A merger effect on different airline groups: empirical study on the Delta-Northwest merger in 2008

Sora Park

doi:10.1590/s2238-10312014000200004

Abstract

The airline industry has performed inconsistently since deregulation in 1978 and there has been a significant profit discrepancy between legacy airlines and low-cost carriers. Starting from the early 2000s, four of the largest legacy airlines chose to consolidate with an effort to increase efficiency and profitability. Delta Air Lines and Northwest Airlines have consolidated in 2008, becoming the largest commercial airline in the world. This paper examined the merger effect on the airfares on top 1,000 U.S. domestic city-pair routes in relation to the number of passengers, the distance, and the market share as well as its potential anticompetitive issues. All airlines were categorized into three groups - Legacy Airlines, Delta-Northwest, and Low-Cost Carriers - and the interactions between the airfares and the variables were examined within each airline group and across different airline groups. It was found that the airfares of legacy airlines and Delta-Northwest decreased at a faster rate than the low-cost carriers while their market shares increased simultaneously irrespective of whether they offered the lowest prices or had the largest market share on each route.

Highlights

The U.S domestic airline industry can be largely divided into two different groups; one is legacy airlines and the other one is low-cost carriers (LCCs)
The market share and the passenger volume for low-cost carriers were negatively related with the airfare at the statistically significant level over the period of four years regardless of whether or not the merger took place, while the price of flight ticket increased by 3.3 percent after the Delta-Northwest merger
The same regression led to different results for legacy airlines; the merger did not affect the fare of the low-cost carriers

Summary

Introduction

The U.S domestic airline industry can be largely divided into two different groups; one is legacy airlines and the other one is low-cost carriers (LCCs). Legacy airlines refer to those carriers who existed before the Airline Deregulation Act of 1978 As they operate on almost any domestic and international routes, they provide first and business class, airport lounges, and other high-level of services with various types of aircrafts. If two airlines with the most market overlap merge to one firm, the cost saving from eliminating the duplicate operations would generate a significant cost saving effect. While the presence of low-cost airlines may bring down airfares in the market, a dominance of merging firms through integration could lock in their profit against cost competition. As a way to compete with legacy airlines in the wider markets, LCCs expand to the international market through strategic alliance, code sharing, or even through a merger with other LCCs

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