Airline mergers, alliances could send prices sky-high

Passengers holding American Airlines tickets for the long weekend ahead can breathe a sigh of relief, now that most of the company's pilots are back in the cockpit.

But some aviation experts see trouble ahead. The cost of American's acquisition of Reno Air - at the heart of the dispute between American and its pilots - could signal the beginning of a trend that in the long term could increase consumers' costs and limit their choices.

Just as most small, low-cost airlines like Reno are again becoming profitable, and several new start-ups are entering the market, some of the nation's largest carriers are aiming to gobble them up. At the same time, the major airlines are creating strategic alliances in an effort to consolidate their clout, not only between themselves, but also with international carriers.

"Are we worried about the impact of all of this consolidation? Absolutely," says David Stempler, president of the Air Travelers Association, a Washington-based passenger advocacy group.

The move to consolidate is happening even as the US Department of Transportation (DOT) and Congress are working to make it easier for new airlines to enter the market. The Senate is poised to pass a bill that will make it easier for new airlines to gain access to some of the largest US airports.

"One just needs to look at how last year's Northwest Airlines strike crippled an entire region of our country," says Sen. John McCain (R) of Arizona, the bill's sponsor. "We must give new carriers the opportunity to compete with the major airlines."

Reno Air, a low-cost start-up, was competing successfully until last December. That's when it was bought by American Airlines. Reno was able to keep its prices low, in part, because its senior pilots earn about half the salary of American's senior pilots.

This week's dispute was sparked by the insistence of American's pilots union that Reno's aviators be brought up to scale sooner, rather than 18 months later, as the company would prefer.

When talks with the pilots union broke down a week ago, American's pilots began calling in sick to display their displeasure. On Wednesday, a federal judge ordered them back to work, although the issue is not resolved.

If the union ultimately wins, it will be very good for the recently acquired Reno pilots, but not so hot news for consumers. "The acquisition of Reno creates one fewer competitor in the market and allows what is the second-largest carrier in the world to grow incrementally," says Paul Dempsey, director of the Transportation Law Program at the University of Denver and the vice chairman of Frontier Airlines.

Soon after American acquired Reno Air, United announced it was interested in buying America West Airlines, another low-cost start-up. That raised alarm bells with several legislators and consumer activists.

A DOT study found that low-cost start-up airlines are essential to keeping the US airline industry cost competitive. It compared markets where a single airline had a monopoly with others that were served by two major carriers. It found the average fare was essentially the same. But "they found that in markets with a low-fare carrier, the average fare in the market was substantially lower, even for the major airlines," says Clint Oster, a transportation economist at Indiana University at Bloomington.

For much of the past year, the DOT has been working on new regulations that are designed to prohibit larger carriers from engaging in what's called predatory pricing against start-up airlines. It's part of another effort to encourage new companies to come into the airline market. The DOT expects the new rules to be issued later in the year.