Merger-Induced Effects of Airline Route Changes

144 Pages·2016·1.39 MB·English

by  Michael Clark

Florida State University Libraries
Electronic Theses, Treatises and Dissertations The Graduate School
2015
Merger-Induced Effects of Airline Route
Changes: Consumer Welfare and the Impact
of Market Regulation Policy
Michael Ty Clark
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FLORIDA STATE UNIVERSITY
COLLEGE OF SOCIAL SCIENCES AND PUBLIC POLICY
MERGER-INDUCED EFFECTS OF AIRLINE ROUTE CHANGES:
CONSUMER WELFARE AND THE IMPACT OF MARKET REGULATION POLICY
By
MICHAEL TY CLARK
A Dissertation submitted to the
Department of Economics
in partial fulfillment of the
requirements for the degree of
Doctor of Philosophy
2015
Copyright (cid:13)c 2015 Michael Ty Clark. All Rights Reserved.
Michael Ty Clark defended this dissertation on July 2, 2015.
The members of the supervisory committee were:
Gary M. Fournier
Professor Directing Dissertation
Mark W. Horner
University Representative
Thomas W. Zuehlke
Committee Member
R. Mark Isaac
Committee Member
TheGraduateSchoolhasverifiedandapprovedtheabove-namedcommitteemembers, andcertifies
that the dissertation has been approved in accordance with university requirements.
ii
To my wife, Janette, and my son, Jude.
This was always for you.
iii
ACKNOWLEDGMENTS
I would like to thank my advisor, Gary Fournier. His guidance and enthusiasm was extremely
valuable. Hetaughtmetoconstantlycheckresultstomakesuretheyhadmeaningfulinterpretation.
I appreciate the many hours he spent with me discussing research and other topics. I would also
like to thank Tom Zuehlke for putting me in a position to continue learning and improving upon
something I enjoy very much, econometrics. A special thanks to Dr. Manuel and Mrs. Mary
Johnson for providing me with the Manuel and Mary Johnson Endowed Graduate Fellowship,
which funding helped make graduate school feasible and allowed me to focus and complete my
research goals. Additionally, thanks to family and friends for all their encouragement and support.
And of course, this could not have been done without the love, support, and sacrifices of my wife,
Janette. This is as much her achievement as it is mine. I cannot say enough for all that she has
done for me.
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TABLE OF CONTENTS
List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x
1 Introduction 1
2 Passenger Welfare Effects from Post-Merger Route Adjustments 5
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 Trends in Hub Usage following Mergers . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4 Demand for Airline Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.5 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.6 Results for Airline Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.6.1 Elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.6.2 Willingness-To-Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.7 Evaluating Changes in Consumer Surplus . . . . . . . . . . . . . . . . . . . . . . . . 25
2.7.1 Market Level Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.7.2 Airport Level Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.8 Implications for Merger Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.9 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3 Predicting Network Efficiency Gains in Airline Mergers for Antitrust Review 38
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.2 Changes in Route Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.3.1 Simulation with Machine Learning Techniques . . . . . . . . . . . . . . . . . 48
3.3.2 Network Feature Predictions . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.3.3 Network Simulations to Estimate Change in Consumer Surplus . . . . . . . . 55
3.4 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.5 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.5.1 Predicting Change in Departures . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.5.2 Predicting Entry-Exit Events . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.5.3 Predicting Upgrade-Downgrade Events . . . . . . . . . . . . . . . . . . . . . . 64
3.5.4 Change in Consumer Surplus Evaluation . . . . . . . . . . . . . . . . . . . . . 68
3.6 Application to Prospective Merger Analysis . . . . . . . . . . . . . . . . . . . . . . . 76
3.7 Welfare Effects with Price Simulations . . . . . . . . . . . . . . . . . . . . . . . . . . 77
3.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
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4 Slot Transfers as a Remedy in Airline Mergers: UA-CO Divestitures at Newark 82
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
4.2 Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.3 Slot Divestiture Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
4.3.1 Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
4.3.2 Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
4.4 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
4.5 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
4.6 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
4.6.1 Price Impact of Slot Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . 98
4.6.2 Welfare Impact of Slot Divestitures . . . . . . . . . . . . . . . . . . . . . . . . 103
4.7 Policy Discussion of the US-AA Slot Divestiture . . . . . . . . . . . . . . . . . . . . 107
4.8 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
5 Conclusion 110
Appendices
A Appendix for Chapter 2 113
A.1 Elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
A.2 Propensity Score Matching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
A.3 Additional Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
B Appendix for Chapter 3 & 4 120
