Introduction
This assignment aims to describe the current state of affairs within the airline industry today. It will examine airline mergers, alliance & consolidation and the creation of mega alliances. It will take an in depth look at the pros and cons of airline alliances and the ongoing impacts they have on a number of different elements such as the airline industry as a whole, the impacts for the airlines coming together and of course for the welfare of the passenger. The assignments will finally asses the outcomes of mergers by paining close attention to certain examples and if they lead to an anticompetitive environment within the industry that leads to reduced customer welfare.
OVERVIEW OF AIRLINE INDUSTRY
The airline industry is an ever growing and ever-expanding entity in today’s world Long gone are the days in which only the rich and affluent people could afford a means of transport that cut travelling times by a substantial amount of time and effort. affordable airlines all the way to airline expertly offering first class services do those that wish to seek the best possible experience whilst 35,000 feet in the air.
As it currently stands there is upwards of 2000, airlines operating more than 23,000 aircraft which provides flights and service to approximately 3700 airports worldwide.
The us market accounts for 1/3 of all air passengers worldwide and has a continued growing number of passengers since 2012. As an indication, enplanement numbers between 2016 and 2017 for the U.S rose by 3.1% (824m to 849m) which is the highest numbers of recorded boarding’s for the us market.
This shows that the US is also, according to IATA statistics from 2017, that it is the biggest revenue generating region for the airline industry, creating more than half of the 38 billion dollars in revenue recorded in 2017 Iata.org. (2018).
Globally however the airline industry has seen a decline in passeneger number growth for the first time since 2012 falling by 1.1% between 2017 & 2018. This decline can be accredited to a number of factors such as increased prices of air travel due to increased oil prices and an increased understanding the public has in regard to the airlines industry effect on the environment
OVERVIEW OF AIRLINE MERGERS
Airline mergers have been said to have come about primarily due to the deregulation of the airline industry and the explosive rate of new carriers entering the market both directly after deregulation took place in the 1970s and later on in the 1990s. The reasoning behind mergers is due to the amount of competitiveness in the market due to deregulation and the introduction of LCC. With this, large airlines are trying to merge together to cut costs and keep up with or cut much of the competition they face by creating a merger.
As concluded by Veldhuis, J. (2005) the rationale for mergers can differ. In some cases, airlines will be taken over or have no choice but to merge due to financial problems faced by the airline of the were to do business as a sole airline. Other airlines merger so that they can take over smaller airlines by acquiring shares above 50% in smaller organizations to increase their market share with the industry within a said region.
Airline mergers however can create severe negative affects to the airline industry if not controlled correctly. Airline mergers can be viewed in two different perspectives. Pro-compedative or anti-compedative. negative effects of a merger (anti-compedative) can influence the economy of the airline industry as well as creating monopolies on certain routes and reducing competition necessary between airlines to ensure the industries economic welfare. With this there needs to be regulations put in places and a classification of remedies to ensure mergers do not lead to the destruction of a fair and healthy industry that supports welfare for its customers and a pro compedative environment. Below the literature explores examples of airline mergers within the E.U and the remedies required to sustain a fair economy for both the customer/traveler and the industry itself.
AIRLINE MERGERS IN THE EU
The current state of the airline industry within the E.U is said to have been affected by the liberalization of the European airline market and also the most recent economic crisis. With these factors combined there has been a large spike in the number of airline mergers/consolidation within the E.U
When examining the EU when it comes to Airline mergers the European commission takes charge if the mergers EU wide turnover exceeds 250 million euro. If this is the case and the mergers turnover does in fact exceed this amount then the EU Commission needs to put steps in place to protect the economic environment and so to avoid the merger having a dominant position in the market on a specific route. It is important to note that the market should be classified as using the origin and destination approach to routes (I.E Every combination of and origin and destination needs to be considered a separate market) with this being the case it is necessary to understand that a destination or region is not classified as the market but rather the Two cities that are affected by the merger.
When a merger does occur, the commission needs to asses’ certain aspects of the proposed merger and its effects on the competitiveness of the market. Taking the case of Swissair/Sabena The EU Commission had to assess the merger and suggest remedies as the merger would have had 100% of the share of routes for Brussels/ Geneva, Brussels/Basle and Brussels/Zurich thus leading to an obvious monopoly. Although it is important to support competitors the overall aim of the commission and the remedies put in place is to preserve competition and economic welfare within the airline industry. In the case of Swissair/Sabena the lack of airport substitutes and slot limitations created obvious entry barriers for other airlines. To remedy this new slot had to be made and forced Swissair to give up 12 slots at Zurich and 12 at Geneva. Sabena then followed and gave up 8 slots at Brussels (Németh, A. and Niemeier, H.2012 )
BENEFITS OF MERGERS FOR:
AIRLINES AND INDUSTRY LOAD FACTOR
As previously stated in the literature. The airline industry saw a boom in the number of carrier’s due to deregulation in the 1970s and then another boom in the 1990s. however this large carrier numbers has since been reduced by the effects of consolidation and exits from the marketplace.
At the time of deregulation there had been near to 20 legacy carriers in the U.S, but as of 2005 that number has plummeted to only 6 legacy carriers. As of 2005 the 6 legacy carriers that still exist in the market place merged leaving, delta Airlines, American airlines & United Airlines.
