Consumer Welfare Impacts of Airline Mergers

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Researchers:

Matt Higgins
Jeff Newman
Michael Schyns

Students:

Virginie Lurkin

Partner Institutions:

Airlines Reporting Corporation
Global Eagle Entertainment

Since 2005, the US airline industry has seen a wave of consolidation.  These include the US Airways  – America West merger in 2005; the Delta – Northwest merger in 2008; the Southwest – AirTran merger in 2010; the United – Continental merger in 2011, and the US Airways - American merger in 2013.  However, the most recent merger between US Airways and American (AA) was been challenged by the U.S. Department of Justice (DOJ). The DOJ claimed that the US–AA merger would harm consumer welfare by increasing fares and ancillary fees.  The DOJ also believed that a merger would motivate US Airways to eliminate its “Advantage Fare” product.  That is, because US Airways’ hubs do not generate a high volume of lucrative nonstop passengers, connecting passengers are crucial to its financial success.  US Airways sells an Advantage Fare on its connecting itineraries that undercut its competitors’ nonstop itineraries by up to 40%.

To date, economists have quantified welfare benefits of airline consolidation using the US DOT data.  However, there are two serious limitations to the US DOT data: (1) it is impossible to link fare information to specific itineraries; and (2) it is impossible to link consumer characteristics to specific ticket sales. 

The Airlines Reporting Corporation (ARC) is a ticket clearinghouse that contains information about all tickets purchased through brick-and-mortar and online travel agencies for travel in the U.S.  In addition, as of 2013, some U.S. carriers provide a 100% of their tickets sold through all distribution channels to ARC. 

In 2013, Dr. Garrow established the first academic partnership with ARC.  As part of this partnership, she and her colleageus will be able to use detailed ticket information to pursue several research questions.   One of the questions they are investigating is how consumer welfare estimates vary when detailed ticket information (such as that avaiable from ARC) is used instead of aggregate ticket information (such as that avaialble from the US DOT). 

We would also like to acknowledge Global Eagle Entertainment (GEE) for providing detailed schedule data for this project.

You can check out a video of Dr. Garrow talking about this project by clicking here.

 

Publications resulting from this project include

Lurkin, V., Garrow, L.A., Higgins, M.J, Newman, J.P, and Schyns, M. Accounting for price endogeneity in airline itinerary choice models: An application to Continental U.S. markets (submitted in January, 2016 to Transportation Research Part A).

Lurkin, V., Garrow, L.A., Higgins, M.J., Newman, J.P. and Schyns, M. (2016). Continuous departure time of day preferences for Contential U.S. airline markets segmented by distance, direction of travel, number of time zones, day of week and itinerary type.  SSRN Working Paper Number 2721974.  Available online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2721974. Accompanying Excel Worksheet is available here.