North American Airline Mergers: Strategic Response to Imperfectly Competitive International Markets

Abstract

The wave of domestic mergers among North American airlines during the late 1980s and the subsequent reduction in competition increased the risk of higher domestic prices for airline tickets. Why then have the North American governments allowed this consolidation to occur? Research to date has focused on these mergers as a domestic phenomenon, but they occurred in response to imperfectly competitive international aviation markets as well. The North American nations and their international airlines could garner the lion's share of the supranormal profits to be had in these imperfectly competitive markets by cutting the costs of their international carriers. Matching international routes with domestic-route networks and establishing a global hub-and-spoke system lower the cost of providing international flight service. Domestic airline mergers are a means to creating significant domestic-route networks, cutting costs, and allowing international carriers to increase profit shares in international markets. Economic incentive for airline mergers is established and provides a basis for consideration of the political sphere; findings indicate that these mergers are beneficial to private interests and are also in the public welfare. Private interest and public-welfare political rationales are often in opposition both in political literature and in practice, but in this case they coincide. Empirical tests support domestic airline consolidation in North America as a contributing factor in competitive gains in international markets for both the nations and the airlines.