At the crossroads of competition, cooperation, and integration: The airline M&A

Abstract

There have been many airline mergers and acquisitions (M&As) over the years to cope with the competitive air transport market. It is common for merging airlines to integrate post-M&A because it can increase efficiency and reduce costs through economies of scale and the elimination of duplicate services. However, they may also compete or cooperate as separated companies for reasons such as damaging brand value or clashing corporate cultures. Meanwhile, airline M&A requires approval from aviation authorities of several countries to prevent negative impacts on consumer welfare. This approval may be conditioned on the revoke of traffic rights or the slot reallocation. This study investigates the operation strategies of airlines -two merging airlines and rival airlines-operated at certain flight-leg based on game theory considering the approval conditions. The results show that airline M&As can lead to more profit by reducing competition. However, there is insufficient evidence that it is more profitable for two airlines to integrate than to cooperate. The key is how much the acquiring airline can absorb the passenger demand of the defunct airline through integration. After the M&A, customers would face higher airfares, but it cannot be concluded that customers are disadvantaged. This is because the increase in the number of flights may lead to a wider range of choices for customers. On the contrary, slot reallocation to prevent monopolies may harm consumer welfare. It is hoped that the managerial insights from this study will be helpful to practitioners concerned with post-M&A airline strategies.