Why Coffee Matters in a Merger

When Continental and United merged during 2010, it took 14 months to solve their coffee problem.

The difficulties began when a 14-member beverage committee selected a light roast from Fresh Brew. Used to a potent Starbucks bean, Continental’s fliers objected to the watery blend while United’s customers, who had always been served the Fresh Brew, were delighted. Told about “howls of protest,” though, the beverage committee decided to re-assemble and start all over again. This time they chose a medium roast (making no one happy?).

If Alaska acquires Hawaiian they too could have a coffee problem. Alaska serves Stumptown’s Holler Mountain (adjusted for altitude) while during a Hawaiian flight, you get a Lion dark roast.

An Alaskan Acquisition

At $18 a share, Alaska Airlines said it would acquire Hawaiian Airlines. Compared to where the shares had been trading, the offer represented a 270 percent premium. While as a $1.9 billion deal, the stakes are relatively small, it could be a good one for Alaska. It gets a new 787 Dreamliner order that would precede its own and a piece of the trans-Pacific market. In addition, Alaska’s economies of scale from growing beyond the Virgin Air acquisition could be irresistible. Now we have to wait and see if they will get the anti-trust go-ahead from regulators.

Our Bottom Line: Airline Competition

Whenever we talk about an airline merger, it really is all about market structure. Deregulated in 1978, the industry no longer had government guaranteeing profits and controlling routes for interstate air travel. Instead, with the market taking over, luxury diminished, profits declined, and new airlines appeared. Competition meant lower fares, disintegrating service, and many more fliers.

Soon though, with profitability tough to achieve, the bankruptcies and mergers began. Or, as Richard Branson said, “How do you become a millionaire? Start as a billionaire, and then buy an airline.” The result is consolidation. Now, shown below, we have a more concentrated market structure through which airlines have more power over fares, routes, and costs. American, Delta, United, and Southwest control two-thirds of U.S. domestic travel.

By 2020, Delta was a combination of 16 merged airlines:

And yet still, since 1990, fares, adjusted for inflation, are down 10 percent. In addition, although market entry is tough where oligopolies prevail, we have some new players. In the budget slot, Avelo and Breeze entered the market.

My sources and more: Slate Money started me thinking about the Alaska Hawaii combination. From there, Axios had more about airline competition as did our past posts (from which I have copied some sentences).