American Airlines and US Airways Merger Monopoly?

Today, the merger between American Airlines and US Airways became official.   Once the merger is completed, the newly formed airline will control approximately 20% of the market according to an article on August 7, 2012 in the Los Angeles Times. There has been a lot of controversy about the merger, with some opponents calling the union between the two airlines a monopoly that would reduce competition and raise fares.  We know that a monopoly, according to our textbook, is defined as the “only seller in the market.”  One thing we know for certain, is that even after the merger, the newly-formed American Airlines Group Inc., is not the only seller in the market.  However, if we take a closer look we may see that American Airlines Group, fits the characteristics of a monopoly if we look at market power. Market power exists when a seller can control the market, specifically when it comes to price and quantity demanded.  In more specific markets, where American Airlines dominates, like Reagan National Airport, we can see how American Airline has market power and could potentially have market power.  In anticipation of this, one article describes the details of a settlement where American Airlines will have to give up some of their market power and share some of its flight slots with Southwest and JetBlue. All in all, American Airlines with give up 52 flight slots at Reagan National effectively lowering its market share from 70% to 56%.  56% is still a pretty big chunk of the market in the Washington, D.C. airport but if we examine airports nationally, we can see that each airport has its own market power. We find Delta in Salt Lake City or Continental in Houston, TX as huge market powers of their respective airports.  I think this variance across the nation helps to alleviate the possible repercussions of any monopoly and its effect on price within the industry.

1 comment:

Dave Tufte said...

Vader: 100/100

Airlines are a tough regulatory problem.

One of the problems of human transportation is that every form of it ultimately ends up being unprofitable.*

In airlines, this is reflected in mergers. Managers are recognizing that they are unlikely to be profitable at their current size, and attempt to save on costs with more economies of scale.

Unfortunately, airlines also recognize that they have monopoly power on some routes, and also on gate access at some airports. Airlines are notorious for using this market power ... and yet still have difficulty consistently generating overall profitability.

And there's the regulatory problem. Do we try to regulate away the monopolies in individual markets first, even though this makes it harder for the airline as a whole to be profitable? Or do we look at the general lack of profitability of each airline, and argue that anything that they're doing to get into positive territory for profits is something like a necessary evil? There aren't good answers for this. But, the answer that our system has chosen is the first one. Then they deal with the unprofitability problem in a piecemeal fashion with indirect subsidies. It's kind of crazy, and it doesn't work that well, but we don't have a lot of examples of how to improve this.

* I think it's a dirty little secret that most people don't understand how uneconomical driving their own cars is. I like my car as much as anyone, but if we did household accounting the way that we do business accounting, almost no one would use their own car.