Although it is believed by some that mergers can have a harmful, anti-compedative effect on the industry load factors the study contuced by … has proven that merges in certain cases do not in fact have a non-compedative affect. This is backed by figures that show that the delta/northwest, united continental & American/ US airways mergers have not had a negative effect on the industry wide load factor from the year 2002 to 2015 despite a dip between the first and third quarter of 2009 which is accredited to the economic recession of that time. However as illustrated by the author both the anti compedative effects of a merger and pro-compedative effects of a merger can lead to an increased number of enplanements. (enplanements rose from 110M to 150m between 2002 and 2015 between the 3 mergers) The increased fares due to pro-compedative effects of a merger could be due to with the airlines increased quality while the anti-compedative affects could be associated with a greater market dominance/power. This leaves the assumption that both anti & pro compedative effects of a merger can have positive effects on the airline in terms of fare numbers
Another case worth examining when studying the benefits of mergers for is the merger of Air France and KLM. The impact of their merger was hugely positive in terms of demand, with the passenger numbers in the Hinterland travelling to Singapore increasing from 76,000 to 80,000 passengers per annum. ( Carlton, D., Israel, M., MacSwain, I. and Orlov, E. (2017 )
FOR CONSUMERS
The KLM-Air France merger of 2004 is well rounded study that highlights the benefits of mergers for airline passengers. The first steps of this merger took place between the years 2004-2010. Prior to the merger of KLM & Air France, only 46 flights offered Air France to Paris connected to the 7 Air France flights from Paris to Singapore. This resulted in their being a composite indirect frequency of Air France flights from Amsterdam to the French capital to Singapore of 6.1 per week. Then, after the merger and the connection of KLM flights to Air France flights the indirect frequency grew from 6.1 to 6.5. This is increase however is marginal as the added value of the 48 additional flights to the French capital in addition with already high Air France frequency is limited. Greater value is added from the 6 flights offered by KLM to Seoul as opposed to the 1 flight per week out of Amsterdam prior to the merger. With this increase in flight numbers/availability it leads to greater benefits for passenger’s due to the increased flight frequency especially in the Amsterdam region but still so for the Paris region. Veldhuis, J. (2005)
DISADVANTAGES OF MERGERS:
FOR CONSUMERS
It is often times believed that mergers can bring about service quality improvements in air travel for the end user. This is said to a result of shared assets, more staff (I.E Quicker check-in times and more gate and baggage handling staff) and a greater frequency. However, mergers can lead to a reduction in the level of competition within the industry which in turn leads to a reduction in the overall level of service quality.
As shown in the literature by (Steven, A., Yazdi, A. and Dresner, M. (2016).) mergers are seen to affect service quality in various different ways. the literature states that although mergers may initially seem to bring about benefits to service quality, the anticompetitive nature will lead to a reduction in the level of service quality not only provided by the merging airlines but by other airlines that have been affected by the reduction in competition due to the merger. When competition is high between airlines service quality becomes an extremely important selling point for an airline to obtain and keep passengers. Passengers have many reasons for flying with certain airlines but when quality drops and affects aspects such as flight times, cancellations and bagging handling problems passengers are less likely to remain loyal
Another negative affect of mergers is the overall changes in passenger welfare. As previously explained in the literature, when airlines merge they increase their market share, however this can lead to airline alliances/mergers becoming dominant and leads to a reduction in air fare prices.
THE RESULTS OF MERGERS
The paper constructed by … examines the merger of air France and KLM. Not only does this paper show the effects of the merger on their own gains and effects on the internal elements of their organisation but it showcases the effect it has had on the external industry and other airlines.
one of the results of the Air France – KLM merger is that is has spurred on the Northwest KLM & Sky Team alliance into a mega alliance. Although the Air France & KLM merger has seen to result in higher revenue yields for the airlines the merger has however led to a negative effect on the industry, this can be identified by the fact that the merger and alliance consolidation has harmed customer welfare and has reduced social surplus (The difference between the willingness of a customer to pay for a service or commodity versus the final price paid by them) it is stated by the literature that these negative outcomes are due to the anticompetitive effects of the merger. While it is important to note that not all mergers/consolidations are viewed as anticompetitive, it is safe to assume that the more mergers and consolidation that occur it is more likely that the industry will become anticompetitive and more remedies will need to be enacted to prevent this anticompetitive environment from spreading. The reduction in competition can be seen in various areas such as the domestic European market as well as markets that connect internal EU endpoints to hubs in the united states Next it is seen that the consolidation negatively affects the competition in the market that connects interior American to interior EU endpoints. This is a market that relies on interline service that is provided by US & European alliance partners. With this model, the creation of a mega alliance eliminates interalliance competition for travellers in such markets which leads to increased interline fares and a reduction in passenger welfare.
Conclusion
After reviewing the existing literature surrounding airline alliances, mergers and consolidations it fair to say that they have various effects on various different areas. In terms of the airlines that merge, most of those that do tend to see a higher revenue yield. This can be due to factors such as a greater number of flights generating revenue from more enplanements/passengers. However increased revenue can also be attributed to the fact that mergers can lead to market dominance and there for increased market share. Although this can be seen as a positive for the two airline that have merged it is seen as a negative for the industry as a whole.
As for passengers, mergers can be beneficial in some areas such as the Air France – KLM merger which led to increased flight frequency out of Amsterdam and Paris. However not all is good for customer welfare. In most cases, mergers lead to an anti compedative environment in which two airlines that have merged together have a greater market share than other airlines operating on their own. In turn, this leads to increased air fares for passenger due to the power the merged airlines have over pricing.
Service quality experienced by passengers in some cases can also decline when mergers are introduced. Mergers as studied above can lead to less competition due to market dominance and thus a decrease in the desire to provide better quality service for passengers
Overall the literature that exists states that mergers create and environment within the industry that inhibits competition, reduces passenger welfare and reduces service quality, with this being evident it seems that there needs to be more stringent remedies put in place to protect the competitiveness of the airline industry but also the welfare of passengers