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Brand Strategy in Airline Mergers: Simulation Examples with Delta and Northwest

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Current Issues in Public Utilities and Public Policy

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Abstract

This study explores brand strategies that can be profitable for firms involved in a merger. This study simulates some typical scenarios with reference to a merger between Delta Air Lines and Northwest Airlines. A merger model is developed to determine the price and flight frequency endogenously. A demand function is based on the discrete-choice behavior of passengers. First, demand parameters are estimated by application of airline performance data obtained from the United States domestic airline markets. Second, counterfactual experiments are conducted using these models and estimated parameters. Particularly, this study specifically examines unobserved brand quality and marginal costs. Also, this study derives price, flight frequency, product share, profit, and consumer surplus on post-merger equilibria. The author’s experiments suggest that unification to a higher quality brand can be more profitable for merged firms than simultaneous supply both higher and lower quality brands if the marginal costs are uniform across brands.

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Notes

  1. 1.

    As a more flexible model, the Random-Coefficients Logit model (RCL) captures consumer heterogeneity [3]. In the model, econometricians estimate mean utility for all consumers and the distribution of consumer heterogeneity. Gayle [13] applies RCL in airline industry data. However, this study does not employ RCL, because some computation difficulties exist [11, 18, 19, 26].

  2. 2.

    Details were presented by Cardell [8].

  3. 3.

    This commercial database arranges original data from “Airline Origin and Destination Survey (DB1B)” reported by The Bureau of Transportation Statistics (BTS), The United States Department of Transportation (USDOT).

  4. 4.

    The population of Honolulu–MSA was obtained from “Population Change for Metropolitan and Micropolitan Statistical Areas in the United States and Puerto Rico: 2000 to 2010 (CPH-T-2)”.

  5. 5.

    AirTran Airways (FL) was acquired by Southwest Airlines (WN) in 2014.

  6. 6.

    It is noteworthy that some pre-merger and post-merger profits are estimated as negative. The following reason can be inferred. The data used for this study were obtained from direct flight services, with many connecting passengers boarding for the same route segment. These simulation results are based only on one-coupon passengers. This basis might lead to under-estimation in simulation experiments. Differences between data and actual transport volumes are discussed in Appendix 2. Practically speaking, carriers can gain revenue from connecting passengers.

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Acknowledgements

This work was supported by JSPS Grant-in-Aid for JSPS Fellows Grant Number JP15J05368 and KAKENHI Grant Number 20K13617. The author declares that these fundings were not involved in the study design, modeling, analysis, outcomes, interpretation, discussion, conclusion, or writing of the article. The author appreciates Professor Kenichi Shoji for database subscription, and FASTEK for English language editing.

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Authors and Affiliations

  1. College of Foreign Studies, Kansai Gaidai University, 16-1 Nakamiyahigashino-Cho, Hirakata City, Osaka, 573-1001, Japan

    Ryohei Yamamoto

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  1. Ryohei Yamamoto
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Correspondence to Ryohei Yamamoto .

Editor information

Editors and Affiliations

  1. Graduate School of Business Administration, Kobe Universtiy, Kobe, Japan

    Fumitoshi Mizutani

  2. Faculty of Business Administration, Kindai University, Higashiosaka City, Osaka, Japan

    Takuya Urakami

  3. Graduate School of Business Administration, Kobe University, Kobe, Japan

    Eri Nakamura

Appendices

Appendix 1

A correlation matrix of main variables described in Sect. 11.4 is presented herein (Table 11.11).

Table 11.11 Correlation matrix
Full size table

Appendix 2

The dataset used for this study is based on direct flight services. As described in Sect. 11.4, observations of airfare paid by passengers and the number of fared-passengers are obtained from O&D survey data. Also airlines’ operation performance data on each route segment are used, with combination of both records. Therefore, some differences are generated between observations and actual transport volumes.

The numbers of one-coupon passengers on the market segment recorded in O&D survey data are smaller than transport volumes on the same segment recorded in operation performance data (T-100). The latter includes the number of passengers who used this route as part of a connection. However, the ticket fares of flight services should be obtained. Difficulties arise in extracting the portion that corresponds to specific segments. In practice, revenue gains from connecting passengers might be large for carriers, as Table 11.12 shows.

Table 11.12 Differences of O&D survey data and T-100 data
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Yamamoto, R. (2023). Brand Strategy in Airline Mergers: Simulation Examples with Delta and Northwest. In: Mizutani, F., Urakami, T., Nakamura, E. (eds) Current Issues in Public Utilities and Public Policy. Kobe University Monograph Series in Social Science Research. Springer, Singapore. https://doi.org/10.1007/978-981-19-7489-2_11

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  • DOI: https://doi.org/10.1007/978-981-19-7489-2_11

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