Slicing Up The Sky

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All sides agree that the consolidations would force rival carriers to bulk up fast or join the endangered list. The most vulnerable major competitors would include No. 3 Delta, whose 18% share of the market would suddenly make it seem like a second-tier competitor to United and American. "Delta would be severely wounded if it just sat back and did nothing," says Brian Harris, who follows airlines for the Salomon Smith Barney investment firm. That could prompt Delta to make a play for No. 4 Northwest or No. 5 Continental. Either deal would give the top three carriers control of nearly 85 out of every 100 U.S. airline seats.

Which is precisely the scenario that critics of airline consolidation are eager to avoid. Says Representative Louise Slaughter, a New York Democrat: "It would be a travesty for the new Administration to let this go forward." Maybe, but few expect the Bush Administration to find the thrust reverser for this one. The President-elect hails from American's home state (CEO Carty was a big Bush contributor), and John Ashcroft, Bush's nominee for Attorney General, comes from TWA's. Says Holly Hegeman, an aviation analyst and publisher of the website planebusiness.com: "I really don't think we would have seen this type of move if the Democrats had kept the White House."

The change in Administrations hasn't stopped some politicians, including Republican John McCain, chairman of the Senate Commerce Committee, who strongly opposes United's takeover of US Airways, from mounting a bipartisan effort to halt the deals. Democrat Byron Dorgan of North Dakota last week urged the Justice Department to "do its job and promote competition in the airline industry, not preside over its demise."

The Justice Department's merger review could come at an awkward time for American, which is preparing to defend itself in a major predatory-pricing trial. American is battling a 1999 Justice complaint accusing it of driving smaller rivals out of its Dallas-Fort Worth hub by illegally slashing ticket prices and saturating the market with new fights.

There is one surprise awaiting the industry. This week lame-duck Transportation Secretary Rodney Slater is expected to issue long-anticipated and controversial "competition guidelines," which the big airlines have tried for years to fend off. The document will give detailed definitions of what constitutes predatory behavior and unfair methods of competition. The guidelines will, for the first time since deregulation, allow the dot wide latitude in looking into the subtle ways competition can be affected. For instance, if a large airline threatens vendors who offer their services to start-up airlines, the new rules would let the dot move quickly to make the offender halt these practices.

Such rulemaking could limit the majors' ability to run off low-price rivals. Says a former dot official: "I don't think it's a coincidence that Slater is pushing this out the door days after American Airlines just got bigger."

American's bold proposal could bring airline deregulation to its logical--if unforeseen--conclusion. More than 50 new carriers have taken wing since deregulation's dawn in 1978, but only a few, like Midwest Express, have survived. And at least one, America West, is the subject of takeover talk. The rest have either been scrapped, like older carriers Braniff and Eastern, or swallowed up.

Today "the whole industry is on the brink of consolidation," says Kevin Murphy, an airline analyst for Morgan Stanley Dean Witter. "Clearly we're going to go from six major carriers to three, and that will be the story of 2001." If that forecast proves accurate, weary travelers had better enjoy today's service, because the prospects for improvement aren't getting any better.