Davy Research |
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Davy on Airlines
Virtual airline mergers; implications of the consolidation of the North Atlantic
04 October 2011
Stephen Furlong |
Joshua Goldman |
Anti-trust virtual mergers — the likely way forward
One of the biggest structural changes to the airline industry over the last 18 months has been transatlantic, joint-venture 'virtual mergers', and the granting to them by regulatory authorities of anti-trust immunity (ATI). Essentially, this allows airline alliances to act as single entities, enabling them to fully coordinate major functions, including scheduling and pricing.
The regulatory environment for virtual mergers remains unclear insofar as the US Department of Justice (DoJ) does not appear to believe the theoretical economic foundation for the Department of Transport's (DoT) transatlantic policy. While there is unlikely to be a regulatory challenge to their ATI, the alliances cannot be seen to be too successful if they want to avoid unwanted attention from competition regulators.
Analysis by route indicates market dominance
The three airline groups now carry at least 80% of traffic between Europe and North America. The alliances are rarely in head-to-head competition, concentrating instead on consolidating operations between their home hubs and on the key routes between European and North American hubs.
The most interesting results come from route analysis, which shows that Star Alliance is dominant on its routes.
Aviation Economics see less hub network competition than in the US. It also see the joint ventures adding at least 2-3 points to underlying route operating margins.
Star Alliance appears most developed; on relative basis, we are long Lufthansa versus Air France KLM and particularly IAG — albeit Air France KLM and IAG can be seen as dangerous shorts at current valuation levels
Aviation Economics sees clear indications that Star's Atlantic alliance is generating significant returns. By most measures — number of transatlantic routes, volumes, hub-and-spoke scheduling, integration of processes — Star is the European leader. Lufthansa has invested heavily to build a protective ring of secondary operations to consolidate the core Frankfurt/Munich hub-based system.