Airfares are generally going up, but LAX travel still a good deal

americanair2.jpgIn laying out its opposition of the American Airlines-US Air merger, the Justice Department presented a case that many travelers wanted to hear: That the airlines are ripping off consumers with out-of-control fare increases and that further consolidation will only make matters worse. There are elements of truth in those allegations, but it's far from the total picture, as you can see by the Southern California air market. At LAX, average one-way fares rose a modest 5.4 percent, to $191.31, between 2007 and 2012. That's roughly two bucks a year. Ontario saw a 13.3 percent increase over the same period, with Burbank up 9 percent and Orange County 7.1 percent. Long Beach was the lone outlier, reporting a 22 percent decline in fares due to the presence of low-cost carrier JetBlue. The fare increases generally coincided with declines in the number of flights. At LAX, the drop was 7.3 percent over the 5-year period; at Ontario, which has seen a plunge in passenger traffic, flights were down 49 percent. (Figures are from a new report by the MIT International Center for Air Transportation.) So why are fares going up at all? You may not want to believe this, but in large part it's because prices had been way too low for years, which is why airlines have struggled to make any money. It also pairs with the decision to cut back on capacity - a single seat on a packed 737 is often the difference between profit and loss for any given flight. Certainly consolidation has been a factor in fare increases for several markets (Chicago, Houston, Detroit, and Philadelphia have taken big hits between 2007 and 2012), but you can't broad-brush the pricing patterns, as the government tries to do in its lawsuit. San Francisco, Denver, and Atlanta have actually seen small price declines during that period (helped along by increased competition in those cities). One little-discussed factor for the increases is Southwest, which has been raising its fares. From the MIT study:

Much research has been done on the famous "Southwest effect," which suggests that passenger traffic increases and fares decrease once Southwest Airlines enters a market. Previous research has shown that entry by Southwest (or even the threat of entry) has the potential to decrease fares in both directly - competing and adjacent markets. However, recent work has suggested that the Southwest effect has started to weaken, and no longer provides the same degree of downward pressure on fares in city - pair markets in which mergers of other carriers have occurred. Similarly, we find that while a Southwest effect on average fares still exists at U.S. airports, it has diminished over time. The presence of Southwest Airlines at an airport in 2007 was associated with a decrease in the airport's average one-way fare of about $36, controlling for average itinerary distance and other low-cost carrier competition; in 2012, that effect had decreased to $17. Average one-way fares at Southwest have increased by about 25% over the same period, weighted by passenger itineraries and adjusting for inflation.

Here's a good summation on the American-US Air situation from Brett Snyder at the Cranky Flyer:

Structural remedies involve shedding off parts of the business to help satisfy competitive concerns. That would include getting rid of slots at Washington/National. It's hard to think of any other structural remedies that would really matter. Sure they could get rid of slots in New York or they could possibly ditch some more in London, but those are markets where there isn't a concern anyway. The other type of remedy is a behavioral remedy. That would basically be a promise from the merged company to do a certain thing (or not do it), possibly for a certain amount of time. In this case, you would think a behavioral remedy would be something like agreeing not to charge the $40 fee for award travel that DOJ strangely fixated on in the complaint. But DOJ will probably want something broader - like a commitment to not raise fees or something like that. I would be surprised if the new American would consider handcuffs strong enough to make a difference to DOJ. But even if there was an agreement on behavioral remedies, you simply can't address much of the complaint. DOJ has pointed out a thousand (mostly tiny and unimportant) markets where the merger would reduce competition too much for its tastes. There's no way to satisfy DOJ's desire for more competition on those routes.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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