The U.S. airline industry began preparing for a conversation it didn’t really anticipate, somewhere between a quiet Washington meeting in February and a Bloomberg story that went viral on Monday night. Sitting across from President Trump, United Airlines CEO Scott Kirby proposed a merger with American Airlines, which the majority of insiders had written off as “never going to happen.” When combined, the two airlines would be the biggest airline in history. The idea is already doing what big ideas do, which is to make people anxious, even though neither company has formally confirmed anything.
It’s difficult to ignore the timing. Due to the war in Iran, jet fuel prices are rising once more, and airlines have been reducing capacity to preserve profits. With a meager $111 million in net income against $54.6 billion in sales last year, American has long lagged behind United and Delta in profitability. In contrast, United earned $3.35 billion. Observing the numbers gives one the impression that something had to give. It’s another matter entirely whether that something is a merger of this size.
People are concerned about the math. After accounting for miles flown, the new carrier would control about 40% of U.S. capacity if American and United merged. These two airlines, along with their regional partners, accounted for four out of ten domestic flights last year. According to Cornell law professor George Hay, there is absolutely no possibility that a court would permit it. Antitrust attorneys generally concur, albeit in a courteous manner. Even in a Trump administration that has been clearly more accommodating to megadeals than its predecessors, industry expert Florian Ederer called the concept “absurd.”
However, the practical antitrust debate is more important to travelers than the abstract one. How do fares fare? Based on every airline merger that has occurred in recent memory, the truth is that they have a tendency to gradually increase, particularly on routes that overlap. In Chicago, Los Angeles, New York, and Washington, United and American square off. They operate concurrent hubs, concurrent marketing campaigns, and concurrent seat and lounge upgrade cycles. Eliminate that rivalry, and you eliminate a genuine source of pressure to lower your pay.
The question about frequent flyers is where things start to get personal. Two of the biggest loyalty programs in the world, AAdvantage and MileagePlus, have different award prices. History is fairly consistent when airlines combine programs: award charts are rewritten, and the results are almost never favorable to customers. The most frequently mentioned example is the 2008 Delta-Northwest merger, which had a negative outcome for those with large mileage balances. If you currently have a tower of unused American miles, you might want to consider using them as soon as possible. Perhaps nothing occurs. Another possibility is that something does.
Secondary cities are those that don’t garner much attention but are most affected by mergers. As the combined carrier rationalizes overlap, schedules in Philadelphia, Phoenix, and Charlotte—places where American operates substantial operations—may be reduced. Divestitures of gate space, slots at LaGuardia and Reagan National, and takeoff and landing rights at O’Hare would probably be necessary even for hub consolidation in the big four overlap markets. TD Cowen identified 289 routes on which the combined airline would only have one or two rivals. In a small number of hands, that is a lot of leverage.
As of right now, the agreement primarily exists in headlines and claims that no one will verify. Within hours, senators Mike Lee and Ruben Gallego, who are hardly natural allies, both opposed it. Last month, Kirby himself told a reporter in Boston that mergers are “big and hard and complicated.” As you watch this play out, you can’t help but feel that the discussion itself is more important than any real deal. The industry is pushing the boundaries of what is feasible. The travelers will soon discover what they are prepared to give up.