B.1 Summary Statistics between Training and Testing Samples . . . . . . . . . . . . . . 120
B.2 Oversampling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
B.3 Price Simulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
B.4 Additional Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
C Human Subjects Approval Memorandum 127
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Biographical Sketch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
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LIST OF TABLES
2.1 Top Airports Used by Carriers in Pre-Merger Period . . . . . . . . . . . . . . . . . . . 9
2.2 Greatest Airport ‘Hub’ Changes Following Mergers . . . . . . . . . . . . . . . . . . . . 10
2.3 Airline Carrier Presence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.4 Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.5 Demand Estimation Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.6 Mean Elasticities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.7 Estimated Change in Consumer Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.8 Change in Consumer Surplus with Propensity Score Matching Markets . . . . . . . . 29
3.1 Predicted Efficiencies in Past Airline Mergers . . . . . . . . . . . . . . . . . . . . . . . 39
2a US Airways-America West (2005) Market Restructuring Between Pre- and Post-
Merger Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2b Delta-Northwest (2008) Market Restructuring Between Pre- and Post-Merger Periods 46
2c United-Continental(2010)MarketRestructuringBetweenPre-andPost-MergerPeriods 47
3.3 Market Classifications for Changes in Flight Options . . . . . . . . . . . . . . . . . . . 54
3.4 Summary Statistics - All Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3.5 Model Root Mean Square Errors for Change in Departures Prediction . . . . . . . . . 60
3.6 Number of Market Entry-Exit Events . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
3.7 Model Prediction Error (%) for Entry and Exit Events. . . . . . . . . . . . . . . . . . 62
3.8 Random Forest (with Oversampling) Market Classification for Delta-Northwest . . . . 63
3.9 Number of Market Upgrade-Downgrade Events . . . . . . . . . . . . . . . . . . . . . . 64
3.10 Model Prediction Error (%) for Upgrade and Downgrade Events . . . . . . . . . . . . 67
3.11 Simulated Network Benefit Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
3.12 Merger Network Benefits ($K) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.13 US-AA Merger Network Benefits ($) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
vii
3.14 Network Benefits with Price Simulation Only . . . . . . . . . . . . . . . . . . . . . . . 79
3.15 Network Benefits with Both Price and Network Simulation . . . . . . . . . . . . . . . 79
4.1 Treatment and Control Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
4.2 Summary Statistics - Newark and UA-CO Merger . . . . . . . . . . . . . . . . . . . . 97
4.3 Fare Regression Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
4.4 Fixed Effects Fare Regression Comparisons . . . . . . . . . . . . . . . . . . . . . . . . 102
4.5 Post-Merger Change in Welfare for Markets with Newark as Enpoint Airport . . . . . 104
4.6 Actual vs. Counterfactual Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
A.1 Airport Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
A.2 First Stage Regression Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
B.1 Summary Statistics - US Airways-America West Merger . . . . . . . . . . . . . . . . . 120
B.2 Summary Statistics - Delta-Northwest Merger . . . . . . . . . . . . . . . . . . . . . . 121
B.3 Summary Statistics - United-Continental Merger . . . . . . . . . . . . . . . . . . . . . 121
B.4 Entry Exit Market Classifications Using Oversampling . . . . . . . . . . . . . . . . . . 122
B.5 Transition Market Classification Using Oversampling. . . . . . . . . . . . . . . . . . . 123
B.6 Model Normalized Root Mean Square Errors for Change in Departures Prediction . . 125
B.7 Newark Airport Carrier Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
viii
LIST OF FIGURES
2.1 Nested Choice of Carrier Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Willingness-To-Pay for Nonstop Flights . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.3 US-America West (2005) Airport Welfare . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.4 Delta-Northwest (2008) Airport Welfare . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.5 United-Continental (2010) Airport Welfare . . . . . . . . . . . . . . . . . . . . . . . . 33
2.6 Welfare and HHI Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.1 Willingness-To-Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.2 Marginal Willingness-To-Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.3 Variable Importance for Upgrade-Downgrade Events . . . . . . . . . . . . . . . . . . . 68
3.4 Welfare Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.5 Welfare vs. Market Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
3.6 Merger Change in Number of Destination Served . . . . . . . . . . . . . . . . . . . . . 78
4.1 Number of Markets Served from Newark Airport by Carrier . . . . . . . . . . . . . . . 86
4.2 Number of Passengers Served from Newark Airport by Carrier . . . . . . . . . . . . . 88
4.3 Average Fare for Southwest Entered Markets out of Newark Airport . . . . . . . . . . 89
4.4 Average Fare for Markets Between Newark and United Hubs . . . . . . . . . . . . . . 90
A.1 US Airways-America West Propensity Score Matching Markets . . . . . . . . . . . . . 115
A.2 Delta-Northwest Propensity Score Matching Markets. . . . . . . . . . . . . . . . . . . 116
A.3 United-Continental Propensity Score Matching Markets . . . . . . . . . . . . . . . . . 116
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