| Airlne Empires Week in Aviation | ||
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| Airline Mergers: Part I - A Closer Look |
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| Written by Courtney Miller | |
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Page 1 of 2  When looking at a timeline of airline history, there seems to be several distinct periods where airline mergers seem to congregate. Within ten years of deregulation, we saw a significant consolidation of the airline industry with ten mergers or buyouts within three years. Although there have been several periods with noted consolidation, not since the years of 1985-1988 have we seen such an explosion in airline mergers. In part one of this article, we’ll quickly examine the buyouts of 1985-1988 to determine the reasoning for airline mergers in a post-deregulation industry. In part two, this reasoning will be applied to today’s airline industry and potential mergers will be analyzed with a focus placed on network and revenue factors.
Why do Airlines Merge? From a broad viewpoint, the answer to this is easy: “Because the managers think its best for business,” but it takes some further inspection into why the airline managers thought it would be a good idea to buy or merge with another airline. So what exactly are the reasons behind a merger? Lowering
 The expansion of flying into a new region is the most easily recognized, and is beneficial to an airline in several ways. Of course the additional cities provide new markets from which to attract new passengers, but they also serve as a boost to the airline’s existing routes. For every new city added to a hub, the total city pairs increases by the total number of cities that can be connected. For instance, a hub serving 5 cities would be able to serve 10 city pairs. The addition of one extra city would increase the possible city pairs by 5. As networks grow larger, each new city provides a significant increase in city pairs thereby increasing the airlines exposure to a larger passenger base. The larger amount of passengers boosts load factor, and also increases the number of fares that a revenue management system could use to extract the highest fares. Assuming there is enough demand from which to extract these passengers and their higher fares, this could prove to be a lucrative scenario for an airline merger. It is important to point out, however, that if the new markets are already oversaturated with capacity, the higher yields and passenger loads may not materialize to the point where they add more to the overall network than the capacity purchased.
Delta, American, and USAir all completed mergers in 1986 and 1987 for the purpose of extending their network. In 1986, Delta acquired a stronghold at Salt Lake City after their purchase of Western Airlines. The next year, USAir bought both PSA and Piedmont in attempts to link their respective regions of California and the Southeast. Also in 1987, American purchased Air Cal in an attempt to establish a presence in California. Of those mergers, Delta is still operating a hub in Salt Lake City, although they have admitted that it is no longer a profitable hub, USAir has all but dropped their California presence but still has a powerful hub in Charlotte and will once again move westward with the America West merger, and American has retreated from its San Jose hub acquired from Air Cal. Even without a full merger, this reasoning has placed a value on an airline’s regional presence, specifically internationally. Pan Am realized they could sell the rights to fly international routes during their struggle for survival, and over several years they shed all international routes. United purchased many of Pan Am’s Pacific route authorities as well as the authority to fly to London Heathrow, and the purchase has proven to be very lucrative for the buyer. |
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