SBI2

Merger Activity and Short-Run Financial Performance in the US Airline Industry
Author(s): Wilfred S. Manuela Jr. and Dawna L. Rhoades

Source: Transportation Journal, Vol. 53, No. 3 (Summer 2014), pp. 345-375
Published by: Penn State University Press
Stable URL: http://www.jstor.org/stable/10.5325/transportationj.53.3.0345
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Merger Activity and Short-Run Financial Performance
in the US Airline Industry
Wilfred S. Manuela Jr. and Dawna L. Rhoades
Abstract
This article examines the announcement and post-merger effects of three
US airline mergers—America West and US Airways, Delta and Northwest,
and United and Continental. The time series data consist of daily and
cumulative abnormal returns using the Standard and Poor’s 500 as the
benchmark index. The event study methodology uses ±60 trading days
around the announcement and merger dates. The share prices of United
and America West increased while Delta’s decreased due to the slowing
US economy at the time of its merger with Northwest. The impact of the
merger announcement on target airlines is positive except for Northwest
due to the weakening demand for air transport as the US economy faltered
at the time of its merger with Delta. The share prices of acquiring and target
airlines increased around the merger completion date, suggesting that new
information is available as the merger nears completion.
Keywords
Airline mergers, event study, abnormal returns
Introduction
Business historians note that there have been five waves of mergers and
acquisitions (M&As) in the United States since the late 1800s (Lipton 2006).
As with all M&As the most important question is whether they have ful-
filled the short- and long-term financial performance expectations of
Wilfred S. Manuela Jr. Transportation Journal, Vol. 53, No. 3, 2014

Corresponding author Copyright © 2014 The Pennsylvania State
Ateneo de Manila University University, University Park, PA
Quezon City, Philippines
Email: wmanuela@ateneo.edu;
wilfredm@yahoo.com
Dawna L. Rhoades
Embry-Riddle Aeronautical University
Daytona Beach, FL, USA
Email: rhoadesd@erau.edu
TJ 53.3_05_Manuela-Rhoades.indd 345 03/07/14 7:09 AM

346 / transportation journal™
s hareholders. Two long-term strategic reasons for M&As are growth and
synergy. Firms choose M&As to avoid missing key opportunities since
M&As tend to create synergy through either creating cost economies or
opportunities for revenue enhancement. The short-term performance
expectations for M&As center mainly on equity price movements with
a focus on changes in stock price for the target and acquiring firms
(Gaughan 1999).
The outgoing general director and CEO of the International Air
Transport Association argued that the reason the global airline industry is
“making any money at all” in 2011—given the earthquake and tsunami in
Japan, unrest in the Middle East, and increase in oil prices—is the “result
of a very fragile balance.” That is, the efficiency gains of the last decade
and the strengthening global economic environment temper the impact
of higher fuel prices, except that with a measly 0.7 percent margin, there
is hardly any buffer for more shocks (Francis, Flottau, and Schofield 2011).
Domestic airlines in the United States have constrained capacity increases,
allowing most airlines to charge higher prices, a positive development in
an industry known for its losses and bankruptcies. The higher revenues
that resulted from charging ancillary fees (e.g., additional charges for food
and beverage for economy passengers, additional fees for preferred seats
and checked-in luggage for passengers who have not attained premium
frequent flyer status, and rebooking and cancellation fees for discounted
economy fares), and the lower costs that resulted from capacity restraint
have facilitated the airline industry’s return to profitability in the second
decade of the 21st century, following a financially catastrophic decade (JD
Powers and Associates 2011).
In addition to being unprofitable, the airline industry is also over-
whelmingly complex as a result of undue government regulation, network-
driven structure, organized labor resulting in high labor cost, capital and
fuel intensity resulting in high fixed and variable costs, high cyclicality
and seasonality of demand resulting in revenue vulnerability, commodity
products resulting in cutthroat and destructive competition, vulnerability
to the weather and other climate conditions, dependence on infrastruc-
ture and technology, an uneven playing field due to state subsidies in other
countries, and an exceedingly variable planning horizon (Taneja 2003).
Overall, these complexities contribute to a history of bankruptcy and con-
solidation in the airline industry. The 2005 report by the US Government
Accountability Office (GAO), reviewing 160 bankruptcy filings in the United
States since the 1978 deregulation of the industry, did not find any evidence
that Chapter 11 bankruptcy protection and reorganization harmed other

