Airline Empires - Airline and Aviation Articles, Airline Simulation - Airline Mergers: Part I

Airline Mergers: Part I - A Closer Look

Written by Courtney Miller

Page 2 of 2

Merging to Eliminate Competition in a Major Hub

In most large airports, there are two carriers battling for market share. Chicago O’Hare sees United and American, Denver sees United and Frontier, and Atlanta sees Delta and AirTran. These cities are large enough to support multiple carriers, but in some of the smaller cities the competition from another carrier has proven so detrimental to an airline that a buyout can result in larger benefits than the large initial cost. Northwest was competing with Republic in Minneapolis until they announced the buyout in 1986. Since Northwest was already well established in MSP, this didn’t extend their network any appreciable amount, but it did eliminate competition to the point where MSP could be considered a fortress hub for Northwest. Although the merger had some detrimental labor effects and has ultimately been considered a failure,

the effects the merger had on Northwest’s yields out of MSP was significant. Other examples of an airline buying its competition include the TWA buyout of Ozark in 1986 and Southwest’s buyout of Muse Air in 1985. Both airlines realized an increase in yields and load factor from the respective cities of St. Louis and Dallas. Seen as a way to invest in the long term viability of the airline, these types of mergers are typically conducted when an airline has a strong enough balance sheet to exchange the initial payment for long term benefits.

Merging to Reduce Competition and Realize Route Synergies

While not popular during the mid-80’s rush to merge, this hybrid merger reduces competition as well as increases the integrity of the route network. Since this tends to be a merger rather than a buy-out, the benefits are largely realized on a short term basis with moderated long term benefits. In this type of merger expansion of the route network is not sought after so much as reducing the overlapping of connecting markets and secondary hubs. The economy of scale cost benefit still applies, and capacity is reduced, or more appropriately combined. Instead of offering multiple flights on small aircraft to similar hubs, the newly merged airline can offer larger, lower unit-cost aircraft to one consolidated hub in the region. The recent merger that most resembles this type of arrangement is the buy-out of TWA by American. The smaller TWA St. Louis hub was reduced to more of a focus city, while the aircraft size of American’s hubs in Chicago and Dallas were boosted to accept the passenger traffic formerly handled by St. Louis. The result was a reduction in competition, without a reduction capacity to levels that could invite low cost airline intrusion.

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Written by Guest on 2006-03-12 16:07:58

Five cities allows four nodes from each city, or 4! which does equal 10. When you add the 6th city, the city pairs increase by 5, or 5! which is 15. The numbers are correct. Its just coincidental that 4! equals 5*2.

city pairs
Written by Guest on 2006-03-12 15:28:47

small quibble. I believe that 5 cities would result in 5! city pairs, not 5X2.

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