If you have flown from coast to coast, you may have been surprised about the prices and wondered where are the cheap fares? You may have heard for the past few years, it was possible to fly from London, UK to Venice, Italy for the price of the pizza. There were many stories about people going away for the weekend and the price of the flight was the least of their concerns.

In an article by Eric Reguly of the Globe and Mail, the cycle of economics using the airline industry is explained. The first step was in Europe every country believed and did have their own national airline for the health of their economy. Most lost money and after numerous years, deregulation or cutting the expenses of the airline was the cry by the politicians and citizens. Deregulation happened and 20 new airlines started operations and many them competed on the same air routes.

When the plane leaves the runway, it either has people in its seats or not, has cargo to be flown or not. To ensure passengers were in the seats, fares went down and people flew more, although over time fees started to increase. What was good or great for the passenger was not good for the company flying the planes. Airline consolidation is under way and that translates into less competition and rising market share for the big incumbents.

An example of the above is the US, there was deregulation and the system has an effective 4 airline oligopoly. The Big 4 are Delta, Southwest, American and United. The combined passenger percentage is 70% with each holding a 16 -18% market share, according to the US Department of Transportation. In 5th place is Alaska Airlines with 6%.

A recent IATA, the International Air Transport Association found that in the US to reach 50% of scheduled seat capacity, 3 airlines were needed. In Europe, it took the top 10 airlines to reach 50% capacity. It was not surprising European fares were less expensive.

The European market is now consolidating – Germany’s Lufthansa bought 41% stake in Italy’s ITA, the successor to bankrupt Alitalia.

IAG which owns British Airways, Iberia, Vueling and Aer Lingus has agreed to buy 80% of Spain’s Air Europa.

Air France-KLM wants to buy 20% of Scandinavian carrier SAS.

The Portugal government has put up its airline for sale, expect bids from Europe’s big airlines.

The airline bosses’ say consolidation means the bigger airlines profitable allowing them to renew their fleets and offer reliable, expanded services. They do not say fares are going up.

The consolidation of Europe’s airlines will mean by 2025, the top 5 groups will control about 73% of the market.

Linking to dividend paying stocks, in every industry there tends to be competition which is good for the consumer, but eventually consolidation which is good for the companies. As an investor, you want to own the industry stock in the consolidation phase as the companies are profitable but compete on the margins.

There are more questions than answers, till the next time – to raising questions.