What Travel Industry Oligopolies Mean for Investorshttp://www.fool.com/investing/general/2013/10/06/what-travel-industry-oligopolies-mean-for-investor.aspx Alexander MacLennan
October 6, 2013
Competition tends to be good for consumers since it drives down prices, but bad for businesses for the same reason. However, when looking at which investments to pick, we need to look at the situation from a business-financial perspective. In the area of reduced competition as a boost for businesses, two parts of the travel industry look particularly appealing.
In 2005, America West Airlines and US Airways merged to form today's US Airways Group (NYSE: LCC). Three years later, Delta Air Lines (NYSE: DAL) merged with Northwest Airlines, an airline passed in total size only two years later upon the merger of United Airlines and Continental Airlines to form United Continental Holdings (NYSE: UAL). Even today, the proposed merger between US Airways and American Airlines parent company AMR is awaiting a trial to determine whether these two carriers can merge to create a new world's largest airline.
Although consumers are against seeing airlines cut capacity and downsize out of less traveled airports, the airlines have to worry about their own bottom lines. These mergers have not only allowed carriers to more effectively manage capacity, but they also reduce the number of carriers needing to raise fares for an industrywide fare increase to take hold.
For these reasons, airlines have managed to revolutionize their industry in less than a decade of mergers. While they are still cyclically exposed, their greater size and better pricing power helps to strengthen financials. This helped US Airways and Delta Air Lines report significant profits for 2012 despite an unfavorable economic climate. United Continental would have also reported a profit if not for a one-time merger-related charge.
Fewer companies than meets the eye
Through consolidation, car-rental companies get many of the same benefits as the airline industry. Fewer compe