Airline Mergers

Oligopoly: Airline Mergers

Feb 12, 2013 • Businesses, Demand, Supply, and Markets, Economic History, Households, Labor, Regulation, Thinking Economically • 664 Views    No Comments

A 1962 song said, “Breaking Up is Hard To Do.” Even more so, it is tough to get together and create an oligopoly.

When Continental and United merged during 2010, it took 14 months to solve their coffee problem.

The difficulties began when a 14 member beverage committee selected a light roast from Fresh Brew. Used to a potent Starbucks bean, Continental’s fliers objected to the watery blend while United’s customers, who had always been served the Fresh Brew, were delighted. Told about “howls of protest,” though, the beverage committee decided to re-assemble and start all over again. This time they chose a medium roast.

And that was just the coffee.

If the American/US Air merger is approved this week, they will have a monumental task. Yes, they immediately have to finalize the split in ownership, how to combine the two boards, which management will remain.  They will have 2 employee cultures and procedures to combine and what about uniforms and dishes and airplane logos?

American just bought new dishes and airplanes. Perhaps intentionally, the dishes have no logo. But the planes are made of lightweight composite materials that require paint. It could be expensive if a merged airline is called American as has been predicted. Then, will US Airways planes get the same look? If so, larger planes like a 777 can cost as much as $200,000 to paint while the price tag is closer to $50,000 for smaller aircraft.

The coffee though, might not be a problem. American and US Airways both serve an arabica bean premium coffee and Nescafé Decaf.

American Airline New Logo

Whenever we talk about an airline merger, it really is all about market structure. Deregulated in 1978, the industry no longer had government guaranteeing profits and controlling routes for interstate air travel. Instead, with the market taking over, luxury diminished, profits declined and new airlines appeared. Competition meant lower fares, disintegrating service and many more fliers.

Soon though, with profitability tough to achieve, the bankruptcies and mergers began. Or, as Richard Branson said, ”How do you become a millionaire? Start as a billionaire, and then buy an airline.” The result is consolidation. Now, with Southwest, Delta, United, and perhaps an American/US Airways combination dominating the industry, we have a more concentrated market structure through which airlines have more power over fares, routes and costs.

Sources and Resources: These articles on the American/US Air potential merger and on the US airline industry perfectly complement this 20 second interactive summary graphic on airline industry history. And here is my source on those dishes without logos. Finally, you might enjoy Neil Sedaka singing, “Breaking Up is Hard to Do.”

Related Posts

« »