Samina Karim Featured in Reuters

in Faculty, Faculty in the News, News
October 11th, 2013

Professor blogs: airline mergers are inevitable

Samina Karim

Associate professor of strategy and innovation Samina Karim contributed a piece to Reuters‘ opinion page “The Great Debate,” in which she explains why the current American Airlines/US Airways merger talks will eventually culminate in a deal. The merger has been delayed due to the ongoing antitrust trial led by the Department of Justice (D.O.J.), which is concerned, from a consumer-interest standpoint, that the resulting airline would have too much market power in its locations. However, Karim uses examples of merger deals in both the music and wireless-operator industries to illustrate her point that, despite said concerns, the consolidation of these two airlines is only a matter of time.

Excerpts from Reuters:

Back in 2012, the music industry consolidated from four big players to three as EMI was split up. Its music business went to Vivendi’s Universal Music Group and its publishing business to Sony/ATV. In this deal, similar concerns of market power led the European Commission to stipulate that Universal had to sell a third of EMI’s assets. And that deal went through.

Meantime, ending in a different fate in 2011, AT&T finally admitted defeat in its attempted bid for T-Mobile. It would have consolidated the cohort of this nation’s cellular operators from four to three. In this latter case, the firms were up against both the D.O.J. and the Federal Communications Commission.

So why are airline mergers inevitable? It’s because, in many ways, the passenger airline industry is more like the music industry than the wireless-operator industry.

In both airlines and music there is a long history of prolific entry of new rivals (such as regional carriers and private labels), and successful ones either grow or get gobbled up by the larger players. Think about it. Most of us have heard the names of smaller music labels but many may not be as aware of the dynamic market of regional, non-legacy carriers. Next time you fly check out the “operated by” field on your ticket and start tracking how many different “operators” you’ve experienced in your travels.

In general, large players are faced with competition by the focused, agile, competitive, smaller players and some of these large players don’t fare well (e.g. American Airlines, EMI, T-Mobile). The usual reaction from Strategy 101 is to try to achieve economies of scale and increase market power. So, voila, with airlines we see consolidation and mergers (e.g. Delta’s merger with Northwest and United’s merger with Continental, and there are plenty of smaller ones).

Read the full blog post here.