THE slumping oil price has cut the cost of petrol, making it a lot cheaper for Americans to drive. Yet although the price of jet fuel—which makes up around 30% of airlines' costs—is down by more than half since January 2014, domestic air fares in America have barely budged (see chart).
Unsurprisingly, then, the country's four biggest airlines—Southwest, Delta, American and United—are coining it. On January 19th Delta kicked off the results season for the airlines, announcing record fourth-quarter profits and forecasting that first-quarter margins in 2016 would be twice as high as in 2015. Analysts also expect its rivals to report bumper earnings for the most recent quarter. In July the US Department of Justice launched an investigation into allegations of collusion over pricing and capacity between the big four (which they deny). But arguments abound on why air fares are so high in America—and what regulators should do to cut them.
Some think the fact that America's five biggest fund managers happen to be among the largest shareholders in each of the big four airlines discourages the carriers from competing vigorously. Together, for example, the five investors own around 17% of both American and Delta. In a paper published in April José Azar, an economist, and two co-authors looked at the data and concluded that this common ownership means ticket prices may be up to 11% higher than they would otherwise be. Mr Azar was the lead author of another study, published this month, which found similar effects from overlapping shareholders in American banks.
In Europe the industry's falling costs will translate into cheaper tickets (see article). Low-cost carriers such as easyJet and Ryanair compete fiercely with older airlines such as BA and Air France, and young upstarts such as Norwegian Air Shuttle and Wizz Air of Hungary are muscling into the market. The overlap among institutional shareholders in all these carriers is much smaller than in America. It is clear, to say the least, that the same economic forces are not present in North America as they are in Europe, says Jonathan Wober at CAPA, an aviation-research firm. Operating margins for North American carriers are likely to exceed 14% this year, around double those of airlines from Asia and Europe, reckons CAPA.
One reason for American carriers' fat profits is a rule banning foreigners from owning more than 25% of voting shares in a domestic carrier in America. Besides preventing the likes of Ryanair and AirAsia from creating wholly-owned American subsidiaries, the rule starves domestic challenger airlines of foreign capital. Analysts say Virgin America would have attacked the domestic incumbents more vigorously if Virgin Group, a British firm that holds an 18.6% stake, were able to inject more capital. Even an increase in the limit to 49.9%, as in the European Union, might encourage more foreign carriers to enter America in joint ventures with locals.
Perhaps a greater problem is that a shortage of take-off and landing slots at America's busiest airports makes it hard for challengers to achieve a decent share of the market. At 40 of America's 100 biggest hubs, a single carrier now operates more than half of the seat capacity. This pushes up prices. For instance, the merger of American and US Airways in 2013 increased American's market share at Philadelphia's airport to 77%, resulting in fares there rising from 4% below the national average in 2013 to 10% above it now.
The Department of Justice has started to wake up to this. In November it blocked the sale of 24 slots at Newark airport to United, already its biggest operator. But so far there have been few other signs that the authorities are ready to brave the wrath of the incumbents and take the sort of vigorous action that is needed to make American air travel a competitive market.
http://ift.tt/1K3WaQB Lack Of Competition Creates Record Profits For US Airlines While Service Continues To Suffer via top scoring links : news http://ift.tt/26OC454
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