On the Giant U.S. Airline Merger - How a Marriage in the Skies Will Effect Competition in the Air Transportation Sector

When American Airlines ties the knot with US Airways, it will become the largest passenger air carrier in the world. Assistant Professor Kai Hüschelrath, a competition economist at ZEW, explains the consequences of the mega merger.

Dr. Kai Hüschelrath directs the ZEW research group Competition and Regulation and coordinates the Leibniz ScienceCampus Mannheim Centre for Competition and Innovation (MaCCI). He has been studying competition economics at ZEW since 2006. Most recently, he was a senior researcher at ZEW’s research department of Industrial Economics and International Management. He is an assistant professor of industrial economics and competitive strategy at the WHU – Otto Beisheim School of Management.

The merger of American Airlines and US Airways will create the world’s largest air carrier by passenger volume. What will this mean for competition on the air transportation market?

Horizontal mergers like these may have contrary effects on competition. On the one hand, they inevitably increase market concentration, and for this reason are suspected of reducing competition and increasing prices. On the other hand, they can bring about efficiency gains that counteract incentives for increasing prices.

What effects can we expect from the airline merger?

It is difficult to predict and quantify potential efficiency gains. What we can do is estimate the influence on competition by analysing route markets individually. For instance, competition regulators can identify the routes on which the parties compete directly and the consequences likely to result if competition is weakened or eliminated by the merger. If it turns out that American Airlines and US Airways are the only carriers on numerous markets, the likelihood that their merger will increase prices is higher than on more competitive markets, or on markets that attract new rivals after the merger.

Dr. Kai Hüschelrath directs the ZEW research group Competition and Regulation and coordinates the Leibniz ScienceCampus Mannheim Centre for Competition and Innovation (MaCCI). He has been studying competition economics at ZEW since 2006. Most recently, he was a senior researcher at ZEW’sresearch department of Industrial Economics and International Management. He is an assistant professor of industrial economics and competitive strategy at the WHU – Otto Beisheim School of Management.

How will the merger effect international competition?

Analysis of competitive effects is sure to focus on the U.S. domestic market, but the merger will doubtless have international ramifications as well. Both carriers offer a large number of flights to destinations outside the U.S. and each is a member of an international airline alliance. US Airways has been part of the Star Alliance since 2004 and American is a founding member of Oneworld. While American is the only U.S. airline in Oneworld, Star Alliance is bigger and has United Airlines, the second-largest US carrier. As it is doubtful whether any airline alliance can survive in the long run without a major partner in the United States, it would be better for competition if the company produced by the merger between US Airways and American joined Oneworld. This move would preserve, or even intensify, competition on transatlantic routes and elsewhere on the international market.

What does this mean specifically for the German market?

If the merger plays out this way, then Air Berlin (a member of Oneworld) can be expected to benefit, as the number of route connections and flight options will increase. Conversely, Lufthansa (a member of Star Alliance) will lose connections in the short term with the exit of US Airways. But because United Airlines remains in the Star Alliance, these effects are likely to be small and, at any rate, only temporary.

How will the merger impact the large connecting points – the so-called hubs – in the United States?

The efficiency gains aimed at by the merger can only be achieved if the route networks are reorganised. But reorganisation will invariably change passenger volumes at the carrier hubs. American now has hubs in Dallas, Chicago, Miami, and New York (JFK); US Airways has hubs in Charlotte, Philadelphia, and Phoenix. The hubs in Philadelphia and New York are geographically close, so combining these could be an option. But a sound assessment requires comprehensive analysis: many other considerations – available airport capacities, for one – go into such decisions. And if one hub is eliminated, significant economic consequences can be expected for the airport it services. We saw this in 2001 when American took over Trans World Airlines and closed the TWA hub in St. Louis, cutting the number of daily flights there from 800 to just over 200.