Cost Functions and Determinants of Unit Cost Effects in Horizontal Airline M&As

Abstract

This paper analyses the unit cost effects of mergers and acquisitions (M&As) using linear, quadratic, and translog cost functions. In addition to a basic unit cost model we specify separate models for distress, profit, relative size, and cost difference, among the merging firms. We use a sample of 19 horizontal M&As in the international airline industry and data spanning from 1980 to 2012. Our models show that M&As do not affect unit costs in a significant way, unless the relative size difference of the merging firms is large, in which case we detect an increase in unit costs.