In February, United Airlines CEO Scott Kirby expressed interest in a merger with American Airlines during a meeting with President Donald Trump. The conversation, first reported by Reuters, has since spread across the media landscape.
Were it to happen, the merger would form the world’s largest domestic airline company. United spokespersons have not responded publicly, but the talk is raising lots of questions about an industry reeling in the United States and beyond due to a partial government shutdown and higher fuel prices induced by the Iran war.
Les Alexander says, “I would imagine this is a story about cost savings to enhance profitability.” (Photo by Sanjay Suchak)
Les Alexander, a professor at the University of Virginia’s Darden School of Business and a merger expert, discusses the potential viability of such a deal and its impact on air travelers already weary from a tumultuous travel season. He offers a warning: Ticket costs and frequent flyer miles could be at risk.
Q. How unprecedented would a merger between United and American be in the modern airline industry?
A. While there has been merger and acquisition activity in the airline industry, this proposal is unique as it contemplates a combination of two of the top four U.S. carriers, which make up about 40% of the U.S. market. The reason it is unique is that it is difficult to have a merger of two market leaders approved by U.S. regulatory authorities. Past attempts to combine airlines, such as with the proposed JetBlue and Spirit combination, were blocked by the Justice Department, as it was believed to create antitrust issues.
Q. What challenges would this deal aim to address for the airlines?
A. The airline industry is quite competitive, and it can be challenging to maintain profitability. By combining two airlines, there are cost savings and other efficiencies that could enhance financial performance.
Q. How might it affect hubs?
A. Both airlines operate hubs at Chicago O’Hare and Los Angeles International, so there could be efficiencies and cost savings from consolidating hubs in those markets. They both also have hubs in the New York and Washington, D.C., areas that could be combined into one in each city.
Q. Is this more about growth, survival or something else?
A. I would imagine this is a story about cost savings to enhance profitability. It would eliminate a competitor in the market that could be putting pressure on airfares. There could be additional benefits of combining market share to become the market leader ahead of Delta and try to strengthen the resulting brand.
Q. What would regulators focus on first when evaluating a merger like this?
A. Maintaining a competitive market would be a primary focus for regulators in this situation. If two of the top four carriers were consolidated into one, you would be removing a major player from the market. A concern would be what it would do to consumers, as pricing could rise due to less competition, and flight options could be reduced.
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