Airline Mergers Analysis - Essay Example

Sur Lecturer: Airline Mergers Laws of consumerism demand that the consumer should always be protected against unfair deals. In recent history, there was an objection to the proposed merger between the American and US air because there was fear this would have been unfair to the consumer. The government took a case to court to argue out the antitrust laws and the impending merger. In this report I have written on who benefits between the industry and the consumer in case of a merger. Report finds that both benefit. American aviation industry has been qualified us the most profitable aviation industry in the world (Hecker, 11-13).The USA has a vibrant aviation industry, it is profitable, diverse and has a wide reach. Over the years, the number of airlines have been intentionally narrowed down to just a few major airlines. Narrowing down of the airlines have been actualized by mergers that have taken place over the years. The following are the major mergers that have occurred in recent history-: AIRLINE YEAR OF MERGER America west and US airways 2005 North west and delta 2008 United and continental 2010 Airtran and south west 2010 US airways and American 2013 The number of mergers have been exceptionally high. This has resulted in creation of some of the world huge airlines. Mergers happen in order for the two partners to gain a certain leverage that was not there before. Universally the reasons behind most of this unions are known. The main reasons include-: 1. Capability building- this is gaining power to do something that was not previously possible. For example capability to train, offer cargo service in case of airline industry or gain a technology. 2. Cutting cost- this might be the biggest motivator if not among the best factors. The situation can be looked as previous competitors marrying. This means that we will not have price wars into the future and costs of advertising automatically drops. 3. Surviving- it is a last resort on most companies, it is usually a case of staying in the business or being driven out of business. Therefore when a company is bankrupt or does not have the capability of surviving the tough market forces, merger come through as the only remedy. 4. Replacing leadership- it is rarely a motivator, but normally in happens within private companies that cannot acquire talent. 5. Competitive advantage- it is a huge factor. Companies are able to reach out to market traditionally not accessed. Therefore this creates a headache for other players since the new merger brings with it financial might. 6. Diversification- this offers a chance for both companies to venture into the world of business that they had not previously been into. Normally this happens in order to search for more profits. 7. The reasons behind the mergers in the USA airline industry are factored in the above explained reasons. Mergers are nice for business but they are not immune to the law. It is normally a case of trending carefully in order not to break the laws of consumerism in the name of mergers. Therefore, it was not by mistake that in 2013 the government of the USA with support from numerous consumer federations filed a law suit stopping the merger between the mighty American and the mighty US air. The previous mergers that ever occurred did not raise as much issue and outcry as the suggestion of a merger between the two airlines. The outcry can be understood, this is because it was supposed to create the biggest airline on the planet. This meant that two previous huge competitors had come into agreement to marry their businesses which would have resulted in them controlling the prices of fares, which obviously was not to reduce but to increase. (American) Consumers hence could not allow such hence in the late 2013 there was a lot talk, debate and pushing about this impending merger. The merger would have happened quickly just like any other company had it not been due to a case that was taken to court by the American justice center. This court filing had been supported fully by the government. The urge to stop the merger through the courts was for the purpose of consumer support. Justice center argued that since the two airlines serve millions of customers, by merging them it would lead to-: I. Higher fares II. Low quality service III. Higher fees. Consumers deserve protection from unfair deals, hence the justice center viewed this as a case of supporting the consumer. With support from consumer groups the message was out there. The government had argued that the consumer was likely to get hurt. Analysts had argued that the consumer was likely to get hurt through the following likely outcomes-; I. Consumers would have less options to choose from II. The fares were likely to go up. III. It would lead to the demise of loyalty programs. IV. Quality of the service would not be assured. V. Likelihood of uncompetitive behavior VI. Ignorance of the small airports by the new merger. The concerns were genuine, the merger of two of the biggest airlines was likely to hurt the consumer rather increase the consumers value. But in terms of business, this was a perfect profit scenario since it was able to create the flying of fully booked flights and a high price. The feelings on the ground were natural and genuine. The question is whether the law had any remedy on this. The government has set very strict laws that were aimed at protecting the American consumer (Cento, 45-46). The laws are fully implemented by the federal trade commission. As part of an attempt to guard the consumer, the country has a set of laws known as the antitrust laws. This is a combination of 3 laws formulated in different years in order to protect the American consumer. The following are the three set of laws that are present for consumer protection in the united states-: I. The Sherman act- this was a law passed in 1890 by the congress, it bans a combination or a contract that seeks to restrain trading. The courts had interpreted this law by saying that any unreasonable combinations are the ones targeted on this sector. II. Act of federal trade commission- this was passed in 1914, this once talks of ban on competition or practices that are unfair to the consumer. It should be noted that any Sherman act violation is also a federal act violation. III. Clayton act- still passed in 1914, its main focus was on mergers. Section 7 bans any mergers or acquisitions aimed at reducing competition or present