Effects Of Merging Airlines APA

Running Head: EFFECTS OF MERGING AIRLINES 1

Effects of Merging Airlines

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EFFECTS OF MERGING AIRLINES 2

Abstract

Ten major United States carriers have merged since 2008 to form four large carriers and

control 80% of the United States market. The companies include Delta Airlines and Northwest,

United and Continental Airlines, Southwest and AirTran and American Airlines and U.S

Airways. The merger has led to a lot of criticism and certain effects on other carriers, customers,

and the merging firms. The customers have a bitter experience of mergers with increased fairs,

loss of luggage, delayed flights among other monopolistic behavior. Despite the monopoly, the

low-cost carriers have managed to stay afloat by accessing gates released by the big four carriers

after the mergers. The mergers have enabled the firms to earn billions in revenue after years of

bankruptcy and sluggish growth. Therefore, while efficiency and customer satisfaction have

dropped the profitability of the firms has increased significantly.

Key words: Mergers, major airlines, recession, stake, monopoly, profit, customer satisfaction

EFFECTS OF MERGING AIRLINES 3

Effects of Merging Airlines

Since 2008 eight major United States carriers have merged to increase their market share

and also gain a competitive advantage. The economic recession in the United States caused

serious losses in the aviation industry leading to the near collapse of airlines worldwide. Since

2000 all major carriers in the U.S. have declared bankruptcy most of them citing poor state of the

economy. Each of the four carriers merged with another airline, and the mergers resulted to the

largest four carriers making up to 80% of the United States domestic market. The same three

airlines have formed global alliances and control 77.1% of the global air market. The merging of

major airlines in the United States produced ripples across the market affecting fares,

competition, lobbying power, market ratio and also with a big impact on other smaller airlines

that held a significant share in the United States airspace. The mergers have led to the fear of

monopoly and price manipulations. Mergers of major airlines in the United States created the

risk of monopolistic control, price manipulation, low customer satisfaction and reduced airspace

growth. The merger of major airlines in the United States led to large market shares, profits and

poor customer experience.

Merging for dominance in the sky has been caused by the recent economic recession in

the United States which has taken a major toll on the airline business. Therefore, airlines have

taken drastic measures to stay above ground. Ten of the major carriers in the states have become

the “four giants” of aviation in the United States. Unification of commanding airlines with

another stirred up the industry beginning with Delta Airlines and Northwest in 2008, then United

and Continental Airlines in 2010 followed by Southwest and AirTran a few months later, leaving

the final two aviation moguls to unite American Airlines and U.S Airways in 2013 finalized their

EFFECTS OF MERGING AIRLINES 4

companionship. Unfortunately, not everyone was happy; the Critics cringe at the word merger

when it comes to aviation because past attempts have left a bad taste in what is believed to be an

“aviation culture.” Flight delays, lost baggage, cancellations, and processes contribute to the loss

of the culture (Isidore, 2013). Therefore, the merger of major carriers has led to the formation of

monopolies in the United States airspace with an overall negative impact. Merging means that

the companies control a large stake of the market and leave the customer with little choice when

it comes to air travel.

Increased Cost of Air Tickets

The idea of merging airlines is not a new one mainly in the United States. There are

three major motives for a merger when dealing with major carriers. The three major reasons why

airlines merge with are the speculative motive, monopoly motive and finally normal business

motive. One of the main impacts of mergers between airlines in a meta-analysis study of almost

6000 mergers indicates that the mergers starting from 1960 resulted in the loss of efficiency in

the air industry (Liang, 2013). Delta Airlines and Northwest in 2008 began the race to mergers

at the near end of the recession in 2008. The merger was not a surprise as both the airlines had

suffered losses during the recession period. However, the merger did not create better standards

or increase efficiency as the companies claimed at the onset of the of the merger. Liang (2013)

analysis of the compared the effect of the major between Delta and Northwest focusing on the

second quarter of 2008 and 2009. The research found that routes served by the companies tended

to be more expensive compared to routes not served by the merged airlines. The case was worse

for longer trips operated by the merger compared to longer routes where the new company did

not operate (Liang, 2013). Therefore the merging of airlines has a positive impact on the merging

EFFECTS OF MERGING AIRLINES 5

airlines but a negative impact on the rest of the aviation community and stakeholders mainly the

customers.

