Airline mergers with low cost carriers

- We examine mergers between major carriers and low cost carriers (LCCs).
- Majors' one-stop and LCCs' nonstop services are substitutes in the merged market.
- Mergers could be achieved by providing either one-stop or nonstop service only.
- The mergers reduce welfare when the one-stop services' costs are intermediate.
- Welfare effects may not monotonically change as network size increases.

A hub carrier operates one hub linking multiple non-hub cities. It merges with a low cost carrier whose nonstop service competes with its one-stop service. The merged airline's profit is maximized by withdrawing the competing one-stop (nonstop) service when the hub carrier's operating cost and connecting passengers' hub-through additional time costs are large (small). The realized merger is welfare-improving (welfare-decreasing) when these costs are large or small (intermediate). These findings suggest the necessity of merger regulation. In some regions, the necessity of regulation does not monotonically change as network size increases.