Essays on the Cost Effects of Airline Mergers and Alliances

Essays on the Cost Effects of Airline Mergers and Alliances
Author: Huubinh B. Le
Publisher:
Total Pages:
Release: 2014
Genre:
ISBN:

My dissertation is comprised of two essays in the field of industrial organization with an emphasis on the airline industry. In particular, I investigate how airline mergers and alliances affect the components of total cost. By using a methodology that does not require the researcher to have cost data, I am able to infer marginal costs, fixed costs and sunk costs changes associated with mergers and alliances. My first essay examines two recent airline mergers--Delta/Northwest and United/Continental. Most post-merger analysis in airlines disproportionately focuses on assessing price rather than cost changes. Perhaps one reason is that reliable price data are more readily available. Despite the difficulty of obtaining cost data, researchers have sought to empirically assess whether cost efficiency gains associated with a merger outweigh the increased market power of the merged firm. The results from my analysis suggest that both mergers are associated with marginal and fixed costs savings, but higher market entry costs. The magnitude of the cost effects differed across the mergers. Moreover, I find that the market power effects of these mergers were negligible. My second essay investigates the cost effects of the codesharing alliance between Delta, Northwest and Continental Airlines. Codesharing is one of the most popular forms of airline cooperation that allows an airline to market and sell seats on its partners' flights as though it owns those flights. Studies have found that airline alliances have very little to no effect on total cost. Rather than analyzing cost as a whole, I study whether a disaggregate analysis on cost is more appropriate. I find evidence that forming an alliance helps generate more passenger traffic for the alliance partners thereby reducing the partner carriers' marginal cost. Even though the literature has found that the total cost effects to be small, an alliance can have a considerable impact on some components of cost.

Three Essays in Industrial Organization

Three Essays in Industrial Organization
Author: David R. Brown
Publisher:
Total Pages:
Release: 2010
Genre:
ISBN:

My research focuses primarily on industrial organization and applied microeconomics. Specifically, I have extensively studied the airline industry. My first essay considers the effect of the Delta/Continental/Northwest codeshare alliance. Codeshare agreements can benefit airlines due to network expansion and benefit consumers by eliminating a double markup on flight itineraries with multiple operating carriers. However, policymakers have expressed concern that an alliance between airlines may facilitate price and service collusion in markets where codeshare partners' services overlap. I develop a structural econometric model that is able to separately identify supply and demand factors as sources of price-quantity changes caused by the creation of the alliance. The estimates from the model show both collusive and demand increasing effects associated with the codeshare alliance. However, the demand increasing effect is larger than the collusive effect. My second essay considers the effects of the recent Delta/Northwest merger. This merger is of particular interest because the two airlines are codeshare partners. Using pre-merger data, a counterfactual simulation is performed in which Delta and Northwest are assumed to merge. The results indicate that codeshare products owned by the merging firms experience higher predicted price increases relative to pure online products. In addition, the mean predicted price increases are relatively small across most markets. I also examine pre-merger predictions with post-merger data and analysis and find that the pre-merger predictions roughly accord with "de-merger" simulated effects using post-merger data. My third essay takes an extended look at airline mergers. When the Delta/Northwest merger was approved by the Department of Justice, consumer groups and policymakers were concerned that the merger and poor economic outlook would act as a catalyst for more mergers. This paper examines this possible scenario using simulations to model the effects of other codeshare partners merging in addition to Delta and Northwest. Results indicate that the predicted price increases for all mergers exhibit relatively small averages but large variances across markets. Further, the largest predicted price increases affect a small percent of products and an even smaller percent of passengers who choose products owned by a merging firm.

Essays on Economics of Airline Alliances

Essays on Economics of Airline Alliances
Author: Xin Xie
Publisher:
Total Pages:
Release: 2014
Genre:
ISBN:

This dissertation constitutes two essays in the field of industrial organization. Specifically, the research focuses on empirically assessing the market effects of airline alliances. The first essay examines how codesharing, a form of strategic alliances, by airlines affects market entry decisions of potential competitors. Researchers have written extensively on the impact that strategic alliances between airlines have on airfare, but little is known of the market entry deterrent impact of strategic alliances. Using a structural econometric model, this essay examines the market entry deterrent impact of codesharing between incumbent carriers in U.S. domestic air travel markets. We find that a specific type of codesharing between market incumbents has a market entry deterrent effect to Southwest Airlines, but not other potential entrants. Furthermore, we quantify the extent to which market incumbents' codesharing influences market entry cost of potential entrants. The second essay examines the effects of granting Antitrust Immunity (ATI) to a group of airlines. Airline alliance partners often want to extend cooperation to revenue sharing, which effectively implies joint pricing of their products (explicit price collusion). To explicitly collude on price, airlines must apply to the relevant government authorities for ATI (U.S. Department of Justice and Department of Transportation in the case of air travel markets that have a U.S. airport as an endpoint), which effectively means an exemption from prosecution under the relevant antitrust laws. Whether consumers, on net, benefit from a grant of ATI to partner airlines has caused much public debate. This essay specifically investigates the impact of granting ATI to oneworld alliance members on their price, markup, and various measures of cost. The evidence suggests that the grant of ATI facilitated a decrease in partner carriers' marginal cost, and increased (decreased) their markup in markets where their service do (do not) overlap. Furthermore, member carriers' price did not change (decreased) in markets where their services do (do not) overlap, implying that consumers, on net, benefit in terms of price changes.