A report presented to the Advisory Committee for Consumer Protections (ACACP) by

Bill McGee reported similar finding concerning the impact of merging airlines on the price

consumers have to pay for air tickets. Since the first merger in 2008 between Delta and

Northwest, the four legacy carriers have increased fairs for tickets several times. In the period

2013-2014, the four dominant carriers in the United States increased their fairs six times. Despite

the companies recording mega-profits the fairs continued to skyrocket causing a significant

disadvantage to the consumer. Increase in fairs means that business and luxuries traveling have

become increasingly costly for many Americans (Leocha, 2014). At the same time, Leocha

(2014) found that the ancillary fees charged by the major carriers in the United States have also

become exceedingly highly and unmanageable. Unfortunately, airlines do not disclose ancillary

fees either through agents or companies portals. The consumers have to learn about the extreme

price tags placed on their luggage after when making payments. Passengers now pay high rates

for everything including seat reservations, meals and also checked bags. Therefore, passengers

are forced to pay more for all low-quality services without many options as the mergers made the

carrier’s controllers of the main airport hubs in the United States.

Customer Experience

Mergers have left the majority of the customers with a bitter experience mainly when It

comes to the type of service they received when traveling with the respective airlines. One of the

most common results of major complaints after the merger of carriers is poor customer service

and mistreatment. The list of complaints includes lost luggage, delayed flights and reservations

EFFECTS OF MERGING AIRLINES 6

headache (Isidore, 2013). Merging airlines in the United States have realized the diminishing

consumer power and have no problem increasing profits the expense of the customer satisfaction.

Example, after the merger of Delta and NorthWest in 2008 the number of complaints to the

Department of Transport shot up by 60%. The data shows the grave nature of mergers of major

carriers mainly in relation to the loss of consumer power. In a free market high competition

forces companies to maintain high standards as a method to attract more consumers or travelers.

However, the merger ten airliners in the United States presents a new challenge. The

monopolistic control of over 80% of the air stake means that over 80% of the millions of

travelers using airports in the United States have little choice when it comes to service providers.

At the same time, the travelers have little power to demand quality services despite paying

extremely high rates for air tickets.

Luggage loss is not the only problem that customers have to deal with in the face of

mega-carriers merging in the United States. The customers have to deal with crowded planes.

Airplanes in the United States fly at a load factor of about 80%. Mergers mean that the same

number of consumers will have to be packed into less number of airplanes (Newman, 2008).

Airlines will squeeze more profits into an aircraft to save on fuel costs. Leocha (2014) notes that

the load factor on domestic flights was between 65-70% compared to the current load factor of

80%. The high load factor means that more travelers with be stacked in one plane and more

profit per plane for the service providers. Leocha (2014) notes that it is now impossible to find an

empty seat on a plane. It also means that the passengers will use the same lavatories which make

the planes very uncomfortable. It can also mean that the carriers will squeeze more seats into an

aircraft and leave the passengers with less leg room. Example, Spirit Airlines CEO stated that the

EFFECTS OF MERGING AIRLINES 7

company only provides 28 inches of legroom. The CEO defended the squeezed compartments

noting that consumers face a little discomfort but save on ticket prices (Leocha, 2014).

Therefore, the mergers have an overall negative impact on the normal traveler experience.

However, air travel has a low consumer power rating which means consumers have no leverage

against airlines offering poor services.

Finally, consumers are likely to suffer from service cutbacks of airline hub. Between

2008 and 2012 carriers have reduced scheduled flights by 16%. The cutbacks at medium size

hubs such as small cities are as high as 26%. The four top companies including American,

United, Delta and the US Airways cut service by 14-18% after their respective mergers (Moss,

2013). This may be positive for the small carriers but can cause large service disruptions for the

regular traveler (Moss, 2013). Example, some high profile cutbacks were seen in the Delta’s

Cincinnati hub where Delta cut the scheduled flights by a massive 63% after the merger with

Northwest. Northwest which used to service the Memphis hub cut services by 35% while US

Airway’s cut service to the Pittsburgh hub by 40%. Cutbacks causes increased fairs to this hubs

by other carriers as competition for passengers reduce (Moss, 2012). Therefore, the merger of

airlines led to cutbacks mainly on smaller hubs which left them vulnerable to monopolistic price

manipulation practices by other carriers operating in the hubs.

