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Stephen Olson at Chinese Development Institute Conference

 

 Clyde Prestowitz giving presentation to CDI...

 

Steve Olson teaching trade negotiations at the Mekong Institute...

 

Stephen Olson to speak at upcoming workshop organized by the International Institute for Trade and Development on 

"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.

Op-Eds

(11/12/00 - Szamosszegi) Why Airline Mergers Are Good For You

Why Airline Mergers Are Good For You
ANDREW SZAMOSSZEGI
862 words
12 November 2000
Pittsburgh Post-Gazette
TWO STAR
E-1
English
(Copyright 2000)

Since May, when United Airlines announced a proposed merger with US Airways, consumer advocates, newspaper editorialists and lawmakers have overwhelmingly condemned the prospect of a merger between two of the nation's 10 largest carriers. The prevailing wisdom has been that this union would provoke further consolidation and thereby erode competition in the airline industry. A summer filled with airport delays did little to build public confidence in aviation.

However, a detailed examination of how three mergers actually would affect travelers yields surprising results. The doom-and-gloom scenario that some people expect is unlikely to materialize. In fact, passengers underserved by the current system are likely to benefit most from a restructuring of the airline industry.

The driving force behind these gains are the network effects that result from the aggregation of independent networks. Imagine two telephone systems independently operating on either side of the Rocky Mountains. Each network provides substantial value to its regional users, but the sum of their combination would add value greater than the separate parts to all who use the resulting network.

These effects are critical to understanding the impact of consolidation, but are ignored completely by critics of airline consolidation, whose main credo seems to be that "big is bad." In contrast, the gains from expanding the breadth of airline networks form the basis of a recent study of airline consolidation by the Economic Strategy Institute and GKMG Consulting Services.

The report analyzed 322 individual markets currently served by the six largest hub-and-spoke carriers: American, Continental, Delta, Northwest, United and US Airways. It assumed a restructuring that would combine these carriers into three national networks.

When two airlines combine, the resulting network is larger than the individual ones it replaced. This means that travelers on the larger network can now reach more destinations without switching airlines. Traveling on one airline is preferable on many levels to travel on multiple airlines (interline travel). Not only traveling on a single airlin more convenient in terms of connection times and frequent flier miles, it is also cheaper. The ESI-GKMG study found interline travel is 55 percent more expensive than single-airline travel.

It may be counterintuitive, but the study found that combining airline networks would actually increase competition. Imagine a route from "A" and "C" that is currently served by one airline. A traveler in city "A" can also travel to "C" via city "B," but only by traveling on two different airlines. Given the expense and inconvenience of interline travel, the passenger will fly direct.

If the airlines that fly from "A" to "C" through "B" merge, there is suddenly a new competitor for travel between "A" and "C." The study found that in the domestic market, such competition would increase in 74 percent of affected airport markets, decrease in 13 percent and stay the same in 13 percent in the event of consolidation. Overwhelmingly, the gains in competition are concentrated in small and medium-sized markets.

By increasing connectivity, consolidation is also likely to increase air travel. The study found a strong relationship between access (the number of city-pairs available to a community) and traffic: higher access is associated with more travel. That is, with more cities connected to more places more conveniently, more people will travel.

Because the greatest gains in connectivity due to the mergers would occur in smaller markets, the largest increases in traffic would occur there as well. Nationwide, the number of single-airline points is estimated to expand by 26 percent. This would translate into a 9.1 percent increase in traffic levels. On a state-by-state basis, Pennsylvania would do even better. With 14 smaller airport markets, such as Altoona and Lancaster, benefiting from increased access, origin and destination traffic in the state is predicted to climb by 17.7 percent.

The benefits of consolidation extend to international air transportation in much the same way. Small and medium-sized communities would enjoy more links to foreign cities after consolidation, and these links would be the subject of even greater levels of competition. Moreover, better access to international markets would enable these communities to benefit economically from the globalization of business.

Twenty-two years ago, the United States deregulated domestic air travel, setting in motion a series of moves and countermoves by industry players that resulted in the competitive landscape that exists today. Though the current system, by all accounts, has increased the level of service and lowered prices, larger markets -- the hubs of the hub-and-spoke system -- have benefited disproportionately.

Consolidation in the industry should be viewed as the natural continuation of the process initiated by deregulation.

The next response to deregulation seems likely to intensify competition, expand access, increase traffic, and broaden commercial opportunity even further. Only this time, the little guys won't be left behind.

Andrew Szamosszegi is a fellow at the Economic Strategy Institute and a co-author of "Consolidation, Connectivity, Competition, and Communities: The Advent of National Aviation Networks." ESI is a nonprofit research organization that receives annual funding from foundations and corporations, including United, Northwest and American airlines.

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