08s6f econ blog

HELLO! =D hmm after the wonderfully exciting fac outing yesterday, i'm here to post an article review after the merger of two airline companies in the U.S. ! sorry its kinda long ! >< happy reading! haha hope it helps! =P

RED: IMPORTANT POINTS FROM ARTICLE
PURPLE: MY ANALYSIS =))

Buckle Up

By Jacqui Goddard Newsweek Web Exclusive
Apr 18, 2008 Updated: 1:45 p.m. ET Apr 18, 2008

Delta and Northwest have come a long way since skirting with Chapter 11 last year. Earlier this week, the two airlines announced a proposed merger. that's designed, in part, to hedge against rising fuel prices and the economic downturn. The marriage will create the world's largest carrier in terms of traffic, with 800 aircraft serving 400 cities in 67 countries. Staff will number 75,000 and combined annual revenue is estimated at $31.7 billion.

The possible merger of two airline companies, Delta and Northwest, is an example of a horizontal integration which occurs when different firms producing the same product or involved in the same stage of production join together to form a business unit. A merger increases a firm’s capacity and market share, which is less costly than internal expansion and yet still allow the firm to reap internal economies of scale (EOS).

So is it all blue skies ahead, or should the industry—and passengers—be buckling up for turbulence? NEWSWEEK spoke to Bijan Vasigh, managing director of Aviation Consulting Group and professor of economics and finance at Florida's Embry-Riddle Aeronautical University about what the merger may mean for the summer travel season. Excerpts:

NEWSWEEK: Delta and Northwest have both been struggling, so teaming up with one another sounds a bit like a three-legged race. Can they make it without stumbling?
Bijan Vasigh: The major objective is to enhance revenue and reduce costs by streamlining, but the jury is still out on how much they can achieve. These two are not the most efficient airlines in the U.S., so merging will create lots of new problems, like how to bring all the pilots together. No doubt they would have less competition and be able to cut costs, but will it still be a panacea down the road? I have a little bit of a negative opinion on that.

The merger would allow the resulting firm to enjoy cost and revenue advantages
A larger firm reaps internal EOS due to a larger scale of production. After merging, the firm will have the resources to support research and development, leading to development of better products to cater to the different tastes and preferences of consumers, allowing the firm to stay competitive and hence enhance revenue and reduce costs. It can also bargain and enjoy bulk purchases at a lower price from suppliers.

A larger firm also reaps revenue advantages. It is able to generate to more revenue and offer a broader array of service. A merger of two airline companies with different expertise also result in a combination which is more to the liking of consumers and enables them to capture a greater market share. They can also set aside a greater budget for advertising, establishing a strong brand name and fostering consumer loyalty.

Is this a done deal, or will it be terminally delayed?
Since it creates a monopoly-power issue, the merger has to be approved by the Department of Justice to make sure it doesn't violate antitrust regulations. It's not a done deal until the government gives permission, which could take several months—though the Bush administration is friendly to this type of issue.

However a merger also means that the firm enjoys a greater market share and has steeper and more price inelastic demand curves. This may result in the company ending up as the monopoly, which is undesirable as the company has full control over prices.

Won't this new mega-airline just threaten the smaller ones? Might we see them forging mergers, too?
Mergers like this could be a way to save the airline industry. If this one goes through, we should see other airlines doing the same in order to be competitive—for example, United and Continental may try, and if that goes through it will steer other consolidations in the U.S.

Merging does not always threaten smaller firms whose survival is made possible if they are able to reach out to consumers who desire for individuality and variety. Small firms can provide more personalized services for consumers as compared to larger firms. Also, as pointed out by Bijan Vasigh, small firms can also merge to join in the competition, which ultimately benefits consumers who enjoy more consumer surpluses.

Is this farewell to cheap tickets?
Yes. The major issue for any type of merger is that lower competition brings higher prices—that's a basic economic issue. They will have a tendency to run less flights, fill up the aircraft with more passengers and charge higher prices. [But] in some respects, passengers could benefit because the new airline will have a bigger reach; they can fly from the U.S. to any part of the world with no problem, so that's a positive.

The increased market power of firm could translate into higher prices and hence, lower consumer surplus. However, consumers benefit from the wider range of service offered.

But might they cut back on some of those routes?
The good thing about this consolidation is that they have many complementary routes; Delta is very strong over the Atlantic and to Europe, while Northwest is strong in the West and the Pacific. But where they are serving the same routes, [those flights] will undoubtedly be trimmed.

This shows an example of technical EOS which can be reaped by the merged firm, by sharing expertise and labour.

With more flights and more passengers to handle, could it also mean more delays? And will my baggage make it?
I don't think it will create more delays. Maybe some services could become less customer-friendly. But troubles with baggage? Hopefully not.

I hear Delta pilots are generally happy with the deal, but Northwest's aren't. Why?
It depends on how they agree on seniority issues and things like pay and work conditions. If you work for an airline [that pays] a lower salary and merges with one with higher wages, you would be happy. But if it had less you wouldn't be happy.

Though merging brings about many benefits for the company, it may also result in unemployment or retrenchment problems as workers who are not as skilled are no longer hired. As stated in this case, pilots in Northwest are unhappy as they are being paid a lower salary than before the merger. This may result in tension among the workers and lead to conflict. This is a type of internal disEOS – management difficulties whereby the firm faces problems in coordination and communication.

Will in-flight service change? Can travelers expect even fewer amenities?
One of the best ways to have more passengers is to provide attractive in-flight amenities--for example, JetBlue is popular for its 23 channels of live television. If there's no competition, cabin amenities can be a way of saving of money. But in a merger, those cabin amenities may go—smaller legroom, less aisle services, and that's a major issue for passengers. But free peanuts and cola … I think they're safe.

Initially, when there is competition, airline companies will tend to differentiate themselves by offering better and more attractive services. However, after a merger when the level of competition is not as high as before, services such as cable amenities may be forgone to reduce costs. This may make the firm less attractive to consumers who are looking for high standards of service.

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i have the soft copy of this review in msword. so feel free to get it from me if u have difficulties reading it on the blog =)) and do give me feedback or correct me if there u find any incorrect analysis anywhere =P thanks!

-xinling :))