Effect on other Carriers

The merger of the eight carriers in the United States led to the combined control of over

41% of the entire market share. Therefore, the companies have a monopolistic control over the

United States air space. The airlines have the ability to either lower or raise their fairs as they

wish to keep the market favorable to their carriers. The airline's use of monopolistic price control

EFFECTS OF MERGING AIRLINES 8

practices threatens the survivor of other small carriers in the United States. The mergers are

likely to threaten the operation of other carriers considering that the mergers allow the newly

formed companies to access gateways in almost every airport in the United States. The U.S.

transport department can rescue the situation by giving some of the gateways to other carriers to

reduce their monopolistic strength against other carriers. However, the mergers and the prices

differentiation are unlikely to cause severe losses to other carriers mainly the small carriers that

have access to smaller cities that were bound to suffer from the majors and the cutbacks. After

the merger of Delta and Northwest research shows that the fairs of decreased at a first rate.

Legacy and Delta-Northwest employed a pricing trick that saw their fairs decrease while the

company market share and profitability increased rapidly. The case demonstrates the threat of

mergers to smaller carriers where a merger can allow a few companies to lower prices

significantly and improve their market share. The bigger companies make a profit by carrying

more travelers at a lower cost. The smaller or low-cost carriers on the other hand risk bankruptcy

and losses.

Despite the big carriers mergers creating a problem for customers and the threat of

monopoly for the small carriers, there are also some opportunities. Small carriers in the United

States including Southwest, JetBlue and AirTran will have new markets open to them. The

merger of the eight airlines to form big four carriers left small cities uncovered as the carriers

concentrate on the main hubs with a high inflow of local and international travelers. Example,

after the merger between Delta and Northwest, Delta had to give up gates in Atlanta to low-cost

carrier AirTran. The Transport Department is likely to force the carriers to release gates in small

but active cities including Memphis, Salt Lake City, Cincinnati, and Cleveland. The open gates

EFFECTS OF MERGING AIRLINES 9

will give the low-cost carriers an opportunity to leverage the large carrying capacity of the

legacy Carriers such as Delta (Newman, 2008). Therefore, the threat to other smaller and low-

cost carriers is less and offers domestic travelers a level of choice when choosing the service

provider.

Merging Benefits versus the Risks

Airlines merge for a variety of reasons including increased market share, monopolistic

reasons, and increase competition or growth purposes. Over the last twelve years each of the

eight American Airlines that merged to form four profitable companies filed for bankruptcy. The

mergers are credited with allowing for the airlines to return to the profitability and also take a

large share of the American air market. In 2010, American Airlines filed for bankruptcy and

returned to profitability in 2012. U.S. Airways has filed for bankruptcy two times in the last one

decade before the merger with American West. Similarly, both Delta and Northwest filed for

bankruptcy between 2006 and 2007 and merged to achieve a better market share that enabled the

Airlines to rise back to profitability (Run Way to final four). In 2014, American Airways

bounced back to profitability recording a quarterly profit of $1.5 billion. In 2012 American filed

for bankruptcy (Elliot, 2014). The rise back to mega-profits for the American indicates the power

of mergers in helping American companies recover from the recession period that saw the

American economy fall to its knees. Other American carriers also enjoyed a year of success with

United Airlines that merged with Continental recording a quarterly income of $919 million,

Southwest Airlines that merged with AirTran recorded earnings of $485 million. Finally, the

merger between Delta and Northwest paid off with an income of $801 million the highest the

companies had recorded since falling to bankruptcy in 2006 (Elliot, 2014). Mergers have the

EFFECTS OF MERGING AIRLINES 10

impact of creating stronger airline industry in the United States capable of overcoming economic

shocks such as the recession in 2008. The mergers have paid off allowing the companies to rake

in large profits and offset years of negative growth witnessed during the recession period.

