Over the past few years, there has been a significant increase in the demand for international travel. This increase has changed how the aviation industry is working not only in the United States but also across the world. Statistics have shown that more than 500 million individuals travel to different destinations annually. However, many countries in the world have only one or two airlines that fly international routes. This has become a significant concern since these airlines find it impossible, if not impractical, to offer their customers services across all markets. Moreover, this issue has been attributed to business globalization and commerce, which subjects individuals to require more travel options. Grounded on the increased number of travels, airlines have responded through establishing mergers. In this paper, the researcher explores how airline mergers in the US have affected the aviation industry in the past decade. Specifically, the researcher is looking at the alliance between United Airlines and Continental Airlines. The discussion for this merger began in February 2008, but the negotiations broke off in April 2008. However, in June 2008, the two airlines resumed their talks and signed an alliance pact. The alliance pact subjected the airlines to link their technologies, share passenger perks and networks. On 2nd May 2010, the directors of these two airlines approved a deal to merge the airlines, thus overtaking Delta, which was the largest at that time. On 27th August the merger was approved by the Department of Justice, and it was completed on 1st October 2010. The airline was renamed as United airlines, and it began its operations on 30th November 2011.
The Impacts of the United Merger
When mergers are created, they can create efficiency gains from the scope and the economies of scale. However, it is essential to note that the merged company can exercise market power effects and steal market share from the competitors or charge higher fares to customers. The united merger had the potential to significantly impact consumers by becoming a tremendous player in the US aviation industry. Therefore, it is vital to examine how the merger affected the consumers, the market concentration, and competition.
The impacts of the United and Continental merger to the consumer
In the recent past, several mergers have been recorded in the U.S. Aviation industry. These mergers have made the industry oligopolistic, consisting of four major airlines: Southwest, United, Delta, and American. Despite these airlines receiving approvals from the DOJ, hot debates have emerged as a result of how they have impacted the consumers. For instance, based on the United merger, the company reduced its flights to some domestic hubs. This affected the loyal customers who always enjoyed their flights before the merge.
Consequently, the reduction of these flights to other hubs led to the loss of service. There are those cities that generated their revenues through the stop overflights. The redundancy from the merger affected these cities, making it clear that the more mergers are approved, the chances of cities losing service also increases.
The United and Continental merge also resulted in increasing in Fares. After their merger was finalized, their hub to hub fares grew. Statistics have shown that the fare increased between 2010 and 2012 at an average rate of 28 percent. Reports have demonstrated that mergers increase fares to generate revenues. However, the increase of fares stimulated the emergency of Low-Cost Carriers (LCC), which mostly operate in domestic hubs. It is also essential to note that both the Continental and United airlines operated in overlapping destinations. Therefore, their merge made them operate as one entity, thus increasing their airfare, which in turn affected the consumers. The merge also reduced competition between these two airlines. Therefore the increase of fare could not be avoided since they wanted to generate more revenues, which could help in running their operations.
Furthermore, one can also argue that merging between the two airlines created widespread disruption to consumers before the merge happened. The regular meetings and schedules of flights were disrupted, and this posed an issue to consumers. This happened because the directors had to draw a timeline on how they would operate efficiently so that they can meet the needs of the customers. Moreover, before the fleets would operate fully, flights were hauled for maintenance purposes. This was a major effect on customers who planned to use the two companies’ flights to carry out their respective duties.
The impacts of the United and Continental merger on competition
The DOJ evaluated the United and the Continental airlines based on the market share and hub economics before approving the merger. The reason why they did this was that hub carriers are vital in offering a great number of flights and routes as compared to point -to point carriers. The United and the Continent airlines offered both point-to-point flights and hub flights. Their merger, therefore, could make them shift the way they could operate. However, it is crucial to state that the merger competition is grounded on the networks overlap, specifically the number of markets that the airlines were both serving. Since the United and the Continent were well-known airlines, their demand was still high. This increased demand increased their market power, especially in their hub airports. Consequently, the demand made the United merger increase its services in its hub, thus making them remain competitive in the market.
Additionally, with the increase in market power, the newly formed United airlines had the mandate to increase market price. This increase exceeded the competitive level and the reason why there was an increase in fares when the merge happened. The newly formed airline had the mandate to set prices in the market where the partner (Continental Airlines) functioned as a competitor. This caused upward pressure on different prices since there was no competitor. However, one can also argue that various airlines merge minimized competition in the United States aviation industry. As stated earlier, merges make companies be monopolies, and this, therefore, makes them superior despite a regulatory body (DOJ) being in place.
The Impacts of the United and Continental merger on market concentration
The United States has experienced the emergence of many airlines in the past few years. However, many of these airlines face stiff competition from superior companies, forcing them to merge. The merging of airlines in the U.S has created four major airlines; Delta, United, American, and Southwest airlines. It is through this merge that the market concentration of airline companies has been reduced. Grounded on the case study, the merge between the United and Continental airlines minimized the market concentration. This, therefore, made the companies operate efficiently without facing competition. Previously, the two airlines competed against each other. This made it difficult for any of the two companies to raise prices or deliver poor services. With the merger, they turned out to be monopolies, thus leading to decreased service levels.
Moreover, as a result of the United and Continental merger, there was an emergence of Low-Cost Carriers. These airlines play a significant role in maintaining market balance. As stated earlier, the newly formed United airlines raised their fares. So, to accommodate the travelers who could not afford the United Airlines cost, the LCC served as an alternative. Additionally, the merger led to the change of operation routes. Those routes faced by the redundancy served as an opportunity for LCCs to establish their businesses, thus increasing the market concentration. However, it is essential to state that market concentration in the aviation industry is based on flight frequency and the market size.
DOJ and the United-Continental Merger
Having discussed the various effects of the United-Continental merger on consumers, market concentration, and competition, it is clear that there is a need for the merger to be blocked for various reasons. To begin with, the merger made the newly formed airline to be a monopoly over several U. S routes. Moreover, the airline has dominated major key hubs, controlling more than 50 percent of the take-off and landing slots in Newark Airport. Consequently, their establishment led to an increase in travel fares, and this affected consumers greatly. The merger also reduced competition within the United States, and this led to a decrease in revenue to the government.
Work Cited