Consolidation in the Skies
The Impact of Airline Mergers and Acquisitions
There has been an uptick in mergers and acquisitions in the airline industry as airlines look to consolidate and strengthen their positions in the market. Mergers and acquisitions can significantly impact the airline industry by allowing companies to expand their route networks, increase their market share, and achieve cost savings through economies of scale.
Mergers and acquisitions can reduce competition in the marketplace by eliminating or reducing the number of companies competing against each other. When two companies merge, or one company acquires another, the combined entity becomes larger and has more market power, making it more difficult for smaller companies to compete.
One example of a merger that reduced competition in the airline industry is the merger of American Airlines and US Airways in 2013. Before the merger, American Airlines and US Airways were two of the largest airlines in the United States and competed against each other on many routes. However, after the merger, the combined entity became the largest airline in the world, with a dominant market share in many cities and regions. This reduced competition in the industry and made it more difficult for smaller airlines to compete on certain routes.
Mergers and acquisitions can increase bargaining power by creating larger and more powerful companies that are able to negotiate more favourable terms with suppliers, airports, and other industry stakeholders. This increased bargaining power can come from several sources, including the combined size and scale of the merged entity and the greater market share it may possess. Before the acquisition, Alaska Airlines was a leading carrier in the Pacific Northwest region, while Virgin America was a smaller airline with a strong presence in California. By acquiring Virgin America, Alaska Airlines gained a larger market share in California and increased its bargaining power with suppliers and airports in the region.
Mergers and acquisitions in the aviation industry can achieve economies of scale by allowing companies to combine their resources and operations, resulting in lower costs per unit of output. In 2010, United Airlines and Continental Airlines announced their merger, which was completed in 2012. To achieve cost savings, the airlines began to consolidate their operations in several ways. For example, they reduced duplicate services and routes, merged their loyalty programs, and standardized their fleet. By doing so, they were able to reduce their costs per unit of output, such as per passenger or per seat mile, which increased their profitability.
With the increasing number of mergers and acquisitions, it is very easy to lead a monopoly in some region. In the aviation industry, a monopoly can arise when a single airline has a dominant market share in a particular region or on a particular route. This can lead to higher fares, reduced service quality, and less innovation, as there is no competition to drive companies to improve their offerings. To prevent monopolies from occurring, many countries have laws and regulations that govern mergers and acquisitions. For example, in the United States, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) review mergers and acquisitions to ensure that they do not result in a significant reduction in competition. If a merger or acquisition is found to be anticompetitive, the DOJ or FTC may require the companies to divest certain assets or operations to other companies to preserve competition. In some cases, they may also block the merger or acquisition altogether.
Overall, mergers and acquisitions create advantages for the operators such as reduced competition, economies of scale and increased bargaining power. It is important for regulators to carefully review and monitor these transactions to ensure that they do not harm consumers and competition.
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