The airline industry has gone through several cycles of consolidation in the last 10 to 15 years: ValuJet/AirTran, AirTran/Southwest, TWA/American, USAir/America West, USAir/American, Delta/Northwest, and United/Continental at the majors. At the regionals, Republic/Chautauqua/Shuttle America, SkyWest/ASA/ExpressJet and Mesaba/Pinnacle have changed the landscape. Alaska and Virgin America are the most recent to announce plans to wed.
Of late, there have been rumors about a jetBlue merger, and there has long been talk of Spirit and Frontier. JetBlue seems to be the most interesting one, because that airline has become a major powerhouse with hubs in New York, Boston, and Orlando, along with a sizable presence in Fort Lauderdale. JetBlue also caters to both business and leisure travelers.
Historically, airline mergers have had to meet several criteria, the most important of which is the maintenance of access to travel for passengers. This became less important as Congress recognized in the last round of mergers that there was too much service at airfares that were too low. With the mega-carriers now operating, profits have soared. However, what makes a merger with jetBlue difficult is the potential choke-hold that its hubs would provide to whomever buys the airline. Congress could require some kind of a fracturing of the company in order to support a merger. JFK, the crown jewel, would be the ultimate bargaining chip.
But here’s the rub: Too much of what jetBlue does out of JFK replicates too much of what other carriers already offer from their own East Coast coast hubs. An airline would need to add service from JFK that jetBlue doesn’t have, or service that supplements existing international service from that market.
Orlando is a leisure market with lower yields, and it doesn’t lend itself well to being a southern connecting hub such as Atlanta and Charlotte, though it does provide ready access to points south in the Caribbean and South America. But, many of those are also load yield, so the problem doesn’t immediately solve itself.
Mergers also create other huge challenges, not the least of which is bringing together drastically different work cultures and product offerings. Nothing will clog up a merger like disgruntled employees that are also being swamped with new procedures, rules, and policies. The end result is billions of dollars lost and millions of unhappy customers.
I won’t say that jetBlue won’t or can’t get caught up in a merger, but it has to be accomplished wisely, with the realization that the end product will be drastically different. I do, however, think that a couple of the ultra-low-cost carriers will be forced to eventually merge, with Spirit and Frontier being the logical choices. They compete for a segmented market offering low fares that are hard to turn into profits. Customer service is less of a concern, but it still matters. I think Allegiant will continue to be a stand-alone carrier because its niche is different, and it sells the whole travel package as a vacation, not just a ticket from A to B.
The regionals are harder to predict. Their existence depends on capacity purchase agreements with the majors. However, even SkyWest, which was long considered “the place” to work, is having trouble recruiting and retaining pilots. It’s possible that, down the road, SkyWest and Republic may have to at least do the dance.
Consolidation is probably over for now. However, in such a dynamic industry, anything can happen. Change is constant, and it stands to reason that offers will at some point be made and entertained. Whether they will be consummated will depend on the circumstances in place at the time.—Chip Wright