Holiday Airfares and Airline Profitability, Research Paper Example

Rising airfares during the holidays has become a noticeable trend in the recent past. While the hike in the ticket prices has generally been attributed to the fluctuating global oil prices, there has been an unsettling trend where irrespective of the rise or drop in prices of fuel, airlines increase the prices when demand is high(Martin). The article by Hugo Martin highlights this trend, providing a general overview of the shifts in corporate culture within the airline industry.

Airline Mergers

The airline industry has in the recent past become embroiled in a very competitive battle between the largest airline companies as they seek to control the largest shares of the market. This has in the recent past been achieved through mergers or the formation of strategic alliances of some of the major players in the market. Changes in the market such as pressures to expand operations on a global scale, the volatility of fuel price and the declining air travel demand has led to the reaction of airline companies in many ways. Some of the ways in which airlines have responded is through reorganizations, new pricing strategies, spin-offs and bankruptcies.

Mergers are a vital component of business within the airline industry in Europe. Mergers usually end up in the creation of a much stronger airline that meets the consumer’s needs, gains the kind of resources required to remain competitive in the industry while still maintaining an airline’s identity. Some of the biggest airline companies in the Europe are as a result of mergers. In 2004, KLM Royal Dutch Airlines and Air France merged to form Air France(Gore). The two airlines are a considerable competitor in the European market while both companies operate as distinct companies.

There are numerous advantages that airlines can realize within a merger. The cost of doing business is one important underlying advantage. Mergers realize lower costs of doing business due to economies of densities. This means that all companies within a merger will realize access to more resources even though they do not have full access to these resources. The availability of bigger network and service coverage increases the company’s marketability, attracting more clients(O’Connell and Williams). They also allow the creation of new branding and marketing strategies as companies can brand themselves separately while marketing themselves as a merger. There is also a considerable increase in cash flow and financial viability of the parties involved within a given airline merger.

Strategic Alliances allow two different companies to combine with another airline to increase their ability to realize their mission, vision and goal. An alliance provides the involved companies a network of connectivity, while customers receive convenience in the services that they receive(Cento). This is because almost all clients demand services from airlines from anywhere to anywhere, a fete too difficult to pull-off as a single airline. In order for an airline to be able to meet the needs and wants of customers, they seek commercial partners who would pool together resources to provide the kind of service coverage and network required in the market(Cento). This is done in a manner that is cost-efficient to both airline companies involved.

Oligopolistic Market

In April 2012, while American Airlines was in the process of bankruptcy proceedings, US Airways moved to announce its intent of a takeover of the bankrupt airlines. This would mean that the merger would see US Airways, the 5^th largest airline in the United States, and American Airlines, the 4^th largest airline in the United States, hold a combined market share of 20%(Gore). This would place US Airways-American in the top spot as the largest US carrier. Their closest competitors would be Southwest Airlines hold 18%, United, Continental holding 17% and Delta Airlines hold 17%. This in essence would mean that over 70% of the market would be controlled by 4 airlines.

This merger will most definitely change the landscape of the airline industry. This is because 70% of the airline industry is currently controlled by legacy carriers. Even though Southwest Airlines is not a legacy carrier parse, its setup looks similar to that of a legacy carrier. This means that the industry will be purely controlled by the legacy carriers. According to the history that has been experienced from the previous two mergers of the legacy carriers, the American Airlines merger will monopolize certain aspects of the market(Blanco). Other facets of the industry will depict the characteristics of an oligopoly. This is where these facets of the market will be closed to a limited number of airline industries. This means that the market will be closed to small fringe competitors such as regional competitors and Low Cost Carriers (LCCs). These carriers usually influence the pricing. This would force the small fringe competitors to implement the high prices so as to stay afloat.

In conclusion, despite the numerous advantages realized by the existing mergers and acquisitions within the airline industry, airlines still continue to hike prices despite the recent drop in global fuel prices. Airlines continue to record near abnormal profits at the expense of their clients. This situation leaves clients perplexed and industry analysts unable to accurately predict trends within the industry. This can be attributed to the change in corporate culture within the industry. As airlines continue to merge, they gain more control of the market. As such, they have the power to dictate prices as they so deem fit.

Works Cited

Blanco, Luis O. Market power in EU antitrust law. Portland: Hart, 2012. Print.

Cento, Alessandro. The airline industry : challenges in the 21st century. Heidelberg: Physica-Verlag, 2009. Print.

Gore, Daniel. The economic assessment of mergers under European competition law. New York: Cambridge University Press, 2013.

Martin, Hugo. “Holiday airfares are rising amid record airline profits.” 22 October 2014. Los Angeles Times. Internet Source. 29 November 2014. <http://www.latimes.com/business/la-fi-holiday-air-fares-20141023-story.html>.

O’Connell, John F and Geroge Williams. Air transport in the 21st century : key strategic developments. Burlington: Ashgate Publishing, 2012. Print.