Instructions3 xCasestudy_1MERGERSAirlineConsolidationHitsSmallerCitiesHardest x
Case Study #1: Airline Mergers
Due: 2/24/2020 11:59 PM
The case study must be a minimum of 4 typed pages (APA format, double-spaced, 1” margins, Times New Roman, font size of 12). Students are expected to use critical thinking and outside resources to give a thorough and thoughtful response. All references must be cited.
Airline mergers
have dominated the industry since the ADA of 1978. This can largely be blamed on the highly competitive and volatile industry the ADA created. These mergers slowed after the initial onslaught of bankruptcies and re-structuring until the 2000’s when they kicked back up again. The reasons for these mergers vary from case to case.
United and Continental merged forming the largest passenger airline in the world (at the time). Southwest and AirTran merged giving Southwest an international presence, Delta and Northwest merged in 2009, Alaska and Virgin America in 2016. The list goes on and on.
Today we have 4 major carriers that control roughly 70% of the market share.
Please select one of the major US mergers/acquisitions since the year 2000 and answer the following questions:
1. What events led up to this merger/acquisition?
a. Ie. What drove this decision? Bankruptcy, consolidation, increase market share, etc.
2. Was this merger good for the consumer?
a. In terms of quality of service?
b. In terms of ticket prices?
c. How is this different in smaller markets vs. larger markets?
3. How did the merger affect the employees of both airlines? Explain.
4. How has this particular merger impacted the industry as a whole?
Airline Consolidation Hits Smaller Cities Hardest
Fliers fare unevenly after big carriers merge, place emphasis on profits
The U.S. airline industry has undergone a dramatic transformation in the past seven years. Whether that’s brought pain or gain for fliers depends largely on where they live.
A Wall Street Journal analysis of industry and government data shows that while airline service and prices have changed little across the country’s major gateways as a whole, carriers have cut flights and raised fares at many smaller and medium-size airports.
From 2007 to 2014, domestic airfares at the nation’s 10 busiest airports, including Atlanta, Dallas and Denver, increased less than 1% on average, while the combined number of domestic seats fell 1.6%.
But at the 90 next-biggest airports—including Detroit, Honolulu and Birmingham, Ala.—airlines cut their total domestic seats by 14.5% and raised fares by 6.4%. All airfare figures are adjusted for inflation.
The uneven impact reflects sharp shifts in airline strategy. In the three decades after the U.S. deregulated the airline industry in 1978, carriers chased market share at the expense of profits, losing tens of billions of dollars over the period. From 2008 to 2014, four mergers combined eight big airlines into four:
American Airlines Group
Inc.,
AAL -2.94%
United Continental Holdings
Inc.,
Delta Air Lines
Inc.
DAL 1.19%
and
Southwest Airlines
Co.
LUV -0.52%
Together, these four carriers control more than 82% of domestic seats in the U.S., and they are now much more focused on profits, methodically adjusting schedules and fleets to maximize their margins.
“Airlines are just moving their capacity where they can make more money, and you can’t make money in smaller communities,” said Mike Boyd, president of aviation-consulting firm Boyd Group International. “As a corollary, the automobile is becoming a more important part of air travel. You might have to drive an hour for the flight you want.”
How airlines add and reduce service is drawing closer scrutiny. The U.S. Justice Department is investigating whether the four largest carriers
colluded on expansion plans
. The investigation followed comments by several airline executives that they planned to limit growth despite cheap fuel. Such restraint could help keep airfares high.
The carriers say they compete vigorously and make their growth plans independently. They say consolidation and other changes have stabilized the industry and made it possible for them to invest in new planes, which benefits air travelers.
To support their claims, airlines generally point to the 2000-to-2014 period, during which average domestic airfares fell 16% to $391. But from 2007 to 2014, during the most recent wave of consolidation, carriers overall raised fares by 5% at the 100 busiest airports and cut domestic seats by 10%.
John Heimlich, chief economist at industry trade group Airlines for America, said the fare increase was necessary to keep profit margins flat.
The 5% fare increase, however, doesn’t include the fees airlines charge fliers to check bags or change flights, which have soared recently. From 2007 to 2014, the price of the average round-trip domestic flight, including fees, increased nearly 16% to $291.30, according to industry data.
The airlines have reduced their flight schedules partly in response to volatile fuel prices, which drove them to stop chasing market share. The cuts intensified in 2009, following the financial crisis.
“As times got tough…carriers had to prune, and it tended to be at some of the smaller locations where demand was either lower or more volatile,” said Mr. Heimlich. “And, in response, they did concentrate resources at their hubs.”
The major carriers now route almost all their passengers through hubs because it reduces costs and lets them serve more cities, industry analysts and economists said. But that also requires many travelers to catch connecting flights at a hub, rather than fly nonstop between cities.
“Point-to-point traffic is really gone at this point,” said Michael Wittman, an airline researcher at the Massachusetts Institute of Technology. “Almost 100% of flights among the big legacy carriers begin or end at hubs.”
Last year, the 10 largest airports by departing seats together accounted for nearly 35% of the roughly 834 million domestic seats available, a 2.5-percentage-point increase from the top 10’s market share in 2007. The next 90 biggest airports now account for 58% of all domestic seats, about 2.5 percentage points less than in 2007.
The growth at big airports was driven by seat increases in Los Angeles, San Francisco and the American Airlines hub in Charlotte, N.C. But not all such megahubs expanded. Chicago’s O’Hare International and Phoenix Sky Harbor International Airport had above-average declines in seats and fare increases.
Carriers also have shifted away from secondary airports in larger cities, in favor of major gateways. At the primary airports in Los Angeles, San Francisco and Boston, airlines added 10.3% more domestic seats and decreased domestic fares by 4.3% from 2007 to 2014. But at the eight smaller airports surrounding those cities, in places including Burbank and Oakland, Calif., and Providence, R.I., airlines cut domestic seats by nearly a third and increased fares by 1.7%.
Airlines made some of their deepest cuts at smaller hubs. Delta eliminated Cincinnati and Memphis, Tenn., as hubs after its 2008 merger with Northwest Airlines, helping decrease those cities’ domestic seats by about two-thirds each from 2007 to 2014. Likewise, United eliminated Cleveland as a hub several years after its 2010 merger with Continental Airlines, leading to a 37% decline in the airport’s domestic seats over the same seven-year period.
Those cuts have had a mixed impart on fares. Cleveland’s fares rose nearly 13% over the period. But Cincinnati and Memphis fares stayed almost flat or fell, because discount carriers filled many of Delta’s gates, increasing competition on popular routes, airport officials in those cities say.
“We’ve had to go through a reinvention,” said Candace McGraw, chief executive of Cincinnati’s airport, where discount carriers now offer 100 flights a week, compared with none in 2007. “We were predominantly a business-traveler airport served by one very large carrier. Now, as we become more multicarrier…there are more price points in the mix.”
The industry’s move toward larger jets with denser seating also has fueled the migration from smaller airports. The new planes have allowed carriers to reduce flights while
adding seats overall
. Smaller planes have become unprofitable because they can’t carry enough passengers to offset the cost of fuel; bigger jets are less costly on per-seat basis and reduce congestion.
The pain for smaller cities likely isn’t over: The shift to larger jets and a worsening shortage of pilots are threatening regional airlines, which generally fly to smaller cities on behalf of the major carriers. Republic Airways Holdings Inc., for example, is hoping a final contract proposal to its pilots last month will
help it avoid bankruptcy
.