The Delta-Northwest merger, the United-Continental merger, and Southwest-AirTran merger, and the American-US Airways merger have more or less concluded the consolidation era for the domestic airline industry.
Today, the top four carriers control rougly 70% of the domestic market, versus about the top nine airlines in 2000. But, does this substantial consolidation translate to a positive moat trend for the domestic airlines?
Flying on Airlines is a Commodity Product
To win in the marketplace, any airline would need to operate at the lowest cost to obtain a competitive advantage. Southwest was the first U.S. airline to earn a moat, thanks partly to it’s brilliant marketing strategy and its one-time favorable fuel hedge positions that gave it a distinct cost advantage over other airlines. Alas, No form of competitive advantage can deliver perpetual expansion. Even the Southwest ecosystem coundn’t curtail further encroachment and other airlies, primarily JetBlue, Spirit, Allegiant, and lately Frontier have further replicated and extended the Southwest low-cost operative model.
The frequent flyer miles that airlines have rewarded to consumers are not enough to create substantial customer-switching costs. I am not completely sure that the recent consolidation has resulted in renewed pricing power for the airlines.