Airline Mergers: Issues Raised by the Proposed Merger of United and Continental Airlines

Airline Mergers: Issues Raised by the Proposed Merger of United and Continental Airlines
Author: Susan Fleming
Publisher: DIANE Publishing
Total Pages: 27
Release: 2010-10
Genre: Business & Economics
ISBN: 1437934757

In early May 2010, United Air Lines and Continental Airlines announced plans to merge the two airlines and signed a merger agreement. The passenger airline industry has struggled financially over the last decade, and these two airlines believe a merger will strengthen them. However, as with any proposed merger of this magnitude, this one will be carefully examined by the U.S. Dept. of Justice to determine if its potential benefits for consumers outweigh the potential negative effects. This statement describes: (1) an overview of the factors that are driving mergers in the industry; (2) the role of federal authorities in reviewing merger proposals; and (3) key issues associated with the proposed merger of United and Continental. Illustrations.

Airline Industry

Airline Industry
Author: JayEtta Z. Hecker
Publisher: DIANE Publishing
Total Pages: 57
Release: 2008
Genre: Transportation
ISBN: 1437909337

The airline industry generates operating revenues of $172 billion in 2007, amounting to over 1% of the U.S. gross domestic product. It carried more than 700 million passengers in 2007. Airline deregulation in 1978 led, at least in part, to increasingly volatile airline profitability, resulting in periods of significant losses and bankruptcies. In response, some airlines have proposed or are considering merging with or acquiring another airline. This report describes: (1) the financial condition of the U.S. passenger airline industry; (2) whether the industry is becoming more or less competitive; (3) why airlines seek to merge with or acquire other airlines; and (4) the role of fed. authorities in reviewing proposed airline mergers and acquisitions. Charts and tables.

Airline Choices for the Future

Airline Choices for the Future
Author: Kostas Iatrou
Publisher: Routledge
Total Pages: 242
Release: 2016-03-16
Genre: Political Science
ISBN: 1317183169

Airline Choices for the Future: From Alliances to Mergers offers an up-to-date assessment of the industry as it stands today, delivering a comprehensive insight into how the world of airline alliances is changing, and how the merger phenomenon is likely to fit into the new scenario. The purpose of this book is twofold. Firstly, it outlines the evolution and the reasons behind alliances between international air carriers, the alliances' track records and the way they have affected airlines and the air transport industry. Secondly, drawing on past and more recent developments in the industry, it examines the experiences airlines involved in cross-border mergers have gone through and the advantages and difficulties they have come across. Alliances and mergers are presented from both the airline and the consumer perspective. The book provides a balanced account of where mergers and alliances have taken the industry to date, bridging the gap between merger theory and implemented practices and strategies. It also identifies the challenges alliances and cross-border mergers have faced and highlights the key forces affecting airline development. Theoretical evidence is supplemented by data collected via surveys and interviews with airline executives, aviation experts, consultants and regulatory bodies.

Essays on Airline Economics

Essays on Airline Economics
Author: Dan Luo
Publisher:
Total Pages: 142
Release: 2014
Genre:
ISBN: 9781321021448

My dissertation consists of three studies on mergers and competition in the airline industry. The purpose of the dissertation is to show how the interactions between airlines affect airfares, consumer welfare, and flight frequencies. Chapter 1 studies the price effects of the merger between Delta Airlines and Northwest Airlines. Empirical analysis finds that, other things equal, the fares for airport-pairs where Delta and Northwest competed with each other prior to the merger did not increase by much following the merger. My findings support the affirmative decision of the antitrust policy makers on the Delta-Northwest merger case and can provide guidance for future merger analyses. In addition to studying the price effects of a merger, it is also important to study non-price impacts. Chapter 2 does so by examining the effect of a change in an airlines network structure on consumer welfare. Specifically, it studies the de-hubbing of the Cincinnati airport immediately following the Delta-Northwest merger and its impact on consumer welfare in markets with Cincinnati as one endpoint and markets with Delta connections at Cincinnati pre-merger. Empirical analysis finds that there is an increase in consumer welfare for both types of markets. Lower post-merger fares due to Delta's pricing strategy and higher frequencies contribute to the consumer welfare gain for these two types of markets, respectively. Finally, Chapter 3 investigates strategic interactions among airlines in flight frequency choices. Using an instrumental variables approach, this chapter estimates the frequency reaction functions, which relate an airline's frequency on a route to its own characteristics and to the frequencies of competing airlines. A positive reaction function slope is found in some cases, indicating the presence of strategic interaction in the choice of frequencies.

Airline Mergers and Acquisitions

Airline Mergers and Acquisitions
Author: United States. Congress. Senate. Committee on Commerce, Science, and Transportation. Subcommittee on Aviation
Publisher:
Total Pages: 80
Release: 1986
Genre: Airlines
ISBN: