The North American Airline Industry

The U.S. airline industry today is arguably an oligopoly. An oligopoly exists when a market is dominated by a small group of companies, often because the barriers to entry are significant enough to discourage potential competitors. In the U.S. airline industry the barriers to entry include high startup costs, infrastructure constraints limiting the availability of take-off and landing slots, and market incumbents' large economies of scale. While four U.S. carriers account for nearly two-thirds of the domestic market in the aggregate, no single airline's market share reaches 20%. Some have a greater market share at particular airports or on certain routes, however.

The Major Airline Players

As of May 2022, four major airlines—American Airlines, Inc. (AAL), Delta Air Lines, Inc. (DAL), Southwest Airlines (LUV), and United Airlines Holdings, Inc. (UAL)—had nearly 67% of the domestic U.S. market share.

American Airlines had the largest market share, at 18.3%, based on domestic revenue passenger miles over the previous 12 months. Southwest and Delta were close behind with 17.1%, while United had 14.3%.

On Feb, 7, 2022 low-cost carriers Frontier Group Holdings Inc. (ULCC) and Spirit Airlines Inc. (SAVE) announced plans for a $6.6 billion acquisition of Spirit Airlines by Frontier, the operator of Frontier Airlines. The deal would create the fifth-largest U.S. carrier with a combined domestic market share of 7.9% in the 12 months ending on May 2022.

Air travel declined markedly in 2020 amid travel restrictions prompted by the COVID-19 pandemic. U.S carriers lost a combined total of $35 billion on an after-tax basis that year. The domestic airline industry returned to profitability in the second quarter of 2021 and posted a combined after-tax profit of $2.7 billion on the third quarter of 2021.

From Deregulation to Consolidation

Between 1940 and 1978, the Civil Aeronautics Board (CAB) regulated domestic air travel in the U.S. as a public utility. The CAB's approval was required for changes to schedules, fares, and routes. The agency was notoriously reluctant to approve airlines' requests for new routes, raising the barriers to market entry for potential competitors.

The Airline Deregulation Act became law in 1978. Its effect was to increase competition, with fare prices decreasing in the 20 years following its introduction. Meanwhile, the number of fares increased from 207.5 million in 1974 to 597.9 million by 2022.

Extensive industry consolidation followed. High-profile mergers have included Delta with Northwest in 2008, United Airlines and Continental Airlines in 2010, Southwest and AirTran in 2011, and American Airlines and US Airways in 2013. The U.S. Department of Justice sued to block American's merger with US Airways but eventually settled the case, allowing the deal to proceed after American agreed to divest some airport gates and slots.

Fares rose for a few years following the 2007-2008 global financial crisis, but have broadly declined since 2013.

In the years leading up to the COVID-19 pandemic, the major U.S. airlines cut unprofitable flights, filled a higher percentage of seats on planes, and slowed capacity growth to command higher fares. In addition, since 2008, the airlines have charged ancillary fees for services previously included in the airfare.

New Controversies

Some lawmakers and passengers have continued to take the industry to task for alleged anti-competitive practices. “Consumers are paying sky-high fares and are trapped in an uncompetitive market with a history of collusive behavior," wrote U.S. Sen. Richard Blumenthal, a Democrat from Connecticut, in a 2015 letter to the U.S. Department of Justice.

Similar concerns prompted the Justice Department's antitrust unit to launch an airline industry probe in 2015. That probe did not produce sufficient evidence to bring a court case, The Wall Street Journal reported in early 2017.

In February 2021 American Airlines and low-cost carrier JetBlue (JBLU) launched the Northeast Alliance code sharing agreement under which they are jointly marketing flights, coordinating operations and providing reciprocal benefits for each other's loyalty programs.

In September 2021, the U.S. Justice Department filed suit to block the Northeast Alliance deal on antitrust grounds, alleging it eliminates competition at New York City and Boston airports and harms air travelers nationwide. Despite the pending suit, American and JetBlue have expanded their co-operation under the alliance over the past year. The airlines have asked a U.S. court to dismiss the government's suit.

The Bottom Line

A handful of U.S. airlines handle the bulk of domestic passenger travel but no single carrier has a dominant market share. Some airlines do operate a large share of the flights from certain airports, and competition on some routes may also be limited. Despite high barriers to entry and persistent complaints of collusion by critics, airfares have broadly declined since the airline industry was deregulated in 1978, and since 2013 following a wave of airline mergers.