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Southwest's Proposed Merger with AirTran Likely To Pass Antitrust Review
Cambridge Aviation Research, Nov 2010, Pages: 18
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.
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