#301 Are Airline Mergers Taking Off? Economic Analyses of the Recent U.S. Passenger Airline Transactions
Nov 25, 2024
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Dr. Gautam Gowrisankaran, a Columbia University economics professor and antitrust expert, dives into the recent surge in U.S. airline mergers. He unpacks the complexities of market definitions and shares insights on competitive dynamics, emphasizing the JetBlue-Spirit merger as a case study. The discussion reveals how customer preferences and route overlaps affect competition, particularly contrasting East Coast and West Coast landscapes. The conversation lightens up with personal anecdotes and humor, adding a delightful twist to the serious analysis.
Economic analyses of airline mergers focus on market definition and share calculation, influencing competition and antitrust evaluations.
Consumer impact differs significantly between mergers, with some like JetBlue-Spirit posing risks, while Alaska-Hawaiian may enhance service offerings.
Deep dives
Recent Airline Mergers Under Examination
The economic analysis of recent airline mergers highlights significant deal activity within the U.S. passenger airline industry, particularly with the acquisitions of Alaska Airlines by Hawaiian Airlines and the proposed merger between JetBlue and Spirit. These transactions showcase the need for careful economic scrutiny, particularly regarding how they affect competition in specific markets. Economic experts assess these deals by defining relevant product and geographic markets, often focusing on direct flight routes between origin and destination city pairs. Additionally, analysts consider whether smaller regional airlines, such as Spirit and Hawaiian, effectively compete against larger carriers despite not being part of the largest four airlines.
Understanding Market Definitions in Airline Mergers
Defining the relevant product and geographic markets is essential for antitrust analysis in airline mergers. Economists emphasize the analysis of substitutes, where the specific routes being evaluated must demonstrate significant competition among airlines to determine market power. For example, the discussion outlines how a Boston to Miami route is viewed as one product market, while options such as Amtrak or personal vehicles are often not considered viable substitutes for longer routes. The overall market definition shapes the evaluation process and influences whether the merger would stifle competition on identified routes.
Non-Price Competition and Consumer Impact
Non-price competition factors heavily into the evaluation of airline mergers, as attributes beyond ticket prices, like service quality and customer choice, play a vital role in consumer preferences. In the JetBlue-Spirit merger analysis, it was evident that Spirit's customer base primarily prioritized low fares over additional services, showcasing the importance of price as a competitive factor. However, the more qualitative aspects of competition, such as service enhancements and customer experience, should also be considered for a comprehensive assessment of the merger’s impact on the market. Stakeholders must carefully evaluate how these mergers could ultimately affect consumers' options and experiences in the aviation market.
Distinguishing Between Harmful and Beneficial Mergers
A critical distinction between recent airline mergers lies in their potential consequences for consumers, where some mergers are deemed harmful while others beneficial. The JetBlue-Spirit merger was projected to result in significant consumer harm, estimated at $900 million, due to reduced competition on overlapping routes, which supported the government’s challenge against it. Conversely, the Alaska-Hawaiian merger presented arguments for consumer benefits through increased connectivity and enhanced service offerings, positioning it as a more favorable transaction. This divergence underscores the complexity of merger assessments and highlights the role of economists in analyzing both the competitive landscape and consumer welfare.
The U.S. passenger airlines have been active in mergers and acquisitions since last year or so, with the Alaska/Hawaiian acquisition, the failed JetBlue/Spirit merger, and more being proposed. But how are these deals and airline competition in general analyzed from an economic perspective? Dr. Gautam Gowrisankaran, Professor of Economics at Columbia University and Senior Advisor at Cornerstone Research, speaks with Anora Wang and Kelsey Paine on market definition, calculation of market share, entry, and beyond. Listen to this episode to learn how economic analyses lay out in specific airline transactions.
With special guest:
Dr. Gautam Gowrisankaran, Professor of Economics, Columbia University; Senior Advisor; Cornerstone Research
