Code Sharing and Merger: Continental, Delta and Northwest

Abstract

When Delta joined the code share between Continental and Northwest in 2003, these three legacy carriers formed the only three-way U.S. domestic code sharing partnership. In 2008, Delta and Northwest announced their intention to merge. The merger was granted by the Department of Justice six months later. This paper analyzes the effects of the three-way code share and the effects of the merger between these two previous code sharing partners. I find both competitive effects and anti-competitive effects of code sharing, i.e., mean market price decrease in non-hub markets and price increase in hub-to-hub markets. Meanwhile, passenger volume increases significantly. Moreover, rivals’ responses are to move price in the same direction as code sharing partners. I find an increase in Herfindahl-Hirschman Index (HHI) and a reduction in traffic after the merger. Specifically, HHI increases for over 1,000 points in markets where merging airlines were either duopolistic or with a third carrier. Pre-merger code sharing markets experience an increase in HHI due to the disappearance of the code sharing contract. Low cost carrier entry mitigates merger effects.

Keywords

airline / code sharing / regulation / demand estimation

RIGHTS & PERMISSIONS

2014 Higher Education Press and Brill