Will Southwest Merger Spell End to Low Fares?

Minnesota Representative James Oberstar, who chairs the House Subcommittee on Transportation, penned a letter to the Justice Department urging the department to take a long, hard look at Southwest’s proposed acquisition of AirTran. In the letter, Oberstar says he’s concerned the acquisition will lead to further consolidation among low-cost carriers, a development that could have drastic effects on airfare for all. You can read the full text of Oberstar’s letter here.

Mostly, however, he worries about Southwest, and whether or not the carrier can truly be called a low-cost airline for much longer. “Southwest’s costs are increasing due to the seniority of its workforce, the end of its long-held advantage on fuel costs from favorable hedging positions, and its entry into high-cost markets such as New York LaGuardia, Boston, and Minneapolis-St. Paul,” Oberstar writes. “There is a serious question as to the extent to which we can continue to rely on Southwest alone for the so-called ‘Southwest Effect’ on air fares in markets in which Southwest is the only low-cost carriers competing with network carriers.”

Were the Southwest Effect to diminish, Oberstar fears other low-cost airlines will be unable to influence fares. “If this merger and [any that might] follow decrease the competition Southwest faces from other low-cost carriers, low-cost carriers as a group may exert much less competitive discipline on network carriers.

“As Southwest’s costs come closer to those of network carriers, it has less ability to offer significantly lower fares. And a decline in the number of other low-cost carriers may lessen Southwest’s incentives to compete by offering low fares. No airlines offers [sic] low fares out of a sense of philanthropy to the traveling public; like any airline, Southwest is ultimately concerns [sic] with the bottom line, and if it is not faced with potential competition from other low-cost carriers, Southwest may decide that it would be more profitable to follow the fares of network carriers, rather than force fares down.”

Oberstar also expresses concern over the merger itself, citing potential service monopolies for Southwest at a number of airports, including Chicago (Midway), Baltimore, and Houston (Hobby).

It’s Oberstar’s comments about the low-cost landscape that really caught my eye, because he brings up some valid points. Southwest’s costs have risen dramatically over the past 18 months, and are currently the highest among low-cost carriers. Its costs are still well below those of United, Delta, or American, but the gap is shrinking. More and more, too, Southwest seems to be morphing into a somewhat traditional network carrier. Southwest has major hubs, especially in Baltimore, Chicago, and Houston, and funnels much of its cross-country traffic through those cities. All of this—plus the fact that Southwest is eliminating a major low-cost competitor—suggests Southwest’s role in the airline industry could be on the verge of changing. Even before the merger, SmarterTravel readers were noting that Southwest no longer seems as low-priced as it had been. Perhaps that change is already under way.

“In sum,” Oberstar writes, “the future of competition among airlines at every level of the industry, legacy and low-cost alike, is at stake in the Southwest-AirTran merger and should frame the Justice Department’s review.” I don’t know if I’d go that far, but the balance of competition is surely at risk of tipping. Southwest is already a behemoth, but it continues to gather power. What will it do with that expanded influence? After all, as Oberstar notes, ominously, air travel isn’t an altruistic business.