Second, mergers have helped improve the competitive ability of the firms and

significantly increase their market share. The merger of the eight firms since 2008 gave them a

large share of the United States air market. The merging of the ten airlines to form four major

carriers gave them control over 80% of the United States air market. Therefore, the mergers

improved the competitive advantage of the companies and enabled them to make record profits

in a recovering economy. A large market share also makes them highly competitive against one

another and other carriers (Mutzaburgh, 2015). The record profits posted by the four major

carriers despite the struggling economy indicates the benefits of the mergers mainly by allowing

the firms to take advantage of major and profitable routes in the main cities.

At the same time, the mergers have created an employee management and operations

challenge in an industry where seniority matters. Newman (2014) highlights that the merging of

computer systems, aircraft fleets and operating procedures in two companies can create a major

challenge. The process is immensely complicated and likely in result in serious setbacks and

operational failures (Newman, 2014). Newman provides the example of the merger between

American West and US Airways in 2007 where bags were lost and customers experienced

numerous disruptions. The same was witnessed when United merged with Continental in March

2012 where the operations slowed down and customer complaints shot by 60% (Isidore, 2014).

The second problem for merging airlines is the management of the employees with matters such

EFFECTS OF MERGING AIRLINES 11

as seniority in question. Certain positions have to be lost in the merger, and at the same time, two

different teams or cultures have to be merged.

In conclusion, the merging of airlines since 2008 has led to the dissolving of ten

independent airlines to form four major carriers. The ten carriers including Delta and Northwest

now control 80% of the U.S. air market. The merging of the carrier has a negative impact on the

consumers who are forced to deal with the monopolistic practices. Key effects of mergers to the

customer include increased fairs, crowded planes, service disruptions and loss of customer

luggage. Therefore, mergers do not favor the customer, and in most instances, the customer

becomes the victim of merging giants. Merging also produces monopolies capable of price

manipulation which threatens smaller carriers. The smaller carriers risk is balanced by access to

more gates given up by large carriers as they merge. At the company level, the merging firms

benefit from increased profitability and control of a significant market share. Overall, merging

has a positive impact on the merging firms and an unfavorable experience on the consumers.

EFFECTS OF MERGING AIRLINES 12

References

Elliot, C. (2014). Airline mergers look good now, but not in the long haul. USA Today.

Retrieved from http://www.usatoday.com/story/travel/flights/2014/08/11/airline-

mergers/13887945/

Isidore, C. (2013, February 13). Airline mergers mean more lost luggage, flight delays. Retrieved

from CNN Money: http://money.cnn.com/2013/02/13/news/companies/airline-merger-

problems/index.html

Leocha, C. (2014, november 2). 5 “good” and “bad” effects of airline mergers. Retrieved from

Travelers United "Your voice in travel: https://travelersunited.org/airline-alliances/5-

good-and-bad-effects-of-airline-mergers/

Liang, J. (2013). What are the Effects of Mergers in the US Airline Industry? An Econometric

Analysis on Delta-Northwest Merger. The Macalester Review, 3(1), 2.

Moss, D. L. (2013). Delivering the Benefits? Efficiencies and Airline Mergers. Efficiencies and

Airline Mergers (November 21, 2013).

Mutzaburgh, B. (2015). Era of airline merger mania comes to a close with last US Airways

flight. USA Today. Retrieved from h

ttp://www.usatoday.com/story/travel/flights/todayinthesky/2015/10/15/airline-mergers-

american-delta-united-southwest/73972928/

Newman, R. (2008). 6 ways Airline mergers will Affect travelers. U.S. News. Retrieved from

http://money.usnews.com/money/blogs/flowchart/2008/04/15/6-ways-airline-mergers-

will-affect-travelers

EFFECTS OF MERGING AIRLINES 13

Runway to the final four. (n.d.). Retrieved from CNN Money:

http://money.cnn.com/infographic/news/companies/airline-merger/

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