Anti-Trust Case power point
Mollyisme
ATCexample.pptxBarriers To Entry
Travel Hub & Travel Route Network
Startup Costs
Overcoming Bankruptcy
Consumer Choice
Merging of Systems & Crews
Government Regulation
Source: Adrian Pingstone
Source: Eric Greer
There are few barriers to entry in this specific case as both airlines are already both well established and can benefit from economies of scale and rights on airport slots. The merging of these two airlines would allow the new firm to possess greater presence in the south, as American Airlines travel hub is stationed in Dallas, TX, which has allowed the firm to develop a strong presence and customer base in the region.
While airlines looking to join the industry face the high capital requirement associated with airline acquisition, the effects can be minimized through the use of outside investors or leasing options.
The greatest barrier of entry that exists in this specific case is that American Airlines was in the midst of bankruptcy, which causes US Airways to take on the burden American’s Financial woes.
Switching Cost: The cost of the consumer to switch their business from one firm to another. In the case of airlines, the cost is relatively low which would thereby lower the barrier of entry and allow for a smoother transition were to merge. The biggest barrier the firms would then face is merging their booking systems, crews and policies.
When the two airlines merge, they can then decrease their costs through economies of scale and increase their profits as a result. This could then allow the pass its profits on to the consumer through reduced fares, improved service/amenities or enhanced rewards programs.
Government Regulation: While the FAA may limit the amount of aircraft in the air as well as their take-off/landing slots, these airlines are already under these regulations and would likely not be any more inconvenienced by them following the merger.
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Social Cost and Behavior
Monopoly
Price Setters
Creates Deadweight Loss
Oligopoly
Few Competitors
Lower Prices
Advertising Drives Competition
Economies of Scale
Source: American Airlines
When a product is produced and sold under conditions of monopoly, the monopolist gains at the expense of consumers, for they have to pay a price higher than marginal cost of production.
Deadweight loss: Loss of welfare caused by allocative inefficiency of the monopoly.
By merging the two airlines, the overall airline size will of course increase, but as part of an oligopoly, the new firm will fear losing customers should it raise prices, since the competitors will not follow suit.
As a result, prices will likely stay the same or even decrease.
Merger expected to “increase cost efficiencies and achieve economies of scale.” (Lawton, 2013)
Firms within an oligopoly market often use advertising as a means of setting themselves apart from competing firms. This process often results in increased competition, which drives innovation.
While there would less choice for the consumer it would not only save an entire airline from shutting down, but could allow for improved efficiency and greater expansion, both of which benefit the consumer greatly.
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The HHI index
Herfindahl-Hirschman Index (HHI)
The sum of the squared percentage sales shares of all firms in an industry.
The HHI index for the industry indicated there is less competition and market is concentrated
HHI could exceed 4,900 points post-merger
Airline options would decrease from 11 major airlines in 2005 to 6 by 2014
Source: NBC Universal
The HHI measures the impact the merge had on the market; the HHI indicated that the merge between U.S. Airways and American Airlines have exceeded 2,500 points in cities they operate meaning the market is concentrated and competition is less. According to the same source, “HHI would increase to as high as 4,959. There would be an increase of 1,493 points after the merger, which would dampen competition to a large extent” (Cederholm, 2014).
This could be due to the reduction of competition and airlines merging to compete in the market.
There were originally 11 airlines in 2005 which would then decrease to 6 airlines by 2014. The result would show the joint US Airways and American Airlines firm at the top of the list.
The only solution for American to regain its leading position would be through a merger with an airline like U.S. Airways, so that it would have network coverage to complement its own (Cederholm, 2014).
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Airline Industry Concentration Ratios Before & After
| US Airline Industry | 1990 | 2000 | 2010 (Before) | 2015 (After) |
| Top 4 Airlines | American Airlines | American Airlines | American Airlines | American Airlines |
| Delta Air Lines | Delta Air Lines | Delta Air Lines | Delta Air Lines | |
| US Airways | US Airways | US Airways | US Airways | |
| United Airlines | United Airlines | United Continental | United Continental | |
| Combined Market Share | 68% | 61% | 65% | 84% |
Source: Company filings; Alaska Air Merger Presentation
It has been argued that the merger of US Airways and American Airlines the Clayton Act's prohibition of activity that "would substantially lessen competition” (Perterman, 2014). These actions, however, could be remedied by divesting of certain assets, which would better equip low-cost airlines to compete with the more dominant firms.
US anti-trust law exists with the sole purpose of protecting the consumer from the consequences that result from a lack of competition within any given market. “Section 7 of the Clayton Act prohibits actions when the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly” (Perterman, 2014).
In 2008, Delta Air Lines acquired Northwest Airlines for $2.6 billion. While the case was also reviewed by the DOJ, it closed its investigation upon issuing a statement “highlighting the anticipated efficiencies and procompetitive effects” of the merger (2008). As this specific case would keep a key player in the industry from shutting its doors permanently, it would likely be of greater benefit to approve the merger, albeit, with several conditions.
“There are only 13 routes served on a non-stop basis by both American and US Airways, according to JPMorgan Chase analyst Jamie Baker, and eight of those routes will be served by the one airline after the deal” (Isidore, 2013).
If the resulting airline is truly able to compete with the carriers dominating the scene today and increases pressure in the marketplace for more routes and lower fares, then a merger could wind up helping airline travelers.
