Mergers: United Airlines & US Airways

US carriers on merger talk

“United Airlines and US Airways have shelved plans to merge, the two carriers' parent companies have said”
-BBC, 30th May 2008-
Possible reasons to merge?

1. Oil price has surged to a new high of USD $135 & will continue to increase given that oil is a scarce commodity. In any airline firms, oil alone consists averagely as much as 35% of their operating costs & that's a lot.
2. Drastic drop in the number of passengers given that now many countries experience slow economic growth & economies are in grea uncertainty. Air travel is perceived as a form of luxury good still. Meaning to say, as income fall, the demand for it will fall by more than proportionate. Those airline operators are severely affected & as such by merging is a good way for them to consolidate financially
3. To achieve EOS on various areas e.g. financial, managerial & purchasing
4. To strengthen its position in the market to avoid being a target of takeover
5. To leverage on each others strength e.g. market share vs. management

Disadvantages of mergers

1. Possibility of diseconomies of scale that arise from the difficulty to monitor overly large business, communication failure etc
2. Consumers may have to pay higher price
3. Airline firms may not reinvest its super normal profit into R&D to discover ways to provide better quality of services to passengers
4. May result in cost inefficiency as there is lack of elements of competition in the economy