Friday, April 9, 2010

Airline Deals Won't Stem Capital Flight

Today's edition of the Financial Times contains an excellent op-ed piece on the financial woes of the global airline industry and the need for governments to allow carriers to consummate crossborder mergers.  See Opinion, Airline Deals Won't Stem Capital Flight, Fin. Times, Apr. 9, 2010 (available here).

April 9, 2010 | Permalink | Comments (0) | TrackBack (0)

Consolidation Continues

Consolidation continues in the airline industry as British Airways and Iberia announced the finalization of their merger agreement today.  See Nicola Clark et al., British Airways and Iberia Sign Merger Deal, N.Y. Times, Apr. 8, 2010 (available here).  If the deal is approved by the European Commission, BA-Iberia will become one of the largest airlines in the world.  Meanwhile, news agencies are still buzzing about yesterday's revelation that American carriers United Airlines and US Airways are in the midst of their own merger negotiations.

From a legal perspective, the possibility of a United/US Airways merger raises more interesting issues.  As discussed yesterday on the blog, see here, the two U.S. airlines have twice failed to win merger approval from the Justice Department.  Despite the fact both airlines have lost significant market share since their last attempted link-up in 2000, their merger plans may run up against Assistant Attorney General Christine Varney's plans for "vigorous antitrust enforcement," including limiting further market concentration in presumably all industrial sectors.  See generally Christine A. Varney, Assistant Attorney General, U.S. DOJ Antitrust Division, Vigorous Antitrust Enforcement in This Challenging Era, Remarks to the U.S. Chamber of Commerce (May 12, 2009) (available here).  The DOJ has already proved to be a thorn in United's side during its (ultimately successful) bid to win antitrust immunity for its partnerships with carriers such as Continental and Lufthansa as part of the Star Alliance.  In that instance, however, the DOJ had no statutory authority to block the Department of Transportation from making the immunity grant.  If United and US Airways decide to proceed with a full-on merger, the DOJ will have full powers to review and potentially challenge the consolidation.

The second interesting legal issue a possible United/US Airways merger raises is what, if any, effect it will have on United and Continental's pending antitrust immunity application for their alliance with Japan's ANA.  Will the DOT put its immunization analysis on hold until the merger is consummated?  If the immunity is granted before a merger is finished, will a new proceeding have to be initiated afterward?  And, regardless of the timetable, will the potential merger have any impact on the DOT's decision over whether or not to grant the immunity at all? 

April 9, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 7, 2010

United/US Airways Merger Talks

The New York Times is reporting that United Airlines and US Airways "are deep in . . . merger discussions" to form one of the world's largest airlines.  See Andrew Ross Sorkin et al., United and US Airways Said to Be in Merger Talks, N.Y. Times, Apr. 7, 2010 (available here).  According to the story, a formal announcement concerning the discussions is not expected for several weeks and that both carriers' unions may oppose the deal.

The two airlines may also face stiff resistance from the Department of Justice's Antitrust Division.  In 1995 and 2000, the DOJ threatened lawsuits to block US Airways's acquisition by United. Both threats were predicated on the implications of United taking over US Airways hub operations at high-use East Coast airports. Perhaps, given the financial woes the airline industry has faced since 9/11, including record high fuel prices and the economic downturn, the Justice Department would be willing to take a more lenient view of a domestic link-up between the two.

This assumes, of course, that antitrust enforcers in Washington won't be spooked by the size of a combined United/US Airways air carrier.  Recent statements by both the DOJ and the Federal Trade Commission seem to indicate limited tolerance for further market concentration regardless of whether or not the transaction will result in efficiency gains.  See Alan Devlin, Antitrust in an Era of Market Failure, 33 Harv. J. L. & Pub. Pol'y 31-38 (forthcoming 2010) (available from SSRN here).  As ill-advised as this policy position may be, it could prove an insurmountable obstacle to any significant consolidation in the U.S. airline industry.

April 7, 2010 | Permalink | Comments (0) | TrackBack (0)

Monday, April 5, 2010

Revenue Management with Opaque Products

Blog readers interested in the business side of aviation may want to read Jochen Goensch & Claudius Steinhardt's new paper, Revenue Management with Opaque Products (Working Paper, Mar. 29, 2010) (available from SSRN here).  From the abstract:

In recent years, opaque selling has evolved into a popular instrument of price discrimination used in many service industries. Opaque products are designed in such a way that some of their characteristics are hidden from the customer until after purchase. Prominent examples include Internet-based intermediaries like Hotwire and Priceline, which sell, for example, airline tickets by disguising details of the service provision like the departure time or the operating airline until the booking has been made. The main benefit of opaque products is the induction of additional low-value demand; however, due to the inherent supplier-driven substitution, the traditional revenue management process changes. In this paper, we therefore propose a capacity control approach that allows opaque products to be incorporated. Our approach is based on the well-known dynamic programming decompositionthat is widely used for traditional revenue management – in theory as well as in commercial software implementations. Analytically, we show that the obtained upper bound on the original dynamic program’s value is tighter than the one obtained by constructing a deterministic linear approximation. Furthermore, we perform computational experiments, using typical airline revenue management scenarios, which show that the developed approach significantly outperforms other well-known capacity control approaches adapted to the opaque product setting.

April 5, 2010 | Permalink | Comments (0) | TrackBack (0)