Air Fares to Rise with Northwest-Continental Alliance, Experts Say

Strategic Insights -

Airline experts expect air fares to increase in the wake of the proposed alliance between Northwest Airlines and Continental Airlines, citing rising costs and increased competition pressures. While the alliance is expected to open up new destinations to frequent travelers, it may also lead to accelerated price increases due to record passenger loads and a shortage of airplane seats in some markets. Experts predict that leisure travelers may need to book flights further in advance to secure discount fares.

Key Takeaways:

  • Northwest Airlines' proposed alliance with Continental Airlines is likely to lead to higher air fares in the short term, due to increased competition pressures and rising costs.
  • The alliance is expected to open up new destinations to frequent travelers, but may also lead to accelerated price increases in certain markets.
  • Leisure travelers may need to book flights further in advance to secure discount fares, as airlines continue to restrict availability to maximize yields.
  • The alliance will strengthen two smaller airlines, Northwest and Continental, which are expected to benefit from increased bargaining power and reduced competition.
  • The Justice Department's response to the alliance is uncertain, but experts believe it should not be a major concern.
  • A comprehensive open skies policy, which could lower fares and increase competition, is not a certainty despite potential agreements with the United States and Japan.

Statistics:

  • Record passenger loads have led to a shortage of airplane seats in some markets, contributing to higher air fares.
  • Air fares to Asia, dominated by Japan, are 70% higher relative to other destinations, adjusting for distance.
  • The top 10 airlines in the industry now account for 92% of the market share, up from less than 50% in 1978.
  • Northwest Airlines' proposed stake in Continental Airlines, 14%, is expected to lead to further concentration in the industry and reduced competition.

Sources:

  • Rosenbluth International
  • Carlson Wagonlit travel agency chain
  • Northeastern University economics professor Michael W. McCormick
  • Duke University's Fuqua School of Business professor Paul Zifkin
  • Morgan Stanley, Dean Witter, Discover & Company airline analyst Kevin C. Murphy
  • Woodside Travel Trust CEO Ivan Michael Schaeffer
  • BTI Americas vice president Jeff Barrett
  • Embrey Riddle Aeronautical University economics professor Bijan Vasigh