Airline merger revenue synergies
What kind of revenue synergies are typically seen in airline mergers? I was reading a report that mentioned how the integration of customer systems is where most revenue synergies stem from.
Cost synergies are obvious with airline mergers, but I’m having trouble thinking of concrete revenue synergies. Wouldn’t the integration of systems be priced into the deal?
For example, before the United-Continental deal, United Airlines had a very small presence in NYC while Delta and American had hubs at JFK. Continental had a fortress hub at Newark. My question is, wouldn’t things like United entering the NYC international market via an acquisition of Continental have been priced into the deal? I’m struggling to see where actual 1+1= >2 style benefits occur.
What systems do you mean? Most airlines operate 1 of 2 ways, hub-&-spoke and point-to-point, and they all compete on pricing! Revenue per seat mile vs cost per seat mile.
Now most traditional airlines (Emirates, American, etc) use a hub & spoke model, i.e. An aircraft will always return to its point of origin (jfk-lax-jfk) or a hub owned by the airline. This is mainly cause the airline and airport would have an arrangement. Whereas, Low cost carriers (LCCs) who negotiate with smaller, less known airports, operate via a point-to-point model(jfk-lax-den). This means that the airports they operate at offer cheaper parking fees and such and the result is that more passengers passing through their terminal ($$$).
For an airline to enter a new market ( fly to a new destination in another country/continent) is dependent on a few factors such as demand, fees, fuel costs, international carrier fees, etc. Most airlines usually merge or acquire others specifically to acquire their fleet of aircraft and/or sell them. Acquiring another airline just to operate from their hub is pointless.
Curious to hear other thoughts.
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Many airline routes are oligopolies, meaning that they are served by a few airlines. If two firms that were previously competing on a route merge, there is one less competitor on that route. This leads to an increase in market concentration which in theory (google Cournot oligopoly which arguably the airline industry approximates, at least in the U.S.) and empirically leads to higher prices. If there are many route overlaps, this can lead to a significant revenue synergy, although merger authorities are aware of this and you will likely be limited in practice as a consequence.
By the way, could you link the report that you are referring to or state its title?
http://pages.stern.nyu.edu/~igiddy/mergerdocuments/airline_merger_integ…
Page 7
My confusion is arising from my thought that what they are talking about seems to all be cost related.
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