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Is Bigger Better for Consumers?

Special Report - Joining Forces

The traditional antitrust criterion is that if a merger makes a company significantly more efficient and doesn’t create or increase artificial market power, then consumers will benefit.

For airlines, there is the potential to enhance service in several areas. Investment in technology and new aircraft should become easier and there will be a streamlined offering. That  could mean significant improvement in congestion problems on the ground and in the air.

The United-Continental deal should bring advantages to its frequent travelers, too. United’s loyal customers had few options going to Latin America, and experienced higher fares and reduced frequencies as a result. Now, they get good service to the south of the border courtesy of Continental, while their counterparts have access to United’s traditional strength across the Pacific.

“Consolidation helps drive unit costs down and gives the customer a more seamless product and experience,” says David Savy, Air Seychelles CEO. “If it pleases the end user, then it will work. So far consolidation has been airline to airline but one could envisage other related businesses, such as airports, joining the foray.”

Lower unit costs reduce product prices. This could mean more good news for travelers, with real air fare prices already having fallen by a third in the past decade to reach historical lows. Choice should improve too, as merged companies free up resources to increase variety and move into niche areas.

The biggest concern for the consumer is that a merged entity could have a dominant market position. Fewer  players could lead to a rise in prices. Although possible, this isn’t inevitable.

First, in an industry as hyper‑fragmented as aviation, achieving dominance would be very difficult. In  2009, the top 10 IATA member airlines represented about 25% of the global market in terms of number of passengers carried. A similar percentage is controlled by only four pharmaceutical companies. And  competition between those companies is still fierce in any case.

Also, part of the merger process is the disappearance of inefficient companies. This helps the consumer because released resources can be allocated more effectively. More efficient companies mean better products, prices, and service for the customer.

There is even an argument against market dominance based on regulatory grounds. If consolidation is abused, that isn’t the fault of consolidation itself. Regulators would need to apply robust laws as they do in any other industry. Penalizing an entire industry is not the correct way to deal with the potential problem of market dominance.

Consolidation case studies

British Airways-Iberia

British Airways and Iberia received European Union approval in the summer to formally merge in late 2010. Both carriers will keep their brand but operate under the International Airlines Group (IAG) holding company. IAG will operate 408 planes flying to 200 destinations and carry some 60 million passengers a year.

Annual savings of up to $554 million (€400 million) by the fifth year are anticipated. There should also be greater potential for growth by optimizing the London and Madrid hubs, and increasing investment in new products and services. A formal tie-up with American Airlines is thought to be next on the IAG list.

Continental-United

Continental and United Airlines are now subsidiaries of United Continental Holdings. Customers will begin to see a more unified product from early 2011. The merger is expected to deliver up to $1.2 billion in annual synergies by 2013, including about $900 million in increased revenue. The combined company will have annual revenues in the region of $31.4 billion.

“Drawing from both companies, we have an excellent board of directors and a strong management team,” says Glenn Tilton, non-executive Chairman. “We have the industry’s best people to deliver on the promise of great products and service for our customers, career opportunities for our people and consistent returns for our shareholders.”

Delta-Northwest

The combined airline, called Delta and headquartered in Atlanta, serves some 66 countries and more than 375 cities worldwide using a workforce of about 75,000 employees.

The merged entity is expected to generate $2 billion-plus in annual revenue and cost synergies from a number of areas. Integration costs have been estimated at $600 million.

“The new Delta will be at the front of the pack in achieving the benefits of consolidation and is well positioned to navigate the tough waters ahead in a difficult economy,” says Delta CEO Richard Anderson.

LAN-TAM

The merger will form a fleet of 220 aircraft, with 200 more on order. In 2009, the two airlines had joint revenue of $8.5 billion. They carried 45 million passengers and employ some 40,000 people.

Annual synergies should knock $400 million off the bottom line. The LAN-TAM merger is a big transaction, particularly for the region, and will give the new entity considerable market power.

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