If we are in supposedly good times, why are some airlines finding it essential to merge?
Why this is important: Historically airlines primarily merged during times of distress to pull their resources together to survive an ongoing or impending economic challenge. Outside of an economic challenge airlines can merge for one of two reasons, growth and synergizing operations. Based on available information, this is the argument Jetblue is using to justify its merger with Spirit Airlines to The Department of Justice (DOJ). To read more about the Jetblue-Spirit merger see our articles Airline Mergers: A Solution To The Pilot Shortage? and Airline Formations and Mergers. While there are public reasons why Alaska Air and Hawaiian Airlines would want to merge, we would like to focus on some economic implications.
Mergers could increase economies of scale for the new entity.
Mergers could provide a means of dealing with the economic challenges that are to come.
Larger airlines “too-big-to-fail” can receive special support during economic tough times.
Get Involved: Do you believe that airline mergers are a good thing? Why or why not? Please share your thoughts in the comments below.
Increased economies of scale.
Through the right synergies, when airlines merge, they can take advantage of economies of scale to reduce fixed costs. This can help an airline to reduce its total expenditures. Subsequently leading an airline to become more competitive in the market within which they operate.
Through greater economies of scale, airlines can compete more effectively with rivals, particularly those who were previously larger than them before the mergers. In some ways, this is the argument that Jetblue is using when defending against the challenge brought by the US DOJ over its merger with Spirit Airlines. Further details on Jetblue‘s argument, and the challenge from the DOJ can be seen in our article, Oh, Come on! Why is the Spirit-JetBlue Deal Not Yet Complete?.
On Aviation™ Note: To demonstrate the economic value of a merger for an airline, it is worth reminding the reader that the merger between Spirit Airline, and Jetblue was not the original deal. The merger was supposed to be between Spirit Airlines and Frontier Airlines, but Jetblue made a somewhat hostile bid and took over the deal for themselves.
A means of dealing with economic challenges.
While readers of this newsletter series would be aware of the economic challenges to come, many in the general public might not be aware. One thing is for sure, the directors and managers of airlines understand and are planning for what is in store. Therefore, they are taking every precaution to prepare themselves. Merging with another airline to increase the economic viability during a downturn is one option.
An airline that has greater command of routes, equipment, and customer base is more likely to survive an economic downturn than one that does not. Also, the ability to merge with another airline and reduce the competition is an advantage.
Being larger and having more control over the variables of the business costs is also very important. Having more leverage to negotiate fixed and variable cost-related items and to absorb cost a little bit easier.
On Aviation™ Note: During an economic downturn, the airline that has the greatest captive travelers, and greater command of the input factors to its operations, are inevitably the ones that are more competitive and more likely to survive beyond the current crisis.
Too-big-to-fail as a strategy.
Another reason for mergers by airlines may not be so pleasant when viewed from the perspective of a taxpayer. That is, if an airline is deemed too-big-to-fail, then it will receive as much support from the government as possible, to stay in business.
One could argue that with all the reasons given by Alaska, Hawaiian, Spirit, and JetBlue for the merger, one of the significant benefits is that if they are just large enough, then they can be classified as too big to fail, and will be able to survive the next inevitable economic crisis via government support.
On Aviation™ Note: We believe that no company should ever be classified as too big to fail, and therefore be propped up by taxpayers’ money. However, we must understand the economic and strategic value of this to an airline since their main goal is to survive, and in some cases by any means necessary.
In previous articles, we have stated that the merger we’ve seen between Spirit Airlines and JetBlue Airways is only the beginning of a trend that will continue. This is because the factors that are causing airlines to want to merge are only getting greater as we go deeper into the economic challenge that we are currently facing, with the worst of it still yet to come. Some airlines have already gone through bankruptcy since the beginning of this economic challenge. For those airlines who see the writing on the wall, their best bet may be to try to merge to be able to survive before Chapter 11 or worse, Chapter 7 bankruptcy is knocking at their doors.
Thank you for reading this week’s On Aviation™ full article. Do you believe that airline mergers are a good thing? Why or why not? Please share your thoughts in the comments below. Remember to check out our On Aviation™ Podcast and continue the conversation on our Twitter and Instagram.
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