Must-know: An overview of the American Airline Group (Part 2 of 12)
U.S. airline industry consolidation
Over the last decade, the U.S. airline industry has been restructured with a number of mergers of the industry’s top airlines. In 2005, the top 11 airlines comprising 96% of domestic market share by available seat miles were American, Delta, United, Continental, Northwest, Southwest, U.S. Airways, America West, Alaska, Jet Blue (JBLU), and AirTran. This number has reduced to six airlines with 94% of U.S. market share by available seat miles in 2014 after:
- American (AAL) merged with U.S. Airways in 2013
- AirTran merged with Southwest (LUV) in 2011
- United (UAL) merged with Continental in 2010
- Northwest merged with Delta (DAL) in 2009
- U.S. Airways merged with America West in 2005
In addition to reduced competition it has also resulted in efficient utilization of resources. Airlines are able to align supply and demand in an efficient manner. The industry provides customers with wider coverage as well as more routes and destinations.
Herfindahl-Hirschman Index measures impact of merger on market concentration
Herfindahl-Hirschman Index (or HHI) is an indicator of the level of competition in an industry. It’s calculated as the sum of squares of each firm’s market share. An HHI value of 2,500 points and above means the market is concentrated and the level of competition is less. If a merger results in an increase of more than 200 points in HHI, it means that the merger is anti-competitive by nature.
According to the Department of Justice (or DOJ), the American Airlines and U.S. Airways merger has resulted in HHI exceeding 2,500 points in many cities where they currently operate. The need for DOJ’s insistence for the sale of slots in Reagan National Airport in Washington, DC—discussed in further detail in the next article—surfaced because after the merger, HHI would increase to as high as 4,959. There would be an increase of 1,493 points after the merger, which would dampen competition to a large extent.
Why merger was inevitable for AAG?
American Airlines, which was once the industry leader in the U.S. airline industry, began losing its market share to its peers after 2005 when the top airlines merged. Delta’s merger with Northwest and United’s merger with Continental changed the competitive dynamics within the industry and made it difficult for American to maintain its unit revenue and compete with its peers’ enlarged capacities and geographic coverage. American’s number one position, in terms of revenue share as shown in the following chart, was replaced by United. Delta took the second position and pushed American to the third position in 2011.
The only solution for American to regain its leading position was through a merger with an airline like U.S. Airways, so that it would have network coverage to complement its own.
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