By Tucker Warren, Kate Bernard, and Patrick Sims, 202-822-1205, twarren@hamiltonps.com, kbernard@hamiltonps.com, and psims@hamiltonps.com

In February, US Airways and American Airlines proposed the two companies merge into a single airline under the American Airlines brand. The proposal was forced into a holding pattern, however, when the U.S. Department of Justice (DoJ) filed suit to block the merger in August. But based on the industry’s pattern of consolidation, its profit margins and airfare trends, we think the government will have difficulty finding the evidence it needs to support its case.

Preparing for Takeoff

The new American Airlines would be the world’s largest airline, valued at an estimated $11 billion. The February announcement was the latest in a series of 22 airline mergers since 1991 – including Delta’s acquisition of Northwest Airlines in 2008 and United Airlines and Continental in 2010 – that have changed the landscape of the commercial airline industry.

In its suit against the consolidation, DoJ argued the merger would result in less service and higher fares for consumers.[i] Of course, no one wants fewer routes or higher prices, and the airlines predictably counter that they have no interest in pursuing these goals either. In fact, maintaining their competitiveness with recently merged legacy competitors is why they are proposing to merge in the first place. In today’s domestic market, US Airways and American Airlines are losing share to Delta’s 16.3 percent, United’s 15.8 percent and Southwest’s 15.2 percent.[ii]

The fact is history is not on the side of DoJ’s argument. Mergers are business as usual for the airlines, which operate on small-to-negative profit margins each year. What’s more, airfare increases more closely track economic conditions like jet fuel increases than they do the airline mergers of the past twelve years.

History of Turbulence

The airline industry has struggled to balance the demand for affordable airfare with the cost of providing safe, reliable service. A look at the industry’s recent history underscores those challenges. Since 2000, there have been 22 Chapter 11 airline filings. Among the airlines to file: United, Delta, Northwest, Frontier, ATA, and US Airways twice. In some cases, collective bargaining agreements with employees played a part. In others, cyclical economic conditions catalyzed consolidation.

Since 2000, the industry as a whole actually operated at a loss, averaging a negative 2.9 percent profit. Only half of those years were profitable for the industry, including from 2010 to 2012 (Exhibit 1).[iii]

For comparison, the energy sector’s least profitable year since 2007 was (positive) six percent. The health care sector experienced its lowest profit margins in 2010 and 2011, at 15 percent. And in 2009, the battered financial services sector generated a three percent profit while the airlines experienced a 1.7 percent loss (Exhibit 2)[iv]. With such tight profit margins, it’s no wonder the airlines have looked to M&A activity to secure their long-term ability to provide quality and meet demand.

Maintaining Altitude

Your wallet may feel otherwise after your vacation this summer, but on an inflation-adjusted basis, average airfares are lower than they were 15 years ago.[v] As it turns out, variances in the cost of round-trip airfare closely track changing economic conditions like jet fuel prices, which account for 30-40 percent of airlines’ operating expenses (Exhibit 3).[vi] Between 2000 and 2011, jet fuel prices have increased 268 percent. Average round-trip airfare saw an increase as well, from $339 to $364, or seven percent, during that time (not adjusted for inflation).[vii] If DoJ plans to focus on higher fares as a central point of contention, it should explain its rationale for pegging fare increases to merger activity specifically.

Cleared for Landing?

The airline industry has a long history of consolidation. Its willingness to shift priorities and ownership stakes has been central to continued service for consumers with such tight profit margins. DoJ allowed three significant mergers to proceed in the last five years under two different presidents. And while more time would provide more conclusive data on the world of consolidation, industry profitability and airfare seem to have stabilized somewhat following the United and Delta mergers. If DoJ does not permit the merger of American and US Airways, it will have to explain how this deal will defy these historical trends to the detriment of the flying public.


[i] “Remarks As Prepared For Delivery By Assistant Attorney General Bill Baer At The Conference Call Regarding The Justice Department’s Lawsuit Challenging Us Airways’ Proposed Merger With American Airlines,” Department of Justice, August 13, 2013.

[ii] “Airline Domestic Market Share June 2012 – May 2013,” Research and Innovative Technology Administration, Bureau of Transportation Statistics.

[iii] “Annual Results: U.S. Airlines,” Airlines For America.

[iv] Dr. Edward Yardeni and Joe Abbott, “S&P 500s Sectors & Industries Profit Margins,” Yardeni Research Inc., September 18, 2013.

[vi] Beth Gardiner, “Steep Fuel Prices Driving Fuel For Efficient Aircraft,” New York Times, July 8, 2012.

[vii] Steve Lott, Vice Present of Communications for Airlines for America told CBSDC, via CBS, March 1, 2012.