The Last Airline Merger Goes Through: No News Here
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Nov 14, 2013

The Last Airline Merger Goes Through: No News Here

By Thomas Hubbard

It’s now down to four. With the merger between American Airlines and USAir now approved by the Department of Justice, just four airlines—American, Delta, United and Southwest—will account for over 80% of the domestic airline industry.

The merger—which follows mergers between Delta and Northwest, United and Continental, and Southwest and AirTran during the past ten years—is likely the last merger we will see among US-based carriers for the foreseeable future. A merger between any two of the remaining firms would be strongly opposed by the US government.

Tuesday’s announcement of a settlement between American/USAir and the Department of Justice was not a surprise. The only surprise was that this settlement wasn’t reached until after the Department of Justice could formally oppose the merger.

It had always looked as though this was a merger that would be approved on the condition that the merged firm sell slots and gates at a few airports to competitors. A great chart in a Wall Street Journal blog a few days ago illustrates the main reason why: the overlap between American Airlines’ and USAir’s hubs is generally minimal, indicating that the overlap between their nonstop routes is not large. American’s share on routes in and out of Chicago O’Hare is high, for instance, but US Airways’ is low. The reverse is true for routes in and out of Philadelphia. Allowing the two firms to merge would have a minimal effect on competition for many routes.

The exception to this rule, as the chart suggests, is routes in and out of New York LaGuardia and Reagan National. Here there is overlap, and predictably American and USAir will have to sell rights to slots and gates at these airports, along with gates at other airports, as part of the settlement. This is essentially the same outcome that we saw in the United–Continental merger, where the merged firm was required to divest gates at airports—in particular, Newark—where there was significant overlap in the two airlines’ operations.

There will be winners and losers among customers, as there are in most airline mergers, but how things shake out will not be known for years.

In an editorial that decried the merger, the New York Times wrote that in “some cities like Phoenix, Charlotte and Philadelphia, the merged airline will have such a dominant position that its competitors will have a very hard time challenging it.” But this argument against the merger is misplaced. If the merger lessens competition, it will not be on routes to and from these cities (in which one of the merging firms had a very small market share). Instead, it will be on routes, many of which require connections, where the competition between firms is currently more even.

Many fliers will likely benefit. Combining the airlines’ networks will allow the merged firms to offer higher-quality service in the form of shorter connections and new service between cities that only one of the firms had previously served.

This merger is an important event in the US airline industry and one that could easily be good for many fliers. The extent to which it is “news,” however, is somewhere between the sun rising in the east and a losing season by the Cubs.

Editor's Note: Thomas Hubbard is a senior associate dean of strategic intiatives and a professor of management and strategy at the Kellogg School. Photo credit to Lipton sale at en.wikipedia.

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