Merger-induced effects of airline route changes: Consumer welfare and the impact of market regulation policy

by Clark, Michael Ty, Ph.D., THE FLORIDA STATE UNIVERSITY, 2015, 143 pages; 3724207

Abstract:

Airline mergers allow carriers to restructure routes to create an improved network configuration, providing efficiency gains that are passed through in various ways to consumers. The gains and losses from network changes are assessed following three different mergers: America West with US Airways in 2005, Northwest with Delta in 2008, and Continental with United in 2010. Recognizing airlines introduce fluctuations in airline route structure on a regular basis for reasons unrelated to mergers, the consumer surplus change is contrasted with a baseline of network system changes that occur in markets unaffected by the merger. Merger-affected markets show welfare gains relative to unaffected markets.

Evaluating airline mergers from a prospective standpoint poses unique challenges due to the uncertainty of adjustments in the network of route offerings that are likely to occur in response to the integration of the merging carriers. Machine learning techniques (e.g. Random Forest) are employed from a purely predictive standpoint to simulate route adjustments. The mergers above are used to evaluate the effectiveness of these techniques. A prospective merger analysis is also provided for the US Airways and American Airlines merger in 2014 since it is too early at this time to evaluate the post-merger outcomes. Welfare simulations allowing only airfares to change are compared with price and network simulations. The results indicate that only accounting for price changes due to merger understates possible benefits that come from improved route adjustments.

Concerns of reduced competition from the Department of Justice regarding the United and Continental merger resulted in a negotiated transfer of 36 slots to Southwest airlines at Newark Liberty International airport, impacting both fare and route options. By acquiring the slots, Southwest entered about half the markets at Newark. This fact is used to implement a difference-in-difference-in-difference method that isolates the price impact of the slot transfer from confounding influences. Results suggest that the slot transfer led to a fare reduction of 7\%. A broader range of product characteristics is incorporated when estimating the change in consumer surplus. Nonetheless, results indicate positive welfare gains from the slot transfer.

This dissertation provides evidence that changes in network characteristics provide important benefits of mergers. A broadened perspective of merger analysis if important to more accurately determine who benefits and who is harmed.

AdviserGary M. Fournier
SchoolTHE FLORIDA STATE UNIVERSITY
Source TypeDissertation
SubjectsEconomics
Publication Number3724207

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