Analysis of Routes Overlapping Effects on the Efficiency Gains in Airline Mergers

• Eric Eduardo de Almeida
• Lucas Morotti dos Santos
• Ana Beatriz Rebouças Eufrásio
• Rogéria de Arantes Gomes

Instituto Tecnológico de Aeronáutica (ITA), Departamento de Transporte Aéreo

Evento

XIX SITRAER – São José dos Campos, SP, Brasil, 25 a 27 de outubro de 2022

Volume

Proceedings of SITRAER 2022 – Air Transportation Symposium · ISSN 2448-1912

Páginas

484–496

Editora

Sociedade Brasileira de Pesquisa em Transporte Aéreo (SBTA)

Editores

Giovanna Miceli Ronzani Borille, Rogéria de Arantes Gomes, Evandro José da Silva, Mauro Caetano, Cláudia Azevedo Pereira

Abstract

Companies from several sectors may experience merger and acquisition initiatives (M&A) seeking improvements in productivity and reduction of costs. In the air transport industry, mergers may occur between companies with different degrees of competition. A suggested measurement of competition is the number of routes that are operated simultaneously by the companies, i.e., the routes overlapping. In order to investigate the effects of routes overlapping in the productivity gains for airlines in a merger process, we assess two pairs of airlines that have carried out a merger process: American Airlines/U.S. Airways and United Airlines/Continental Airlines. Data shows that the first merger involved companies with more routes overlapping than the second one. To compare productivity gains for these companies, a Cobb-Douglas production function relating RPM with ASM, number of employees, and fuel consumption was applied for a period of 12 months before the merger for all mentioned airlines, and for periods of 12, 24 and 36 months after the merger for the resulting companies. The data was obtained from the USA Bureau of Transportation Statistics. The results evidenced that the merger with more competition showed a diminishing return to scale just after the merger. However, in the following periods, there was increasing return to scale. In contrast, the merger with less previous competition showed increasing return to scale after the merger. These results suggest that when there was a merger between airlines that compete more, at the first moment, the resulting company experienced negative effects on its productivity probably due to difficulties to reduce inputs, or to proportionally increase the outputs, and to restructure the new company. The results also show that both resulting companies demonstrated gains in efficiency after the merger in the long run.

Keywords: Airlines merger; Routes overlapping; Theory of production; Cobb-Douglas