Oligopoly and Mergers: American Airlines and US Airways Group

American Airlines and US Airways group have recently negotiated terms with the US Justice Department which allow the two entities to merge.  In order to follow through with the merger, American Airlines and US Airways the airlines have to forego a combined 104 flight slots at Ronald Reagan National Airport and 34 flight slots at LaGuardia Airport.  The airlines were further required to give up gate rights in O’Hare International, Los Angeles International, Boston Logan International, Dallas Love Field, and Miami International. 

In theory, losing these flight slots will make the “low-cost” airline carriers more competitive.  To induce further competition, three-fourths of commuter flights leaving Washington must have small or non-hub destinations while the other 25 percent of flights will go to medium-sized airports.  There is evidence for higher competition levels via mergers in the past.  JetBlue leased 16 slots at Reagan National, which increased consumer welfare by $50 million per year.  Southwest Airlines gained 36 slots at Newark Liberty International Airport as a result of United and Continental merging.  Ticket prices dropped by 10 percent and traffic rose by 36 percent.

The merger was a seeming inevitability after earlier mergers between major airlines – Delta and Northwest, United and Continental, and Southwest and AirTran have merged since 2005.  The merger allows American and US Airways to compete with the largest firms.  The merged airlines will control more flights from Reagan than any other airline.

However, this merger will not likely be beneficial for consumers.  In the end, there is one less competitor in the oligopolistic market, which will give competing firms more market power.  Higher market power gives firms an ability to sell tickets at higher prices and in lower quantities.

Sources:
Justice Dept. Clears Merger of 2 Airlines – New York Times
AMR, US Airways Must Divest Slots in U.S. Settlement – Bloomberg

2 thoughts on “Oligopoly and Mergers: American Airlines and US Airways Group

  1. Will airline firms really benefit from lowering quatities, as you suggest in the last paragraph? Are there economies to scale in terms of feul costs or other costs, or does offering more flights add more costs rather than benefits?

  2. By increasing extra stops on long routes airlines can decrease the number of planes in the air and increase volume aboard planes. Leasing and buying outright planes can also come into play with the decision of how many flights to offer.

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