Fasten your seatbelts: deeper airline oligopoly ahead

With the expected announcement of a planned acquisition of Virgin America by Alaska Airlines on Monday, the United States domestic airline industry could become even more oligopolistic. Should the merger be approved, a ray of competitive sunshine will diminish for airline travelers. 

Criticism of high fares, cramped seating, excessive fees, and surly staff have been a staple of air travel ever since the Obama administration permitted a series of mergers that reduced the number of major airlines in the domestic market to 4 dominant “network” airlines that connect nearly all significant passenger airports to the rest of the nation. United gobbled up Continental, American was taken over by US Airways, but with the larger carrier the surviving entity, and Delta acquired Northwest. The result has been record profits and a further deterioration in the passenger experience. Despite the cheery ads one sees, domestic coach airline travel on the so-called “legacy” carriers has been a grim experience for most of the public, with shrinking seats space, vanished compliemntary meals, and an assortment of new fees, including for checked baggage.

Southwest Airlines, a comparative upstart dating from the 1970s, actually carries the most domestic traffic, and utilizes a fare and fee structure as well as passenger experience at variance with the rest of the industry, and has risen from an intra-state Texas carrier to the most popular domestic carrier. It has a strong culture centered around making the passenger experience less dreadful, and is generally a pleasant carrier to fly. In the large and growing international market, the share of the legacy carriers is overwhelmingly strong, although Southwest has begun to enter the market south of the border.

Here are US Department of Transportation statistics showing the dominance of four carriers.

Alaska Airlines has pursued a very successful strategy sometimes called a hybrid. After going through a bankruptcy it kept its costs very low, but has some amenities superior to the legacy carriers, and this enjoys strong passenger loyalty in its hometown of Seattle, Alaska, and in West Coast cities where it has a strong presence. Virgin America is a much younger carrier, with a minority holding by British billionaire Richard Branson, and emphasizes a superior passenger experience on its flights, with extensive video and music entertainment, mood lighting, and more comfortable seats, among other amenities. I have flown both Alaska and Virgin America a fair amount, and find them superior to the legacy carriers and Southwest, overall.

The other upstart carrier, Jet Blue, bears some similarities to Alaska, Virgin America and Southwest, offering a better passenger experience on the whole, and was believed to be in a bidding war for Virgin America.

The shareholders of Virgin America want a return on their investment, of course, and the airline has only recently attained profitability in the current ear of very low fuel prices. It faces serious competitive pressures on its bread and butter transcontinental routes, and has a mixed record expanding onto other markets where its hip image has not carried as much weight, and where frequency of service is a major factor in corporate contract decision-making. An acquisition by a less hidebound carrier like Alaska or Jet Blue would not completely extinguish the alternative passenger-centered approach in favor of the cattle car strategy of the legacy carriers, but it will diminish competition, without a doubt.

Oligopoly works out really well for investors. For the consumers, not so much.

This potential  merger promises to be an interesting exercise for anti-trust watchers. If Virgin America disappears, I will certainly miss it.