Airline Fares

The WSJ article talks about the proposed merger and the move by department of justice to block the merger for numerous reasons. Once of the reasons stated is hike in price due to reduced competition. Let's start by looking at factors that may or could drive prices. I say may or could since it's only airlines who can predict the ticket prices! There are four primary things that drive prices: competition, supply, demand, and oil prices. Out of these four factors, some have a stronger impact than others. Post 9/11, it was demand and supply driving the prices. Prices fell significantly since the demand went down. Airlines had to cut prices to attract customers. In the current situation it's the competition along with oil prices that really affect prices the most.

For any airlines it is important to have flights with more passengers onboard. They should be able to generate enough revenue out of their flights to offset the cost of flying. In order to do so they try to keep % of unsold seats to minimum.

Over the past decade there have been quite a few mergers. Prior to 2005, there were nine major U.S. airlines while as of today there are just five. The merger of American Airlines and US Airways would bring that number down to four with their market share as 83%.

These mergers have helped the struggling airline industry, airlines are much more stable though not completely out of danger and has definitely rewarded Wall Street investors. Mergers do help attain efficiency gains, lowering unit costs and improved productivity for the airlines but this cost is not being passed on to the consumer. The end consumer has faced higher fares and fewer airlines to choose from. Mergers drive up airfares because reduced competition, especially at hub airports where concentration is high and helps dominant airline with increased market power.

Competition is always a good thing. It keeps prices stable. Airlines