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Market Structure
U.S. Airline Industry operates as an Oligopoly
Small number of firms who dominate the market
US Airways/American would form a horizontal merger
Top 5 Major Airlines in the U.S. Post-Merger:
American + US Airways (Largest Market Share)
Delta
United
Southwest
All Others (Smallest Market Share)
Source: Airline Traffic Reports; DOT
An oligopoly market structure is defined by Miller (2016) as “A market structure in which there are very few sellers. Each seller knows that the other sellers will react to its changes in prices, quantities, and qualities” (p. 599). The US Airways/American merger was considered a horizontal merger [(“The joining of firms that are producing or selling a similar product” (Miller, 2016)].
The airline industry operates as an oligopoly in a sense that there are a lot of barriers to enter the airline industry such as legal barriers, high operating costs, high costs of aircrafts, high fixed and variable costs (i.e. airline pilots and staff, insurance, etc.).
Prior to the merger in 2013, Delta had the highest market share, while American and US Airways ranked 4th & 5th with US Airways having the smallest market share of the top five airlines (CAPA, 2013).
As of August 2017 American Airlines held the highest market share with 18.5% of the industry based on domestic revenue passenger miles (US Dept of Transprtation), 2017).
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Market Behavior
Oligopolies such as the U.S. Airline Industry participate in Game Theory Behavior
US Airways & American Airlines participate in a “Cooperative Game”
Companies who collude to make higher than perfectly competitive returns
Explicitly cooperated to make themselves jointly better by merging
Source: Vivify
According to Miller (2016) “Game theory is a way of describing the various possible outcomes in any situation involving two or more interacting individuals when those individuals are aware of the interactive nature of their situation and plan accordingly. The plans made by these individuals are known as game strategies”.
U.S. Airways and American participated in what’s called a “cooperative game” [(“A game in which the players explicitly cooperate to make themselves jointly better off. As applied to firms, it involves companies colluding in order to make higher than perfectly competitive rates of return”-Miller, 2016)}.
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Pricing Strategy And Profit
A Typical Flight Has 10 Different Price Points
Most Expensive Fares (Business Class) Are Bought Closer To Departure
High Demand And Customer Willingness To Pay
Price Elasticity Varies On Consumer Travel Reason, (Business, Vacation Etc.)
Added Fees Drive Profits-baggage Fees, Upgrades, Change Fees
Less Competition For Travel Hubs Creates Lower Prices For Consumers = More Long Term Business
Airlines such as US Air and American Airlines operate in a Competitive Oligopoly as they are both National and international Airlines. This is further supported by the fact that their flights have differing price points.
There are benefits to both sides of the merger for both consumers and the firms they are as follows:
Greater travel route options for consumers
Higher wages for employees
Less competition for firms
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Price Discrimination Vs. Price Leadership
Price discrimination, difference in business and leisure ticket costs
Airlines bank on the necessity for business travel and the unpredictability that business travelers possess with travel
Price leadership occurs frequently within the Airline industry, as seen in frequent flyer programs and fare specials
Source: AAPD
Both price discrimination and price leadership can be clearly seen within the Airline industry.
Discrimination occurs with the differences in charges for the different seating/boarding classes. This can also be seen where certain routes are more expensive than others.
Price leadership occurs through the use of fare specials and frequent flyer mile earning programs. (AAdvantage-American, Wanna get away-Southwest, Economy Class-United)
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References
Bureau of Transportation Statistics: Retrieved from: https://www.rita.dot.gov/bts/press_releases/bts015_15
CAPA, (2013), Retrieved from: https://centreforaviation.com/insights/analysis/american-airlines-and-us-airways-merger-plans-proceed-as-the-silly-macho-battle-ends-138997
Cederholm, Theresa. (July 11, 2014). Must-Know: An Overview of the American Airline Group. Market Realist. Retrieved: http://marketrealist.com/2014/07/must-know-us-airline-industry-consolidation-and-restructuring/
Complaint at 1-7, United States v. US Airways Group, No. 13-CV-1236 (CKK), 2013 WL 4055128 (D.D.C. Aug. 13, 2013), ECF No. 1.
Isidore, C. (2013). US Airways-American Airlines to merge. Retrieved from: http://money.cnn.com/2013/02/14/news/companies/us-airways-american-airlines-merger/index.html
Lawton, Thomas C. (March 1, 2013). Why American Airlines and U.S. Airways tied the Knot. Retrieved: https://www.usnews.com/opinion/blogs/economic-intelligence/2013/03/01/whats-behind-the-american-airlines-us-airways-merger
Miller, R.L. (2016). Economics Today, Eighteenth Edition. Pearson Prentice Hall. Retrieved electronically: http://gcumedia.com/digital-resources/pearson/2015/economics-today_ebook_18e.php
Peterman, Catherine. A. (2014). Future of Airline Mergers after the US Airways and American Airlines Merger. Journal of Air Law and Commerce, 79. Retrieved from http://scholar.smu.edu/cgi/viewcontent.cgi?article=1359&context=jalc
Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigation of the Merger of Delta Air Lines Inc. and Northwest Airlines Corporation. (2008, October 29). Retrieved from https://www.justice.gov/archive/opa/pr/2008/October/08-at-963.html
