Kapil Rohra, Dongchen Chu, Haibing Xiang, Meng Wang, Wei Zhang, Zhe Wang
500 B Economics, University of La Verne
Prior to 1978, the United States airline industry was regulated by the Civil Aeronautics Board. The airline companies in those days use to compete based on the quality and customer service. As the competition was not based on price, there was a certain dress code that had to be adorned to travel by an airplane. However, in 1978, the Airline industry was de-regulated and prices were no longer controlled by the Civil Aeronautics Board. The anti-trust agency and Department of Justice were allowed to enforce only certain regulations in this industry.
Therefore, the airline companies started competing on price, which had certain impact on the customer service and quality provided by the companies. This industry change had a drastic effect on certain airlines, where some companies filed for bankruptcy and others merged with each together to counter the change in the market environment. Over the years, the industry has become more concentrated with few big companies having the majority of market share.
Due to the increase in concentration, it had become important to question about the effects on the suppliers, customers (airline passenger) and supporting industry. Considering that the customer is the revenue generating component, we have focused our research on the effects of mergers on the customer. In order to understand the effects of the merger, we have focused our analysis on understanding the change in competition, network configuration and routes, ticket prices, number of servicing airports, quality and performance of airlines. We applied these variables to the industry structure to study the pre and post merger of Delta-Northwest and United-Continental airlines. Through our analysis, we were able to prove that the mergers had more of a negative effect than positive effect to the customer. Therefore, we were able to provide enough data to validate and prove our hypothesis.
In today’s society, the aircraft is one of the most common traffic tools that people use to travel or transport. In the United States (U.S.), there are 100 certified airlines that operate over 11 million departures per year, 545,000 employees and over 8,000 aircraft operating 31,000 ﬂights per day. According to latest data, the commercial aviation contributes 8 percent to the U.S GDP. From this data, it is clear that the airline industry is important to the people as well as the economy.
In the past years, the airline industry was regulated by the Civil Aeronautics Board (CAB). They didn’t allow the airline companies to compete on price; rather they competed on quality and customer service. In 1978, the government de-regulated the industry by eliminating the power of the CAB and had oversight only on anti-trust and competitive issues. Since, that period, many airlines have either acquired or merged with other airlines to overcome the industry turbulence. The current example would be the American Airlines and US Airways merger of $11 billion dollars.
With these horizontal mergers and acquisitions, they have been able to reduce the presence of multiple airline companies and form more concentrated big companies. This has changed the industry structure to form intentional/unintentional monopoly or duopoly over certain routes. If the American-US Airways merger is passed by government agencies, it will form 4 big giants having control over majority of the U.S. airline industry. Additionally, the airline industry is a complicated industry with many variables affecting business operations. Hence, the integration process is rather a difficult and complex process. This leads to the question about the effects on customers (i.e. airline passengers), suppliers and supporting industry.
Considering that the airline industry is a very capital intense