AV421-3: Explore the occurrence of vertical and horizontal mergers in the aviation industry.

GEL-1.02: Demonstrate college-level communication through the composition of original materials in Standard English.

GEL-8.03: Apply critical thinking to formulate a logical solution to a problem.

PC-2.2: Formulate innovative solutions for identified initiatives.

Introduction

As a future manager in the aviation industry, you will apply your understanding of markets to assist in decisions related to mergers with other companies. The ability to calculate and translate industry concentration measures, market conditions, and pricing behavior from industry and market data can provide the sound foundation to prepare for and predict the success of a possible merger.

In this assignment you will write an APA investigative report to include the following:

• Using industry and market data in Excel documents (New York to Los Angeles Main Route and Buffalo to New York Feeder Route) to calculate appropriate measures for an airline.
• Identify airline merger decisions based upon the board recommendations, data, and predict any issues that may arise from U.S. antitrust authorities using sound economic justification.
• Write a five-page APA report applying the calculated industry concentration measures, market conditions from the data provided, and five-forces framework to justify your merger recommendations and predictions for their success or failure.

Directions:

1. You will be using the following Excel documents for this assignment. Please download them now:

New York to Los Angeles Main Route

Buffalo to New York Feeder Route

Note: you will have to enable this worksheet to make any changes if you wish to perform calculations in Excel.

2. Additionally, you will use lessons from the historical airline merger between American Airlines and U.S. Airways to provide further evidence of merger benefits and issues. The following Congressional Budget Office (CBO) Testimony on Airline Mergers provides the appropriate information and should be downloaded now:

CBO Testimony PDF

Note: you will need a PDF reader to view the document.

Scenario:

For this assignment, you will be working as a manager at the major airline called ECON Airlines. Your duties require you to assist the executive board during the recent crisis. The board has decided that mergers are necessary for the continued success and growth of the airline. The airline competes against several airlines and currently operates only one route: New York (JFK) to Los Angeles (LAX). ECON Airlines also contracts with several regional airlines to feed the JFK to LAX flights paying a fixed fee per passenger. The feeder route flown by these contracted carriers is Buffalo (BUF) to New York (JFK). The board does not wish to extend the network beyond the current Origin and Destination (O&D) offered but believes a merger with American Airlines could improve the market power of the airline. They are also open to recommendations for innovative horizontal merger solutions that may have been overlooked. Further, they want to separately explore the possibility of a merger with the contracted feeder GoJet Airlines, LLC to reduce costs. The board is in the initial stages of determining appropriate actions on any mergers and has placed you in charge of exploring the possible benefits and any issues from merging with these other airlines.

Investigative Report:

The ECON Airlines board has tasked you with developing an investigative report of the current industry and market conditions ECON Airlines faces, possible U.S. antitrust authority issues, and your recommendations for the proposed future vertical and horizontal mergers in each market with appropriate economic justification. They have also asked that you provide an alternative recommendation for a horizontal merger that they may have overlooked.

Write a five-page APA investigative report applying the industry and market data for ECON Airlines with economic justification for your merger recommendations and projected U.S. antitrust authority issues to include the following:

Market Conditions

Provide accurate information about the market conditions for the main route used by ECON Airlines and the feeder route that supplies additional passengers.

Vertical Merger

Formulate a recommendation for or against a vertical merger with GoJet Airlines for ECON Airlines using both your calculated measures and lessons from the previous merger of American Airlines and U.S. Airways as evidence to support your recommendation.

Horizontal Merger

Formulate a recommendation for or against a horizontal merger with American Airlines for ECON Airlines using both your calculated measures and lessons from the previous merger of American Airlines and U.S. Airways as evidence to support your recommendation.

Innovations For or Against Mergers

Discuss critical and innovative concepts in your recommendations for or against mergers for ECON Airlines.

Steps:

1. Using the files for the Main Route and Feeder Routes:

Calculate the following measures and apply meaning to these values as they relate to the market and proposed merger.

Market Conditions	Industry Concentration
Rothschild Indices	Four-firm Concentration Ratio
Lerner Indices	Herfindahl-Hirschman Index

2. Below are some areas and concepts you may want to explore when examining the market and industry conditions in the Main and Feeder Routes:

a) What level of markup do you see for each airline in each market? Do all airlines markup their prices similarly or do some have relatively higher or lower markups?

b) Discuss these markets using elements of the five-forces framework to include rivalry, entry costs, and substitutes for travel.

c) How sensitive is ECON Airlines demand relative to the industrys demand in the Main Route? What about American Airlines?

d) What is the expected combined total revenue (Fare x Passengers per period) for ECON Airlines and American Airlines? How does this compare to the total revenue of the top four airlines?

e) What is the expected combined number of employees for ECON Airlines and American Airlines? How does this compare to the total employees at the top four airlines?

f) What is the expected combined fleet size for ECON Airlines and American Airlines? How does this compare to the fleet size of the top four airlines?

g) What do the two industry concentration measures for each route tell you? From these calculated measures, do you anticipate any issues with U.S. antitrust authorities?

h) What cost savings are possible from a merger with GoJet Airlines, LLC? Are there more attractive alternatives?

i) Compare these findings with the CBO Testimony related to the merger between American Airlines and U.S. Airways.

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3. Write a five-page APA investigative report exploring the market conditions and industry concentration with your final merger recommendations for ECON Airlines. In your report you should:

A. (2 pages) Describe the market and industry conditions for:

i. The Main Route using the measures you calculated and the five-forces framework.

ii. The Feeder Route using the measures you calculated and the five-forces framework.

B. (1 page) Explore the possible vertical merger with GoJet Airlines, LLC in the Feeder Route.

i. Discuss the possible benefits and cost savings from the merger.

ii. Are there any more attractive alternatives?

iii. What issues with antitrust regulatory authorities do you predict?

iv. Compare this merger to the details in the CBO Testimony.

v. Do you recommend ECON Airlines pursue this merger? (Use the information you provided above and in (A) to support your recommendation.)

C. (1 page) Explore the possible horizontal merger with American Airlines in the Main Route.

i. Discuss the possible benefits from the merger.

ii. Are there any more attractive alternatives?

iii. What issues with antitrust regulatory authorities do you predict?

iv. Compare this merger to the details in the CBO Testimony.

v. Do you recommend ECON Airlines pursue this merger? (Use the information you provided above and in (A) to support your recommendation.)

D. (1 page) Research innovative merger strategies for the airline industry. Provide a citation, explanation, and apply your interpretation of your research findings to this possible merger.