Economists have a pretty good idea of the likely effects of the pending United-Continental airline merger. Such mergers of large companies in any industry with few players can have at least two effects, and Minnesotans already are familiar with both.
One effect, lowered costs, can benefit society as a whole, as the same good or service is produced with fewer resources. Unfortunately, this also usually means some jobs become redundant and people are laid off. The reduction in employment often is permanent.
The other outcome is that less competition allows the merged company to succeed in charging higher prices than it would have been possible without the merger. Other companies in the now-less-competitive sector can do the same. That hurts consumers. It also hurts society as a whole, because without the discipline of competition, monopolistic firms over time often become inefficient. These negative effects also are long-term.
Executives of the merging firms always stress the positive aspects of the first effect — that of reduced costs — while downplaying potential layoffs. They never mention the second effect, higher fares, though that often comes to dominate.
Cost reductions come from the fact that even large companies have functions in which there are economies of scale. For example, the marketing, accounting and management information system departments of two merged airlines can be smaller than the sum of these departments in the two separate companies. There also may be potential to purchase various inputs in larger quantities. And to the extent there are overlapping routes, the number of flights can be pruned and the percentage of filled seats on remaining flights increased.
The Delta-Northwest merger was completed in October 2008, and the two airlines finished consolidating their operations earlier this year. The combination has reduced costs, although estimates of how much vary. Employment in Minnesota, largely at the former Northwest headquarters in Eagan, dropped by slightly more than 600. There also have been reductions in Atlanta, where Delta is based, although those are hard to sort out because Delta initiated a major buyout retirement program only months before the merger was announced.
Reportedly, fares have increased by 10 percent since the merger. Here, one must be careful not to blame the merger alone, because many low fares charged in recent turbulent times for the airline industry were too low to be sustained over the long run. But the merger itself has increased the cost of flying to some degree.
The effects of the deregulation of airfares and routes initiated by the Carter administration varied greatly from city to city. In general, inflation-adjusted fares fell substantially. But people flying from smaller cities where service is dominated by one airline often pay through the nose.
As the hub-and-spoke system developed in the 1980s, larger cities that were hubs experienced a two-edged sword effect. They benefited from the convenience of frequent direct flights to many destinations. But they paid higher fares than in more competitive markets, though fares were often still lower in real terms than before deregulation. Anyone using Minneapolis-St. Paul International Airport over the past three decades knows that well.
Deregulation of fares and routes was never intended to be deregulation of all competition. But antitrust vigilance faded on the vine during the Reagan administration. Under Obama, the Justice Department seems marginally less lethargic about enforcing antitrust laws than under George W. Bush, but don’t expect any major challenge to this or other mergers. This merger may help restore financial stability in the troubled airline industry, but it will come out of the pockets of consumers in the long run.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.