Manuela and Rhoades: Merger Activity and Short-Run Financial Performance \ 347
airlines by adding capacity and/or driving down prices. The report also
indicated that there is no evidence Chapter 11 bankruptcy protection and
reorganization helped bankrupt carriers lower costs and improve perfor-
mance. Further, Chapter 7 liquidation and consolidation did not appear to
slow the overall growth of capacity in the industry. Most analysts, however,
consider M&As as a way to improve airline and industry profits (Hanlon
2007), arguing that consolidation results in increased revenues and non–
labor cost improvements (Chase 2010).
The focus of our article is on the short-term performance of the share
prices of six full-service US airlines involved in M&As from 2005 to 2010.
The movement in the share prices of acquiring and target firms has been
shown to indicate market perception on the proposed merger (Franks and
Harris 1989; Houston and Ryngaert 1994). A positive share price movement
suggests investor confidence that the proposed merger is in the best inter-
est of shareholders. A negative share price movement reflects concern that
the merger will not prove beneficial to the firms involved or comes at too
high a cost to shareholders. This article uses an event study methodology
to examine the short-term share-price performance of three high-profile
mergers: America West and US Airways in September 2005, Delta and
Northwest in October 2008, and United and Continental in October 2010.
The major objective is to determine whether the Hanlon (2007) view of con-
solidation holds true for the most recent M&As in the US airline industry.
Although we recognize that “mergers” and “acquisitions” are not equiv-
alent terms, we use these terms interchangeably throughout the paper since
“mergers” and “acquisitions” are used interchangeably in the literature
despite having exact meanings in specific situations (Sudarsanam 1995).
Mergers and Acquisitions in the United States

Lipton (2006) argues that there have been six waves of merger activity in
the United States. The first wave occurred from 1893 to 1904, character-
ized by large horizontal mergers in the manufacturing and transportation
sectors. The second wave began in 1919 and lasted until the 1929 stock mar-
ket crash, which involved mostly vertical integration in manufacturing and
transportation. The third wave, which started in 1955 and lasted until some-
time between 1969 and 1973, can be characterized as conglomerate diversifi-
cations. The fourth wave, beginning in the late 1970s and lasting until 1989,
was marked by hostile takeovers and leveraged buyouts. The collapse of the
junk bond market and the US savings and loan banks in the late 1980s sig-
naled an end to this activity. The fifth period (1993–2000) witnessed some
of the largest mergers in US history (e.g., Boeing and McDonnell Douglas,

AOL and Time Warner, Citibank and Travelers, and Exxon and Mobil).
The sixth period (2002–2006) of M&A activity was fueled by globalization,
changes in government rules, and low-cost financing.
Despite extensive research on M&A performance, there is no clear
evidence that M&As result in successful performance in the short or long
term, although research suggests that long-term financial performance
is negative (Langetieg 1978; Mandelker 1974). A review of business con-
sulting literature by Paul A. Pautler of the US Federal Trade Commission
(2003) found that results reported by these firms showed no enhanced
shareholder value and a decline in revenue growth for both the target and
acquiring firms. In a meta-analysis of M&A activity, King et al. (2004) found
no clear explanation for post-acquisition financial performance. The four
most commonly explored variables used to explain post-acquisition per-
formance—acquisition by conglomerate, related acquisition, method of
payment, and prior experience with acquisition—were not significant in
explaining the variance in performance. The factor that seems to account
for some short-term variance was conglomerate acquisition, which dem-
onstrated negative abnormal returns. Overall, King et al. (2004) conclude
that there is no evidence acquisitions improved financial performance the
day after its completion and limited evidence of a slightly negative effect
on acquiring firms. Evidence on short-term performance of target firms is
more consistent, however. Target shareholders earn positive returns from
merger agreements (Asquith 1983; Datta, Pinches, and Narayanan 1992;
Dodd 1980) as do the bondholders and preferred stockholders (Dennis and
McConnell 1986), while the shareholders of acquiring firms earn zero or
negative returns (Malatesta 1983; Varaiya 1986).
Airline Mergers and Acquisitions in the United States

The first round of consolidation in the US airline industry occurred in the
1920s when small carriers were urged to grow and extend their reach in order
to compete for the lucrative air mail contracts of the US Postal Service (Kane
2003). Following the scandal in 1932 over graft and collusion among airmail
carriers that led to the passage of the Black-McKellar Act banning carriers
involved in the collusion, there was a second round of consolidation that
“reconfigured” these earlier carriers and allowed them to continue partici-
pating in the carriage of airmail while the third wave began after the Airline
Deregulation Act of 1978 (Kane 2003; Rosen 1995). Table 1 shows the M&A
activity and bankruptcy in the US airline industry since deregulation. With
eight carriers controlling 90 percent of the domestic market in 1989 and six

Table 1/Airline Mergers and Acquisitions Activity and Bankruptcy in the United
States since Deregulation
Year Carrier Action
1979 Republic Formed by merger of North Central and Southern
1980 Pan American Merged with National
Republic Merged with Hughes Airwest
1982 Continental Acquired by Texas International
1983 Continental Filed for Chapter 11 bankruptcy protection and reorganization
1985 Midway Acquired Air Florida
Southwest Acquired Muse Air
Continental Acquired New York Air
People Express Acquired Frontier
1986 Piedmont Acquired Empire
Continental Acquired Rocky Mountain; merged with People Express and New York Air
Northwest Acquired Republic
Trans World Acquired Ozark
Airlines
Eastern Acquired by Texas Air
Delta Acquired Western
Texas Air Acquired People Express
Alaska Acquired Horizon
1987 USAir Acquired Pacific Southwest
American Acquired Air California
Alaska Merged with Jet America
USAir Acquired Piedmont
1990 Continental Filed for bankruptcy and reorganization
1991 Eastern Filed for bankruptcy and ceased operations
1992 United Airlines Acquired Air Wisconsin
Braniff Filed for bankruptcy
1993 Continental Acquired by investor group
1994 Braniff Ceased operations
1999 Northwest Acquired Reno Air
Delta Acquired Comair
2001 American Acquired assets of Trans World Airlines
United Filed for Chapter 11 bankruptcy protection and reorganization; emerged
from bankruptcy protection in 2006
2002 US Airways Filed for Chapter 11 bankruptcy protection and reorganization; emerged
(Continues)

