Is the Airline Industry an Oligopoly?

The American airline industry today is arguably a oligopoly. An oligopoly exists when a market is dominated by a small group of firms, often because barriers to entry are significant enough to discourage potential competitors. In the US airline industry, barriers to entry include high start-up costs, infrastructure constraints limiting the availability of take-off and landing slots, and the large economies of scale of incumbents. While four US carriers account for nearly two-thirds of the overall domestic market, no airline’s market share tops 20%. Some, however, have a larger market share at certain airports or on certain routes.

Key points to remember

  • One could argue that the US airline industry is an oligopoly controlled by the four major national carriers: American Airlines, Delta Airlines, Southwest Airlines and United Airlines.
  • The Airline Deregulation Act of 1978 removed the power of the Civil Aeronautics Board (CAB) to regulate the airline industry in the United States.
  • Without federal government control, airlines were free to establish routes, increase the number of flights and adjust fares.
  • Over time, the airline industry has consolidated, with a number of carriers merging.
  • Some industry critics say the consolidation has hurt competition, and the US Department of Justice has filed a lawsuit to block a codeshare deal between American and JetBlue at airports serving New York and Boston for antitrust reasons.

The main actors of the airlines

As of May 2022, four major airlines – American Airlines, Inc. (AAL), Delta Air Lines, Inc. (DAL), Southwest Airlines (LUV) and United Airlines Holdings, Inc. (UAL) – owned nearly 67% of the US domestic market share.

American Airlines had the largest market shareat 18.3%, based on chargeable passenger miles over the past 12 months. Southwest and Delta followed closely with 17.1%, while United had 14.3%.

February 7, 2022 Low Cost Carriers Frontier Group Holdings Inc. (ULCC) and Spirit Airlines Inc. (SAVE) have announced plans for a $6.6 billion acquisition of Spirit Airlines by Frontier, the operator of Frontier Airlines. The deal would create the fifth-largest US carrier with a combined domestic market share of 7.9% in the 12 months ending May 2022.

Air travel fell sharply in 2020 due to travel restrictions caused by the COVID-19 pandemic. US carriers lost a combined $35 billion after tax that year. The domestic airline industry returned to profitability in the second quarter of 2021 and posted a combined after-tax profit of $2.7 billion in the third quarter of 2021.

From deregulation to consolidation

Between 1940 and 1978, the Civil Aeronautics Board (CAB) regulated domestic air travel in the United States as public utility. CAB approval was required for changes to schedules, fares and routes. The agency was notoriously reluctant to approve airline applications for new routes, raising barriers to market entry for potential competitors.

The Airline Deregulation Act came into effect in 1978. Its effect was to increase competition, with fare prices falling in the 20 years following its introduction. Meanwhile, the number of tariffs has increased from 207.5 million in 1974 to 597.9 million in 2022.

Extensive industry consolidation followed. High profile mergers included Delta with Northwest in 2008, United Airlines and Continental Airlines in 2010, Southwest and AirTran in 2011, and American airlines and US Airways in 2013. The US Department of Justice sued to block American’s merger with US Airways, but eventually settled the case, allowing the deal to continue after American agreed to give up some gates and airport slots.

Rates increased for a few years following the 2007-2008 global financial crisisbut have largely decreased since 2013.

In the years before the COVID-19 pandemic, major US airlines cut unprofitable flights, filled a higher percentage of seats on planes and slowed capacity growth to demand higher fares. In addition, since 2008, airlines charge ancillary fees for services previously included in the airfare.

New controversies

Some lawmakers and passengers have continued to take the industry to task over alleged anti-competitive practices. “Consumers are paying exorbitant rates and are trapped in an uncompetitive market with a history of collusive behavior,” wrote US Senator Richard Blumenthal, a Democrat from Connecticut, in a 2015 letter to the US Department of Justice.

Similar concerns prompted the Justice Department’s antitrust unit to launch an investigation into the airline industry in 2015. That investigation did not produce enough evidence to file a lawsuit, the Wall Street reported. Newspaper in early 2017.

In February 2021, American Airlines and low-cost carrier JetBlue (JBLU) launched the Northeast Alliance codeshare agreement where they jointly market flights, coordinate operations and provide reciprocal benefits for each other’s loyalty programs.

In September 2021, the US Department of Justice filed suit to block the Northeast Alliance deal on antitrust grounds, alleging it eliminates competition at New York and Boston airports and harms to air travelers across the country. Despite the ongoing lawsuit, American and JetBlue have expanded their cooperation under the alliance over the past year. The airlines have asked a US court to dismiss the government’s lawsuit.

As the COVID-19 pandemic has hit airline industry revenues, there has been a benefit for travelers – a significant drop in the average domestic fare from $350 in 2019 to $260 in 2021.

The essential

A handful of US airlines handle the bulk of domestic passenger travel, but no single carrier holds a dominant market share. Some airlines operate a large proportion of flights from certain airports, and competition on certain routes may also be limited. Despite high barriers to entry and persistent complaints of collusion by critics, airfares have fallen significantly since the deregulation of the airline industry in 1978 and since 2013 following a wave of airline mergers aerial.

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