Timing is Everything

US airways and American Airlines are trying to merge together into one company, but the US government has filed a lawsuit to stop them. The government has filed an anti-trust lawsuit for fear of the company gaining too much power and gaining the ability to control prices. The interesting part of this merger is that this type of merger between airlines has been done four times within the past 8 years (Delta and Northwest airlines, United and Continental Airlines, Southwest and AirTran, and US Airways and America West Airlines). If the merger is successful, it would create the largest airline in the world.

The airlines argue that the merger would allow them to compete with larger firms such as Delta and United Airways, both who went through a merger recently. The US government says that mergers similar to the one US Airways and American Airlines are proposing have led to less competition and customer satisfaction. US Airways and American Airlines believe that their merger would allow them to better compete with Delta and United, thus improving competition amongst the larger national airlines.  One statistic that worries the US government is the amount of air traffic certain airlines would control at major airports. In the case of the US airways and American Airlines merger, if the merger happens, would control about 70% of the air traffic at Ronald Reagan Airport in Washington DC.

The airline industry has an important characteristic that makes it a prime industry for which a firm could become a monopoly or an oligopoly could form: a high barrier to entry. A fleet of planes is a very expensive fixed cost for a new airline to incur. This large amount of capital required to purchase a fleet of planes makes it very hard for a new firm to enter the market. It would be more efficient for an airline to acquire or merge with another airline to gain their aircraft rather than buy new ones.

Another interesting aspect of this merger is the US Airways and American Airlines argument for why they should be allowed to merge: because the government has allowed it before in similar cases. Why won’t the US government allow the merger? Were the economic models it used to estimate the impact of the previous mergers so flawed, the results from the actual merger were completely different? Or is there something else that the government isn’t telling the two airlines? Timing is everything and I guess US Airways and American Airlines are just a little too late.

3 thoughts on “Timing is Everything

  1. It’s really interesting that there have been four other major mergers in recent history, but this one is not allowed. Could the heightened merger activity reflect industry growth that could be compared to the brewing industry. As we learned, the brewing industry experienced a minimum efficient scale that has been increasing greatly since the end of prohibition. Perhaps the MES for the airline industry is experiencing a similar phenomenon. Perhaps rising fuel costs could be driving the increase in the airline industry’s rising MES.

  2. We could also look at network externalities in this case. Like technology, the more control over air traffic through vital airports, the more people will choose to book their entire trip with the single airline. Perhaps the government is worried that the positive externalities resulting from this merger would be so significant that it would render other competitors (who also performed mergers, but seemingly on a smaller scale) powerless in an increasingly monopolistic market.

  3. Going from 8 to 7 firms might not have a clearly deleterious impact, but at some point (5 to 4?) that calculus changes.

    Another issue is whether mergers are between airlines that compete directly, or that have little overlap – one stronger in the West Coast / Pacific, another in the East / Atlantic. It’s hard to argue that such non-rivalrous mergers impede competition, rather than (potentially) lower costs. In the background as well are a large number of bankruptcies; unprofitable firms get more latitude than profitable ones.

    In any case, the argument “you’ve approved mergers before” is so limp as to seem an act of desperation!!

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