Why airline mergers are inevitable

By Samina Karim
October 9, 2013

The American Airlines/US Airways merger talks are on hold due to the ongoing antitrust trial led by the Department of Justice. The D.O.J. is concerned, from the perspective of protecting consumers’ interests, that the resulting airline would have too much market power in many of its locations. Though this is true (assuming nothing about the airlines’ business was changed and no assets were divested), the underlying issues are broader than that.

This is an inevitable story of consolidation and creative destruction and the cyclicality of the two. This proposed merger — or one like it – will happen. It’s just a matter of time. But let’s compare an American Airlines/US Airways pairing with two, comparable, big-headline mergers.

Back in 2012, the music industry consolidated from four big players to three as EMI was split up. Its music business went to Vivendi’s Universal Music Group and its publishing business to Sony/ATV. In this deal, similar concerns of market power led the European Commission to stipulate that Universal had to sell a third of EMI’s assets. And that deal went through.

Meantime, ending in a different fate in 2011, AT&T finally admitted defeat in its attempted bid for T-Mobile. It would have consolidated the cohort of this nation’s cellular operators from four to three. In this latter case, the firms were up against both the D.O.J. and the Federal Communications Commission.

So why are airline mergers inevitable? It’s because, in many ways, the passenger airline industry is more like the music industry than the wireless-operator industry.

In both airlines and music there is a long history of prolific entry of new rivals (such as regional carriers and private labels), and successful ones either grow or get gobbled up by the larger players. Think about it. Most of us have heard the names of smaller music labels but many may not be as aware of the dynamic market of regional, non-legacy carriers. Next time you fly check out the “operated by” field on your ticket and start tracking how many different “operators” you’ve experienced in your travels.

In general, large players are faced with competition by the focused, agile, competitive, smaller players and some of these large players don’t fare well (e.g. American Airlines, EMI, T-Mobile). The usual reaction from Strategy 101 is to try to achieve economies of scale and increase market power. So, voila, with airlines we see consolidation and mergers (e.g. Delta’s merger with Northwest and United’s merger with Continental, and there are plenty of smaller ones).

So why wasn’t the AT&T acquisition of T-Mobile inevitable? It’s because there has been less creative destruction in this industry. Historically, there hasn’t been the frequency of firm entry in the cellular-operator market that we’ve seen in airline or music industries — at least not yet. But it is growing and technology may well change the delivery of these services in our future.

So instead of dragging out this antitrust trial — and the worst outcome would be to deal with this all over again in a few years — either the D.O.J. should stipulate its antitrust demands and let American Airlines and US Airways just get on with it, or each airline should start courting another partner.

PHOTO: US Airways flight attendants chant during a protest by pilots, flight attendants, baggage handlers and other union members working for American Airlines and US Airways urging the U.S. Justice Department to allow the two companies to merge at a rally in front of the U.S. Capitol building in Washington September 18, 2013.  REUTERS/Jim Bourg

 

2 comments

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You cannot compare the airline industry to the music industry. Music labels distribute and promote the arguably unique work of individual artists, while the airline business has transformed into an economically cyclical commodity industry. The prmary drivers of airline consolidation have been over capacity and a need for as much global coverage as possible. The small, regional “code share” carriers you refer to? They don’t compete with the trunk airlines, they were INVENTED by the trunk airlines to provide feed into the larger airline’s route system. The government sparked transformation of the air transportation industry with the 1978 passage of the bill that deregulated the industry (thank you Alfred Kahn). Decades ago, Dr. Kahn predicted the unbridled industry would eventually evolve into the oligopoly we see developing today. Judtice probably should have blocked the NWA/Delta combination, but they didn’t. You say American and US Air should look for other merger partners? Look at the industry, there aren’t any merger partners for these two awkwardly sized airlines. Please do not embarass yourself by proposing other combination possibilities.

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“China’s official news agency has called for the creation of a “de-Americanised world”, saying the destinies of people should not be left in the hands of a hypocritical nation with a dysfunctional government.”

Our political parties are seriously hurting the country now. Both of them. We need a referendum vote on Term limits for congress and SCOUS and campaign finance reform. Nothing more or it will be turned into a never ending argument and well get nothing. Just those two things and all things can be achieved after just one or two election cycles. DEMAND IT!

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