Consolidation and anti-competitive market power

By Hubert Horan

Airneth column
February 2011
by Hubert Horan

The last decade’s intercontinental airline consolidation has directly created the anti-competitive pricing powers forbidden by competition and antitrust laws worldwide. Conservatively estimated, this artificial pricing power is already costing North Atlantic consumers over $5 billion a year. These consumer welfare losses will steadily increase due to recently approved (but not fully implemented) regulatory actions such as BA-American, Continental-United the US-Japan Alliance case, and other cases likely to follow in the wake of the US-Japan case.

“Anti-competitive market power” has a clear, longstanding definition under economic theory and antitrust law. Reductions in competition due to mergers or antitrust immunity are only problematic when conditions allow carriers to sustain supra-competitive prices and profits for extended periods. The key issues are entry barriers, market contestability and risks of cartel/oligopoly conditions where competition among the large remaining carriers becomes a zero-sum game and it is more profitable to reduce service and raise prices. Risks of artificial market power can only be justified when offset by major, objectively verifiable efficiency gains such as major unit cost reductions or network synergies that directly drive major capacity increases.

All of these problematic conditions can be observed on the North Atlantic and the other major intercontinental markets which have been the exclusive focus of the “industry consolidation” movement. There are huge barriers to competitive entry, including the requirements for hundreds of widebody jets, global marketing infrastructure and the need for a huge connecting hub at a city that is a major center of international trade. There is absolutely no possibility that future competitive entry could discipline anti-competitive pricing abuses on the North Atlantic—the last successful market entry (Piedmont) was 24 years ago. 98% of the North Atlantic market is now permanently controlled by a cartel of the three immunized alliances. Since each of the three alliances control major national markets (i.e Germany, Switzerland, Belgium and Scandinavia for Star) and have sizeable shares of the aggregate market, none have any incentive to engage in serious price competition.
The issue here is the extreme concentration triggered by the 2004 Air France-KLM merger and the recent antitrust immunity grants. Some mergers and ATI grants are benign or even pro-competitive. I helped developed the original Northwest-KLM alliance network that served as the template for all subsequent alliance networks. In 1999, even with three large alliances, the North Atlantic was still robustly competitive (top 3 concentration was only 47%) and strongly profitable. Multiple independent studies have found that the original alliances produced huge, tangible benefits for consumers including lower prices, increased capacity, and new links to smaller cities that had never had competitive transatlantic service. None of the consolidation since 2004 has created new service, reduced unit operating costs or lowered prices.

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