Thursday, February 7, 2013

Airline Operations

The airline industry is so interesting because it demonstrates many of the concepts we study in Managerial Economics with many applications to pricing, strategy, costs, etc. We usually learn more when there is a big change, like the proposed AA/US Air merger. Douglas A. McIntyre's biggest complaint is that customer service falls off and this is not reviewed by government officials in the merger review. He does make a succinct statement of the possible economies of scale:

The theory behind airline mergers is that they create economies of scale. Back office operations can be chopped in half. Airport gates, most of which are expensive, can be consolidated. Planes can be taken out of service, and some duplicate routes can be cut. Staff reductions save employee expenses. The Delta, United and probable American mergers have each been set in turn to create the largest airline in the world. The size of an American tie up with U.S. Airways will create the largest one of all.

The theory behind merger effects does take into account affects on product offerings but, in practice, these are difficult to measure. This difficulty becomes apparent in Luke Froeb's contribution "Post-merger Product Repositioning:."


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  2. As noted in Managerial Economics 4th edition, on page 87-88, American Airlines attempted to strike a deal with Boeing to purchase airlines exclusively from Boeing over 30 years to land a lower cost per plane. It would have to be assumed that many other airline companies have attempted to land deals with other airline manufactures, or proposing mergers like the AA/US Air merger mentioned in this blog. Mergers, acquisitions or deals with manufacturing companies would certainly drive the price per seat for airline companies. Much like the cost of oil, post 9/11, the impact of fuel costs would also impact pricing, strategy, and costs. In a 2014 article from CBS news, although fuel costs were lower for airlines, it failed to reach the consumers. It would have to be assumed that the marginal costs that were lost during the oil impact were being recovered when the jet fuel prices had dropped. (
    According to the article, Southwest, American and United gained profits of 27, 87 and 144% respectively, over profits in 2013. The incentive for many of these airlines is to increase profits in the short term, by maximizing fares, then reduce them over the long term to appear to be offering lower fares than their competitors.