The most recent wave of consolidation has raised new questions about  the state of competition in the industry. Airline Industry

		The U.S. Our analysis of the latest available  financial data reported by airlines to DOT showed that the industry  generated operating profits of approximately $21.7 billion from 2007  through 2012. This recovery follows  operating losses of $5.6 billion for the U.S. passenger airline industry as a  whole in 2008, due largely to the economic recession and volatility in the  price of fuel. U.S. airlines as a whole have  increased their cash reserves from approximately $8 billion in 2007 to  approximately $13 billion in 2012. This growth has been aided by  three factors: (1) an increase in passenger traffic; (2) capacity restraint  (i.e., limiting the supply of available seats in relation to the level of  demand), which has contributed to a rise in airfares; and (3) increased  revenues from ancillary fees. 3). In 2012, the U.S. airline industry generated  approximately $6 billion in checked baggage and reservation change  fees, up from approximately $1.4 billion in 2007. Despite Industry Consolidation, the Average Number of Competitors Has Not Substantially Changed in the Markets Traveled by the Majority of Passengers

Since 2007, there has been little change in the average number of  competitors in the most heavily traveled domestic markets. The latter results may have  occurred in part due to growth in network size and new connections  created since the mergers. In addition, we found that since 2007, low-cost  airlines have expanded into the largest passenger markets, adding new  competitors in some markets where mergers may have reduced  competition. Examples include New York to Los  Angeles and Washington, D.C. to Boston. For example, during this period, the average number of  effective competitors each year ranged from 4.3 to 4.5 in the markets  represented in the first quintile (see fig. Additional changes to the structure of the market may occur after the  three recent airline mergers are fully implemented and conditions for  approving the fourth and most recent merger are fully met, as well as due  to other economic circumstances. For example, Southwest  Airlines increased its dominant position at Chicago Midway International  Airport from 74 percent of passenger traffic to 85 percent from 2007  through 2012. Consumers Have Experienced a Rise in Fares, Additional Fees, and Fewer Flights in Certain Markets, but Benefit from New Services and Expanded Networks

		Domestic Fares Have Recently Risen

As the economy has been slowly recovering from the recent recession,  demand for air travel has also been recovering. We found that consumers paid approximately 4 percent  more in real terms, on average, for air travel in 2012 than they did in  2007. Fares have continued to rise since 2012. larger airports in larger cities). The study concluded that airlines  have been consolidating service at the nation’s largest airports, while  cutting back on service to medium- and small-hub airports. Passengers may benefit from these  new planes because they are quieter and offer enhanced entertainment  options and other in-flight amenities. However, according to both consumer  advocacy organizations we spoke with, as network and low-cost airlines  compete more on service, attempt to differentiate their brands, and take  steps to increase consumer loyalty, an adverse effect is that consumers  have less ability to comparison shop and airlines compete less on price. Most Stakeholders Cited Barriers to Entry as a Challenge

A majority of the stakeholders we interviewed cited barriers to entry as a  key challenge to competition in the domestic passenger airline industry. As entry,  or the threat thereof, may have a disciplining effect on incumbent firms’  behavior, barriers that make entry more difficult can hamper competition  and enable incumbent firms to charge higher prices without fear that  doing so will attract new competitors. Stakeholders Offered a Limited Range of Potential Federal Actions to Address Challenges, and Differed on Priorities

Stakeholders offered contrasting perspectives regarding the role of the  federal government in addressing the competition challenges they  identified. Agency Comments

We provided a draft of this report to DOJ and DOT for review and  comment. Both DOJ and DOT provided technical comments that we  incorporated as appropriate. Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to examine (1) how the financial health  of the U.S. airline industry has changed since 2007; (2) changes to the  structure of the market since 2007; (3) how consumers have been  affected by changes in the financial health and market structure of the  U.S. airline industry; and (4) what stakeholders believe are the key  challenges to airline competition and actions the federal government  could take to address these challenges. City-pair markets are typically viewed  as the basic, relevant market for airline travel in the U.S.
For each version of the data, we calculated (1) the proportion of total  passengers carried by each airline in the market; (2) the weighted and un- weighted average number of effective competitors (defined as having at  least 5 percent of total passenger traffic in the market); and (3) the  average Herfindahl-Hirschman Index (HHI), which is a measure of the  level of concentration in a market and provides an indication of changes  in the level of competition. We identified  and selected these stakeholders based on prior GAO work, a review of  relevant academic literature, and expertise in their field.
Why GAO Did This Study

