Dear Wall Street Journal

Filed in archive Personal Thoughts on April 14, 2010

My name is Vinay Bhaskara, and I am the writer of the Aviation Weblog. I am writing in regards to the recent articles your paper published on the merger talks between United and US Airways. The articles were generally well-written; however they did make the point that consumers may see fares hiked. And many consumers as well are unhappy about the deal. But these same consumers don't realize the dangers they face, if in fact United and US are not allowed to merge.
United and US Airways are the weakest of the five major US legacy carriers. Legacy carriers are the airlines that offer first class service, and fly across the Atlantic, and/or the Pacific. These carriers (Continental, Delta, American, United, and US Airways) are under attack on two fronts. Internationally, they have seen yields on profitable flights to Europe and the Pacific eroded by the increased liberalization of bilateral agreements. And the losses that they have faced there are nothing compared to the bloodbath that is the US domestic market. Today, the US has far too many carriers, low-cost and full service alike. The intense competition for passengers, with often as many as four different airlines operating a route, has pushed fares so far downwards, that legacy carriers cannot make a profit because of their naturally higher cost bases. In the last 10 years, the aforementioned carriers, and Northwest (who merged with Delta in 2008), combined for losses of over $29 billion.

United and US Airways are perhaps the hardest hit by the rise of low cost carriers. US Airways faces dogged competition from LCC giant Southwest Airlines at two of its hubs in Phoenix and Philadelphia. Even though the carrier's fortress hub in Charlotte is relatively untouched, its Washington-Reagan operation has significant competitors, and the former America West night-flight hub in Las Vegas was decimated by leisure giant Allegiant Air, and Southwest. And while United is relatively isolated, they still have American's giant hub in Chicago, JetBlue's pinprick operation at high-yielding Washington-Dulles, Virgin America's new hub in San Francisco, and a bunch of competitors at Los Angeles. Not to mention, their east-west flow hub in Denver is the only airport in a city not named New York or Los Angeles two have three airlines hubbing there; United, second hometown airline Frontier, and Southwest. The airlines also face trouble with costs: they pay a lot more to their employees than LCCs, and unions; US Airways still hasn't resolved the issues with employees of America West that surfaced after US Airways' previous merger.

What can a merger do to solve the issues facing US Airways and United? Well plenty. For starters, they will be able to rationalize capacity and hubs. Take the examples of Phoenix and Denver. Currently, they do the exact same job for both the airlines; connect passengers from east to west. Once United and US Airways merge, they will be able to consolidate those operations in one hub, essentially half the cost. Considering the scale of operations at each airport, you are talking about huge savings. They can also reduce redundant capacity for routes they fly. Why have 20 combined daily flights between Phoenix and Denver that are 70% full, when you can have 15 at 85-90% load factors. Another hub that could/should be right-sized is Philadelphia or Washington-Dulles. However here, the hub that loses out will still remain as a huge base due to strong origin & destination traffic. And consolidating the brands would result I the trimming of excess employees, and give a single type of service across the board.

But why does the merger benefit the consumer? Quite simply put, if the two airlines do not merge, they will fail. And if the airlines fail, a whole lot of small towns in America will lose their air service. Did you ever wonder why all the low cost carriers are based at the major airports? It's because their business model needs large volumes of passengers to make a profit. And large volumes of passengers usually fly between the largest cities. Plus, the LCCs don't have hubs over which they can flow passengers. If United or US Airways goes under, little towns like Erie and Cheyenne will lose air service. Why? Well these airports have too little demand to be served by mainline or large aircraft. Therefore, regional jets are required for service. LCCs can't make regional jets work because they need economies of scale. But legacy carriers can, because they can send passengers to other places through their hubs. Let's say for example, that US Airways operates a 60 seat jet from Erie to Philadelphia. Now 30 of those passengers may be going to Philadelphia, but the rest will be going all over the country; Miami, Detroit, Atlanta, and so forth. Those destinations don't have enough demand to be serviced directly, but can be served through a legacy hub. If the legacies are gone; entire airports will be wiped off the commercial route map, and the network of airports will look more like Southwest's with 68, versus Delta's, with over 300.

Despite the higher fares it will inevitably bring, the US Airways/United merger is an important step in the right direction for the airline industry. Rationalization of capacity is absolutely necessary, and US Airways and United have tons of useless capacity. And consumers need the legacy carriers to provide service to smaller cities. Something tells me that the cities of Aspen, Cheyenne, and Erie, sure as hell support this merger.