Mergers and Acquisitions in the U.S. Airline Industry: An Event Study of Stock Data Observations from the Last Three Decades

Lars Christian Hjorth-Johansen

Student thesis: Master thesis


After the Deregulation Act of 1978 changed the U.S. airline industry from being government controlled to a liberalized market, a merger wave struck the industry where consolidation among a great proportion of airlines created the legacy carriers of today. Three decades later, the industry have seen a new wave, only this time with a completely different underlying motivation. From previously consolidating in order to grow geographically and improve operational performance, the new millennium have seen U.S. airlines merge in order to survive as bankruptcies and financial distress have challenged the existence of the majority of U.S. airlines. Where there exists evidence of collusive pricing as a result of the mergers in the post- deregulation time period, there are not any recent research including mergers of the 21st century. With a foundation based on previous studies, this thesis aims to answer two hypotheses. The first hypothesis asks whether there are positive abnormal returns for bidder and target airlines involved in an airline merger at the time of announcement. The second hypothesis looks at the existence of collusion among rivals through the market power hypothesis, which suggests that rivals benefit from competitors’ mergers as collaboration limits output and increase prices. The hypotheses are tested through an event study where all available stock data from U.S. airlines between 1985 and 2016 is included, thus only including data from a liberalized industry. Through measuring the normal performance of the stocks, abnormal returns are calculated and analyzed. The data have been divided into smaller samples to better explain the economic performance of the merging airlines and their rivals through the three-decade horizon, and in addition looked at collectively to yield an overall conclusion. From the available data, there are evidence of both bidder and target airlines achieving positive abnormal returns upon an M&A announcement, in line with previous research. While the data initially indicates the existence of market power through collusive pricing, the inclusion of new data makes this study decline the market power hypothesis for the dataset as a whole, indicating that rivals experience slight disadvantages from their competitors’ mergers rather than benefits.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2017
Number of pages98
SupervisorsBjörn Preuss