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Southwest's Proposed Merger with AirTran Likely To Pass Antitrust Review

Description:

This Quick Take report quantifies the effect of the proposed Southwest-AirTran merger on competition in the domestic market at the industry-, airport-, and route-level. By computing the Herfindahl-Hirschman Index (HHI) for each overlap route and market, we "red flag" 18 airports and 33 routes for excessive market concentration using the Department of Justice's recently-revised merger guidelines. Primarily due to service overlaps at Baltimore and Orlando, the proposed merger would push 16 routes into monopoly status. As a result of this relatively large increase in monopoly routes, our analysis includes a brief examination of Southwest's pricing practices on its existing monopoly routes. Recommendations are offered for leaders at the affected airports.

The proposed acquisition of AirTran by Southwest would cement Southwest’s position as the largest U.S. carrier by domestic passenger volume and bring it within striking distance of the new domestic revenue passenger mile (RPM) leader, United-Continental, while securing footholds in several desirable business destinations. If completed, this merger would bring significant change to markets such as Atlanta, but the greatest change may be to Southwest itself. With the stroke of a pen, Southwest will be transformed into an international airline flying a multiple aircraft type fleet. And if successful, this merger could serve as an archetype for a new wave of consolidation among U.S. low cost carriers.

This Quick Take report assesses the regulatory hurdles of this proposed merger by examining its likely competitive effects on the industry as a whole and on the airports and routes currently served by both carriers. Our calculations and analysis are based on T-100 domestic passenger data for the twelve months ending June 30, 2010. We present Herfindahl-Hirschman Index (HHI) calculations to quantify increases in market concentration for each overlap airport and route. By applying the revised guidelines recently published by the Department of Justice and the Federal Trade Commission, we "red-flag" 18 airports and 33 routes which may attract antitrust scrutiny, including 16 routes pushed into monopoly status. In light of this relatively high number of new monopoly routes, we conclude our analysis by examining Southwest’s pricing practices on routes it currently dominates.

The enterprisewide option also includes 1 hour of analyst inquiry.

Contents:

Already #1 by domestic passenger volume, the proposed merger positions
Southwest as a close second in RPMs

Data & Methodology

Analysis & Results
- The big picture: airline competition at the system level
- Red-flagged: 18 airports could attract antitrust scrutiny
- 33 red-flagged routes, including 16 new monopolies
- Southwest: discount monopolist

Conclusions & Recommendations
- Implications for non-overlap airports

Appendix: Quantifying Market Concentration with the Herfindahl--Hirschman Index (HHI)

References

List of Figures

- Map: airports currently served by Southwest and AirTran
- Domestic system capacity by month 1990-2010
- Domestic system-wide load factor 1990-2010
- Domestic system-wide market concentration (HHI) since 1990
- A decade of growing market shares distinguishes this pairing from the last four major airline mergers
- Map of airports red-flagged for increases in market concentration due to the proposed merger
- Southwest fares on monopoly and competitive routes
- Southwest yields on monopoly and competitive routes

List of Tables

- With AirTran, Southwest moves to within striking distance of #1 United-Continental in domestic RPMs
- DOJ's classification of markets by concentration and guidelines for acceptable increases in HHI
- Red-flagged: proposed merger causes 18 airports to exceed DOJ guidelines for market concentration
- Red-flagged: 33 routes could draw antitrust scrutiny, including 16 new monopolies

Companies Mentioned

Airports Mentioned:

- Baltimore/Washington International (BWI)
- Buffalo Niagara International (BUF)
- Chicago Midway Airport (MDW)
- Columbus International (CMH)
- Dulles International (IAD)
- Fort Lauderdale International (FLL)
- General Mitchell International Airport (MKE)
- Houston Bush Intercontinental (IAH)
- Indianapolis International (IND)
- Jacksonville International (JAX)
- Kansas City International (MCI)
- Lambert International (STL)
- Logan International (BOS)
- Los Angeles International (LAX)
- Louis Armstrong International (MSY)
- McCarran International (LAS)
- Orlando International (MCO)
- Palm Beach International (PBI)
- Philadelphia International (PHL)
- Pittsburgh International (PIT)
- San Antonio International (SAT)
- Seattle/Tacoma International (SEA)
- Sky Harbor International (PHX)
- Southwest Florida International (RSW)
- Tampa International (TPA)
- William P Hobby Airport (HOU)

Airlines Mentioned:

- AirTran Airways
- America West
- American Airlines
- Chautauqua
- Continental Airlines
- Delta Air Lines
- Delta Connection
- Frontier Airlines
- JetBlue Airways
- Mesa Airlines
- Northwest Airlines
- Republic Airways
- Shuttle America
- Southwest Airlines
- Trans World Airlines (TWA)
- US Airways
- US Airways Express
- United Airlines
- United Express

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Southwest's Proposed Merger with AirTran Likely To Pass Antitrust Review

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Southwest's Proposed Merger with AirTran Likely To Pass Antitrust Review

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Web Address

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Report Formats

Contact information

Please fax this form to: (646) 607-1907 or (646) 964-6609 (from USA) +353-1-481-1716 or +353-1-653-1571 (from Rest of World)

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Please fax this form to: (646) 607-1907 or (646) 964-6609 (from USA) +353-1-481-1716 or +353-1-653-1571 (from Rest of World)

Please fax this form to:
(646) 607-1907 or (646) 964-6609 (from USA)
+353-1-481-1716 or +353-1-653-1571 (from Rest of World)

Please fax this form to:
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+353-1-481-1716 or +353-1-653-1571 (from Rest of World)