Airline Consolidation, Merger Retrospectives, and Oil Price Pass-Through

Following decades of lax antitrust enforcement, the airline sector today suffers from a market power problem. Fewer firms means there is less competition, which is great for corporate profits but bad for consumers and other stakeholders. In “Airline Consolidation, Merger Retrospectives, and Oil Price Pass-Through,” Roosevelt Research Director Marshall Steinbaum studies the last 10 years in the airline sector, which saw the consolidation of six legacy carriers down to three, with only one low-cost carrier (Southwest) remaining a national player.

The standard tools antitrust regulators use to determine whether a merger in the airline industry will result in higher fares for passengers fail to assess the full impact of industry-level structural trends, largely due to the cumulative effect of mergers and the wide variation in how different routes are affected. Existing merger control jurisprudence places a premium on assessing merger-specific effects, leaving out more general industry structure and the “coordinated effects” — behavior by all industry players, not just the merging parties — of individual and multiple mergers. And yet, a growing body of evidence shows an overall trend of consolidation in the U.S. economy and that that consolidation carries detrimental economic effects.

To address this shortcoming, Steinbaum offers one alternative method of assessing coordinated effects of mergers, looking at the difference between how the industry responded to a steep drop in oil prices in 2008 versus the response to a similar drop in 2014.

The findings are clear: Following a series of three mega-mergers in a ten-year period, there was less competition along certain routes, and the remaining airlines were able to keep more of the overall reduction in costs for themselves as profit, rather than passing it on to passengers in the form of lower fares. In short, airline industry consolidation between 2008 and 2014 led to passengers facing higher fares on those routes than they would have otherwise.

Post-merger reviews — as called for by voices across the political spectrum — are absolutely needed to determine whether predictions made by merging parties about the potential benefits to consumers have proven true; and to take action, as needed, if the benefits to consumers failed to materialize. But this approach by itself does not take into account the cumulative effect of consolidation if the antitrust authorities only examine the effects of each merger in isolation and the post-merger behavior of the merging parties, as opposed to all the players.

A more comprehensive approach would be to consider the industry holistically, including the role that a spate of mergers might have had on market structure and on the behavior of other stakeholders, be they competitors, suppliers, workers, or customers.

Merger control is an inherently limited policy tool, and yet it is currently the only functionally available tool in the antitrust and competition policy toolbox. What this paper points to is that we not only need a more aggressive approach to merger enforcement — including the assessment of coordinated, as well as unilateral, effects — but it also elevates the necessity to revive other antitrust tools, including those that tackle monopolization.

Airline Consolidation, Merger Retrospectives, and Oil Price Pass-Through by Roosevelt Institute on Scribd


Originally published at Roosevelt Institute.