The Competitive Dynamics Between American, Delta And United

The United States commercial aviation industry originally had dozens of airlines, each of which operated just a few handfuls of routes, and any mergers and acquisitions were heavily controlled by the industry's principal regulatory bodies. Eventually, by the 1970s, it became very clear that airlines were no longer going to thrive under the strictly controlled environment that had until then been the status quo.

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Airlines needed the flexibility to expand and pull back their network offerings to meet fluctuations in market demand, and they needed the freedom to leverage different ticket prices and products to ensure that they could increase per-passenger revenue generation as much as possible. This kind of deregulated environment may have seemed bad for passengers, who could have seen air service disappear and ticket prices rise, but the opposite ended up proving true.

An act which changed the industry forever

As a result of overwhelming industry pressures, the United States Congress passed the Airline Deregulation Act of 1978, which completely changed the way that airlines operated. Coupled with the arrival of the Boeing 747, which allowed carriers to experiment with luxurious travel products, airlines began to identify a new lucrative way to generate profits. Carriers could now charge business travelers, who wanted more last-minute flexibility and nicer seating, different prices from vacationers, who were simply looking for the best deal.

As a result of the Airline Deregulation Act's passage, the industry was effectively split in half. Some carriers decided to target those lucrative business travelers and others who were looking for a higher-end travel experience, and these airlines soon began to introduce luxurious business-class cabins and industry-leading loyalty programs. These airlines soon became known by the industry term full-service network carriers, although many refer to them simply as legacy airlines, as these airlines were those that existed before deregulation with relatively limited exceptions.

A second kind of airline was born, one that decided to directly target leisure travelers who were always on the hunt for the best deal that was on the table. To profit, these airlines needed to lower operational expenses to provide rock-bottom prices for passengers, leading them to become known as low-cost carriers (LCCs).

Three major airlines have grown out of the environment created by the Airline Deregulation Act

Today there are exactly three legacy airlines in the market: United Airlines, Delta Air Lines, and American Airlines. These three carriers have been the product of many mergers over the years, and their continued growth within the market can be attributed to many provisions laid out in the original Airline Deregulation Act of 1978. According to the United States Congress, the goals of the act were as follows:

1. The maintenance of safety as the highest priority in air commerce
2. Placing maximum reliance on competition in providing air transportation services
3. The encouragement of air service at major urban areas through secondary or satellite airports
4. The avoidance of unreasonable industry concentration, which would tend to allow one or more air carriers to unreasonably increase prices, reduce services, or exclude competition
5. The encouragement of entry into air transportation markets by new air carriers, the encouragement of entry into additional markets by existing air carriers, and the continued strengthening of small air carriers

Aside from the first point, all the stated objectives of the Airline Deregulation Act relate almost exclusively to the nature of airline competition. It is very easy to see how the enforcement of these objectives has led to the rise of massive airlines like United, Delta, and American.

Carriers were incentivized to enter more and more markets and to expand air service as much as possible and were rewarded immensely for doing so. They were encouraged to go into secondary airports and were also forced to face more competitors when they did so.

Only some airlines will survive

This created a "survival of the fittest" kind of market, where only a few airlines would be able to survive through extensive expansion. When the industry has faced headwinds, such as when oil prices rose significantly in the 1980s, air travel fell in the wake of the September 11th attacks or when passenger numbers went off a cliff during the COVID-19 pandemic, carriers have gone under.

When airlines have gone bankrupt, those that survive will undoubtedly absorb what is left of them. This may happen directly, as is the case in many airline mergers that have occurred over time, or indirectly in which a new airline will swoop in to capture a defunct carrier's market share. These are the tactics that have, over time, led to the creation of behemoth airlines like Delta, American, and United.

So where does that leave Delta, American, and United?

Given the industry's extensive history of consolidation, industry observers have continued to face questions as to the future of America's three major legacy airlines. While the headline mergers affecting the market today involve low-cost airlines, there is some speculation about whether another landmark merger could take place at some point involving these three major players.

Delta Air Lines has, for around a decade now, been the market's leader in terms of profitability and product quality, bolstered by a billion-dollar credit card partnership with American Express which keeps generating revenue for the airline. United Airlines is in the hunt for the industry's top position, improving everything from its loyalty program to inflight offerings in a bid to better compete with Delta, according to CNBC.

American Airlines appears to be the carrier falling behind. The gap in terms of profitability and service quality has widened between Delta, United, and their Texas-based competitor. Now whether a merger would take place if American's financial fortunes continue to decline remains to be answered, and many still doubt whether the U.S. federal regulatory agencies would even approve this kind of merger, given the massive impact it would have on the industry.