important to note that the Southwest-Air Tran merger pushed Southwest into the nation's largest domestic airline
Prior to Southwest's acquisition of Air Tran only two years ago, Air Tran was one of the nation's -lowest-- fare airlines. In fact, immediately prior to that merger, Air Tran's average fare per mile was 20% --less-- than Southwest.
So where did the DOJ's prior to this week's open door merger policy leave American and US Airways (LCC)? In 2012, American controlled just 18% of the industry's* capacity, and US Airways was well behind with 10%
While it -sounds-- great to hear how keeping American and US Airways separate will somehow magically create stronger better and more competition and thereby keeping air fares lower, nothing could be further from the reality of what will occur.
The facts are that Delta, United, and Southwest -all-- with their recent DOJ approved mergers have now become so large and so financially strong, that it is pure fantasy to suggest that either American and/or US Airways will be competitive as stand-a-lone airlines.
The DOJ's Anti-Trust Lawsuit makes several preposterous "claims". One of those claims is that the prior approved mergers -supposedly-were the cause of higher air fares and reduced service/capacity. It's incredibly obvious that the DOJ knows nothing about the industry, where the airline industry has been, and more-so, why it is where it is today.
Here are some "air fare" facts the DOJ conveniently left out of their anti-trust suit:
- Just ten years ago (2002), the (spot) price of jet fuel was .69 cents/gallon. Fuel expense for the industry was less than 14% of industry revenue. Last year, jet fuel averaged $3.06/gallon, a 344% increase. For 2012, 36% of industry -record-- revenues were needed to pay for fuel.
- Ten years ago, the industry average passenger fare to fly one mile (yield) was 11.48 cents. Adjusted just for inflation and excluding the exorbitant increase in fuel costs, the average passenger fare per mile in 2012 would have been 14.65 cents. The actual industry average passenger fare per mile in 2012 was 14.70 cents and barely above simple inflation. After accounting for the increase in ancillary fees and fuel costs, air fares have simply not increased as the Attorney General claims.
For a more visual look at air fares and just how outrageous the Attorney General's claims are, let's look at Southwest's air fares. Note that Southwest operates the most capacity to the most airports in the US and is recognized as the "low fare" airline. Southwest does not have baggage fees. Southwest is typically used by politicians as the "airline" all airlines should be like.
Southwest's average passenger fare per mile (yield) and year-over-year change
Year - cents - y/y change
2002 - 11.77
2003 - 11.97 +1.7%
2004 - 11.76 -1.8%
2005 - 12.09 +2.8%
2006 - 12.93 +6.9%
2007 - 13.08 +1.2%
2008 - 14.35 +9.7%
2009 - 13.29 -7.4%
2010 - 14.72 +10.8%
2011 - 14.97 +1.7%
2012 - 15.64 +4.5%
Total air fare change since 2002 for Southwest was +3.87 cents/mile (+33%). CPI inflation over the same time period was 28%.
When comparing the 2012 passenger fare per mile to year 2002, the largest network merged carriers all had smaller fare increases than (unmerged) Southwest and especially (unmerged) JetBlue.
Change in average passenger fare per mile from 2002-2012
JetBlue = +51%
Southwest = +33%
Delta = +31%
United = +30%
American = +25%
US Airways = +10%
Furthermore, when looking at air fare/mile changes over the past five years, Southwest again had the highest increase of all competitors.
The DOJ's law suit suggests US Airways market share at Washington Regan Airport (NYSE:DCA) is anti-competitive. Reality is if it weren't for the DOJ recently approving US Airways trading over a hundred (restricted) landing slots at New York's LaGuardia Airport (LGA) for Delta's (restricted) landing slots at DCA, Delta would not now be in control of LGA and US Airways would not have their high market share lead in DCA.
Now after Delta has already achieved their dominance at LGA, the DOJ makes an issue of the DCA landing slots that US Airways gained from the Delta swap. Furthermore, if it weren't for US airways having so many "slots" to/from DCA, dozens of small communities would not have non-stop flights to the DCA airport.
Here are some more facts Attorney General Holder left out in his law suit reasoning.
- At Chicago Midway Airport, there were 16.7 million passengers last year. Southwest carried 90.2% of them, and their Air Tran merger adds another 3.8%
- At Houston Hobby Airport, there were 10.2 million passengers last year. Southwest carried 88.6% of them, and their Air Tran merger adds another 4%.
- At Dallas Love Field Airport, there were 7.7 million passengers last year. Southwest carried 96.3% of them.
- At Baltimore MD Airport (competes with DCA), there were 21.5 million passengers last year. Southwest carried 59.2% of them, and their Air Tran merger adds another 12.4%.
Would it be better to have three more-or-less equally strong airlines competing or four? The only legitimate option going forward is to have a fourth -equally strong-competitor for United, Delta, and Southwest. The merger of American and US Airways is the best choice and better for the industry, the communities they serve, and especially for the consumer.
Dozens of once great airlines went out of business for one primary reason: they failed to remain competitive with the -industry--. Without a merger, there is simply no possibility American and US Airways will be able to compete over the long-term in what is now a much consolidated industry.
AirlineFinancials.com LLC is a globally recognized company that provides airline industry data, analysis and consulting services.
Robert Herbst is an independent airline industry consultant. He is the founder of AirlineFinancials.com which provides airline industry analysis and commentary for major US carriers. In addition to his consulting work, Mr. Herbst was a commercial airline pilot for over 35 years. His aviation experience and financial background provide a unique analytical perspective into the airline industry.
Disclosure: I am long AAMRQ.PK.