In theory, a meritocracy has the advantage that a company can use the most capable person available to fill a given position thus enhancing productivity/efficiency/safety. It also provides an incentive to an individual to work hard, gain experience and attempt to improve his ability. However, for it to work an unbiased system of continuous assessment is needed. On a military squadron this can happen as squadron pilots work side by side with each other every day, and the executives who assess a pilot's performance see them at close quarters very frequently and are in a position to make such judgements. Obviously, nepotism and personality clashes do occur which unfairly advantage or disadvantage an individual. However, there are procedures for redress of grievance and there is a hierarchical chain for assessment which should (theoretically!) prevent the aforementioned unfairness. It is almost impossible for such a system to work in a commercial airline, unless the company is very small, as the management pilots who would decide on promotion do not see their pilots often enough to assess their performance, and a one-off assessment twice a year in the simulator and an annual line check are not adequate as overall indicators.
However, be under no illusion that a seniority system is good. It does not allow a company to exploit its pilots' strengths and I believe that it is a disincentive for any pilot doing more than the bare minimum as there is no professional reward for hard work, experience or ability. Also, it does not in general allow someones previous experience to be used fully when they first join a company. Unfortunately, a seniority system is probably the only one that works for the nature of commercial flying.
Having grown up in a military meritocracy I found the seniority system in an airline frustrating, but acknowledged that it was probably the best system for the operational structure.