Since 2007, there have been four major airline mergers. As a result of this consolidation, about 85 percent of passengers in the U.S. flew on four domestic airlines in 2013. Certain industry observers have raised concerns that consolidation could have adverse effects on airline competition, such as higher airfares and reduced service. Others argue that consumers stand to benefit from recent changes in the industry as profitable airlines reinvest in new planes and expand their networks.
To assist Congress in overseeing changes in the airline industry, GAO was asked to examine the state of competition in the domestic passenger airline industry. This report addresses (1) changes to the financial health of the U.S. airline industry since 2007; (2) changes to the structure of the market since 2007; (3) how consumers have been affected by these changes; and (4) views of stakeholders on the key challenges to airline competition and actions the federal government could take to address these challenges.
GAO analyzed airline financial data reported to DOT, as well as DOT passenger itinerary data from 2007 through 2012, the latest year available. GAO interviewed DOT and DOJ officials and 26 stakeholders, selected based on prior work and their expertise in the field, from organizations in sectors such as academia, airlines, consumer advocacy, and finance. Their views are not generalizable, but provide perspectives on a range of competition issues. Both DOJ and DOT provided technical comments on a draft of this report, which were incorporated as appropriate.

What GAO Found

The U.S. passenger airline industry has returned to profitability following the recent economic recession. From 2007 through 2012, the industry generated approximately $21.7 billion in operating profits despite losing about $5.6 billion in 2008. U.S. airlines maintained approximately $13 billion in cash reserves in 2012. Growth in revenue has driven industry profits, aided by increased passenger traffic, “capacity restraint,” (i.e., limiting the supply of available seats in relation to the level of demand), and revenue from ancillary fees for checking bags and other services. For example, baggage and reservation change fees collected by U.S. airlines increased from about $1.4 billion in 2007 to $6 billion in 2012. Additionally, unlike prior recoveries when airline capacity growth undermined the ability to charge profitable fares, airlines since 2009 have restrained capacity growth even though demand for air travel has risen with the economic recovery.
In recent years, the average number of competitors has not substantially changed in markets traveled by the majority of passengers, despite several major airline mergers. From 2007 through 2012, the average number of effective competitors (defined as airlines with more than a 5 percent market share) ranged from 4.3 to 4.5 in the markets with the most passengers. During this period, the average number of effective competitors in markets with the fewest passengers decreased slightly from 3.3 to 3 airlines. While these results reflect market changes that have occurred since several airlines merged, the American-US Airways merger occurred after GAO's analysis. The mergers created larger networks and new connections in some markets. Also, low-cost airlines have expanded since 2007, thereby adding new competitors into some larger markets. The structure of the market will continue to evolve as economic conditions change and the recent airline mergers are fully implemented.
In recent years, consumers have experienced higher airfares, additional fees, and fewer flights in certain markets, but also new services and expanded networks. Consumers paid about 4 percent more in real terms, on average, for air travel in 2012 than in 2007, without considering additional fees. The airline industry has reduced flights, especially to smaller airports, and consolidated service at large airports. Airlines have also invested in new aircraft and introduced new services, such as early boarding and entertainment options, in an attempt to differentiate products and increase revenue.
Most airline stakeholders cited barriers to market entry, especially restrictions on takeoff and landing slots at four U.S. airports—Washington, D.C.'s Reagan National and three New York City area airports—as a major challenge to airline competition. Barriers that make airline entry more difficult can hamper competition and enable incumbent firms to charge and maintain higher prices. In addition, access to capital and the size advantages of major airlines present a formidable challenge for any new airline. Stakeholders suggested addressing challenges to competition by increasing capacity at congested airports, enhancing fare transparency, and allowing states a greater role in consumer regulation of airlines. However, stakeholders differed regarding the role of the federal government in addressing competition challenges, in part because changes to the airline industry due to consolidation are ongoing.