1. In December 2013, American Airlines merged with U.S. Airways. The last flight
ID: 1195964 • Letter: 1
Question
1. In December 2013, American Airlines merged with U.S. Airways. The last flight on a plane with the U.S. Airways colors took off from Boston-Logan airport a few weeks ago. This link has some background on the merger: http://marketrealist.com/2014/07/why-american-us-airways-merger-was-conditional/
a. Why did the Department of Justice oppose the merger?
b. What conditions did the government set before allowing the merger to proceed?
c. There have been other airline mergers in recent years. Why have these occurred?
d. Comment on the magnitude of the Herfindahl-Hirschman Index in the airline industry.
e. Foreign companies are not allowed to own a majority stake in U.S. airlines. Is this a good idea? Justify your answer.
f. The CEO of Ryanair, Europe’s largest discount airline, once suggested (tongue in cheek) that he was considering charging for passengers to go to the bathroom. Would you approve of such a move? Why or why not?
Explanation / Answer
a) With the merger the market concentration power increases which means the merger company will have most control on the market hence will increase the chance of exploiting other competitors and buyers. he merged entity would operate as a monopoly and eliminate the benefits of competition to consumers.Thus, the Department of Justice oppose the merger.
b) The conditions are:
The combined entity’s share in the Washington Reagan Airport (or DCA) would be as high as 68% and its share in New York LaGuardia would be 33%. Thus, The DOJ insisted on sale of slots and take-off rights in few airports to low cost carriers as a condition for approval of the merger.
c) Mergers of airlines generally occur with th epurpose of increasing control over prices, reducing cost, increasing market share. IN short increasing or gaining power over the market.
d) the airline industry is a kind of oligopoly industry where only few sellers are present. In this industry airlines that provide low cost or strong network distribution holds greatest market sjhare. Hence the concentration power becomes strong in this market than others. Therefore, the magnitude of the Herfindahl-Hirschman Index in the airline industry is usually high.
e) With foreign stakes in US airlines, the ownership and control will increase of foreign investors in this industry to which there would be a risk of allowing intruders into our won home in the industry where concentration is already high. Hence Foreign companies are not allowed to own a majority stake in U.S. airlines
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