a hint of creating a monopoly. The law was amended twice after this, once in 1936 and the other in 1976. The 1936 amendment cautioned against unfair and discriminatory treatment of prices and services between merchants. Then in 1976 another amendment required that the government to be informed when any two companies or more are planning a very huge merger or acquisitions (United States, 23-25). The above antitrust laws compelled the government to go to court. Clayton act also gives a right to any person who feels that, their consumerism rights or any violation of the above antitrust laws has occurred to go to court. In relation to the above laws the government had sued for the definite dismissal of the merger and also for the delaying of the merger while the definite dismissal was being discussed. In the relation to the above laws, the plaintiffs felt that the antitrust laws had been broken although they could not convince the labor judge on the same. Sherman act- the justice department viewed this combination as a plan that was harmful and it restrained trading. In trade there must be competition. By these two airlines merging it meant competition which normally results in fair pricing would have gone to the wind. Federal trade act- the merger was definitely in disfavor of competition. Since the two companies were fierce competitors. The feeling was that, the consumer would be short charged on this deal. Clayton act- the merger still would have led to price monopoly. This happens when a big company fixes a certain price and then it becomes a market trend. Normally the price can tend to be put on the higher, which Clayton act discourages as a situation of a bad merger. This case was widely followed, interest on it had been because of the government involvement and support for the consumer. Fortunately or unfortunately when the courts released the verdict, the two airlines had been given the power to move on and form the merger. The court did not feel as if any of the above laws had been broken. The fact there were other three big airlines still in operation it was not viewed as a bad merger. This meant that by Okaying this merger American commercial airline industry would have four huge airlines controlling an 80% chunk in the market. Hence this definitely means that an element of competition is expected. The American had argued their case on bankruptcy. It was depending on this merger in order to move from bankruptcy. There were some benefits on this, it meant many jobs would be saved and also safe guard the interest of the consumer by remaining on the market to offer the normal service. The creditors were much more interested in this merger, this is because it meant that, their debts would be paid fully. The creditors were diverse including some inions of labor. While the consumer needs to be protected the creditors surely needed to be compensated fairly. The government along the way withdrew the case on antitrust laws, on out of court agreement and convincing. Therefore the question is whether this airlines benefit the consumer or the companies themselves or rejuvenate the industry. According to price water house research this mergers are not bad after all. They benefit both the industry and the consumer in equal measure. Study shows that when mergers happen, the airlines behave in a certain way, they do away with routes that do not bring in business and concentrate on routes that bring business. By doing this, the airlines are able to order better trains that are fuel efficient and fast, hence lowering some of their costs (Vasigh, 78-79). The decision to withdraw from the unprofitable is heaven sent to the rest. Small airline companies go into this routes with the hope of cashing in and they offer good prices which is good competition for the bigger airlines and this leads to stability of prices. This means that the consumer benefits from the low fares while the industry suddenly becomes profitable for the small players creating the necessary industry diversity. Another line of study focuses on service and the quality of that service. The airlines have been predicted to start making money after this mergers. The customer will not feel any difference in fares. The fares might remain as an average for some time, but the savings the airlines will be making will be good for the customer in the long term. It is usually viewed that majority of the airlines harbor old or outdated systems. Hence when this airlines start making savings automatically it will lead to upgrading of systems. (US air) Airlines will acquire nice planes that will ensure the comfort ability and safety of the consumers, likewise baggage systems will be improved and then later the fares might start dropping. The results might not be seen immediately, but within some time the consumer will benefit. So the question of whether any antitrust laws were broken is answered through the courts verdict. The benefactor between the airline and the consumer falls into a tie. Both of them benefit while at the same time improving the industry. The consumer finally will have a chance to experience better service quality and the commercial aviation equips itself with better tools in order to remain relevant in the modern business culture. Work Cited Cento, A. (2009). The airline industry: Challenges in the 21st century. Heidelberg: Physica-Verl. Hecker, Jayetta Z. (2009). Airline Industry: Potential Mergers and Acquisitions Driven by Financial and Competitive Pressures. Diane Pub Co. Raybould, D. M., & Firth, A. (1991). Law of monopolies: Competition law and practice in the USA, EEC, Germany, and the UK. London: Graham & Trotman. Vasigh, B., Tacker, T., & Fleming, K. (2008). Introduction to air transport economics: From theory to applications. Aldershot, England: Ashgate Pub. Ben-Yosef, E. (2005). The evolution of the US airline industry: Theory, strategy and policy. Dordrecht: Springer. United States. (2001). The airline mergers and their effect on American consumers: Hearing before the Subcommittee on Commerce, Trade and Consumer Protection of the Committee on Energy and Commerce, House of Representatives, 107th Congress, 1st session, March 21, 2001. Washington, DC: U.S. G.P.O. Vasigh, B., Fleming, K., &Tacker, T. (2013). Introduction to air transport economics: From theory to applications. Farnham, Surrey, England: Ashgate. Hovland, R., &Wolburg, J. M. (2010). Advertising, society, and consumer culture. Armonk, N.Y: M.E. Sharpe. Read More