Running Head: Airline Industry

Globalisation of world economies is forcing countries and companies alike to improve their competitiveness in the global market. This being the case, the American airlines industry is set for a shake-up given that thee sector is heavily shielded from external competition by the American government (Marketplace, 2008).

This is because the ever increasing demand for national and international travel is creating bigger markets for airlines that can efficiently meet travellers needs, something that American companies become disadvantaged. In order to position themselves better in the global market, global airlines have been merging in order to take advantage of economies of scale and increase connectivity among their routes (Haran, 2008).

The biggest merger so far has been between the Holland based KLM and the Paris  based Air France. With regard to American airline companies, the government has protected the industry for too long such that they are loosing out on the good fortunes that have befallen the industry. As a contribution to the debate of current trend in the Unites States’ airline industry, this paper shall concentrate on the recent merger indications between several US based airlines that were sparked by Delta and Northwest Airlines.

The first section shall deal with the current situation in the industry, the second with the increasing need to open the industry to internal and global competition, and the third section, with reasons behind the current merger trend between within US Aniline companies. The sections shall be followed by a conclusion listing all the microeconomic issues discussed in the paper.

Current State of the Industry

The US airline industry has for long been an oligopolistic market dominated by several airlines. However, the increasing entry of budget airline in the industry has given the bigger players a run for their money, meaning that oligopolistic traits are increasingly being replaced by the competitive characteristics.

The bigger and old players in the market face the headache of dealing with ageing aircraft that need constant repair (George, 2008). This means that costs of production has been increasing with rime, as the planes get older. Secondly, these big players find themselves being captive of labor unions representing employees, some of whom have operated with the airlines for decades. These kinds of increases in the cost of their operating mean that consumers of their services would pay more for travel.

Contrary, budget airlines find themselves with newer aircraft that do not require constant repairs, reason being that they are relatively new in the market. In this regard, the budget airlines are able to operate at lower costs and therefore charge competitive fares for their services, much to the detriment of bigger and well established players.

Budget airlines are less affected by union demands. In addition, the older airlines have for many years invested in other facilities whose maintainable increases the cost of operating their businesses, which further means that budget airlines would continue  to out-compete their well established rivals.