Title:
Why Airline Mergers Don’t Work
Author:
Victor J. Cook Jr.
Publisher:
Self-published
Date Published:
June 2008
Mergers are supposed to increase shareholder value, but in the U.S. airline industry, they’ve had exactly the opposite effect. Since deregulation in 1978, traditional, full-service airlines, also known as “legacy” carriers, have lost a combined US$29.6 billion on ill-conceived mergers. Why? The author concludes that executives of Northwest, Delta, and US Airways failed to understand the structural challenges inherent in running an airline after deregulation — namely, high fixed costs for planes, strong labor unions, and exceptionally price-sensitive customers. They also mistakenly believed that merging with other legacy carriers and increasing their market share would enable them to raise prices and cut operational costs. Instead, facing pressure from a new breed of low-cost airlines like Southwest, the traditional carriers were forced to lower prices or risk losing customers, which in turn led to poor earnings.
Bottom Line:
The fundamentals of running an airline don’t necessarily improve with increased market share, so mergers rarely help reduce operating costs and increase earnings.