Table 1/Airline Mergers and Acquisitions Activity and Bankruptcy in the United
States since Deregulation (Continued)
Year Carrier Action
2004 US Airways Filed for Chapter 11 bankruptcy protection and reorganization; emerged
Aloha Filed for Chapter 11 bankruptcy protection and reorganization; emerged
2005 US Airways Merged with America West
Delta Filed for Chapter 11 bankruptcy protection and reorganization; emerged
Northwest Filed for Chapter 11 bankruptcy protection and reorganization; emerged
2008 Delta Merged with Northwest
Aloha Ceased operations
2010 United Merged with Continental
Southwest Merged with AirTran
Source: Airline websites.
carriers controlling 86 percent of the market by the early 1990s, the merger
activity that started in the 1980s resulted in a sudden increase in the overall
concentration of the industry (Hanlon 2007; Kim and Singal 1993). There was
a great deal of criticism for mergers between carriers based at the same air-
port (e.g., Northwest and Republic, Trans World Airlines and Ozark). This
is primarily because the mergers resulted in reduced departure frequency
and higher fares, despite the Department of Transportation’s argument that
airline markets remained “contestable” (Bailey and Williams 1988).
Beginning in the 1990s, budget or no frills airlines exerted increas-
ing pressure on full-service airlines. Legacy carriers reduced capacity and
departure frequency after the September 11, 2001, terrorist attacks in the
United States, while low-cost airlines expanded service (Bond 2003; Haddad
2003). The Air Transport Association (2003) reports that the 2001 terror-
ist attacks, rising fuel costs, and the severe acute respiratory syndrome
epidemic in East Asia in 2002 and the following year created “the perfect
economic storm” for US airlines, resulting in bankruptcy and a new round
of industry consolidation. The US GAO (2005) report mentioned earlier con-
cluded that “the perfect economic storm” did not allow legacy airlines to
lower operating costs to a point that allows them to favorably compete with
low-cost airlines, making consolidation the only logical option for most
full-service carriers. Steffy (2007) reports, however, that of the 20 major air-
line mergers since deregulation, only Delta and Western can be considered

a long-term success. Piedmont and US Airways, which merged in 1989, has

been considered one of the least successful as attempts by the management
of the two airlines to have identical pay structures resulted in the highest
cost structure in the US airline industry (Jones and Jones 1999).
In the case of short-term financial performance, the share prices of
acquiring and target firms show abnormal returns before and after the effec-
tive merger date (Israel 1991; Lang 2000). Moreover, the two-day abnormal
returns are positive for target and acquired firms (Singal 1996). The insta-
bility and volatility of the airline industry, however, make most M&As that
promise to reduce costs and increase profits appear attractive to airline
investors (Hanlon 2007). Table 2 presents the opinions of analysts from
major investment houses on the most recent airline industry consolida-
tion. Although most analysts are cautious in declaring consolidation as an
Table 2/Analysts’ Opinions on Airline Consolidation

Analyst Date Comment
Barclays Capital April 8, 2010 “Airline consolidation is back in the headlines; an
Chase 2010 unambiguous positive for the group in our view. We
are unsure how to estimate the likelihood of an actual
transaction, but can say with conviction that we believe
consolidation would be a significant positive for combin-
ing carriers and the broader industry.”
Deutsche Bank January 2011 “Consolidation, in our view, represents a later stage for a
Linenberg et al. mature industry that is seeking ways to address it finan-
2011 cial volatility. Furthermore, we think there is a growing
recognition that network size does matter, particularly to
the most profitable revenue segments.”
JP Morgan February 2011 “Consolidation—the fewer participants at the table, the
Streeter 2011 lower the risk of dissent between any two. When LUV/AAI
closes, we’ll be able to say that we shed FOUR airlines/
managements/pricing departments in just six years.”
JP Morgan 2009 “While we’d much prefer Washington to turn a blind eye,
Baker, Tan, and capital to act prudently, and outright liquidations(s) to oc-
Streeter 2009 cur . . . [consolidation] could still provide sufficient capac-
ity relief and allow for profits under certain assumptions.”
Raymond James 2011 “We believe some may currently overestimate the airline
Pfennigwerth and industry’s ability to ‘price up’ through changes in industry
Parker 2011 structure (consolidation) or changes in pricing strategy . . .
consolidation can influence pricing to the extent that it
leads to incremental capacity reduction.”
UBS September 2010 “The United-Continental merger was announced in May
Castle, Crissey, Wei, and is anticipated to close in October 2010. Management
and Mitchell 2010 estimates annual synergies of up to US$1.2bn, but—just
as important—the deal adds to the capacity discipline
theme in the industry and is the key component of the
sector’s continued health.”
UBS April 2010 “Consolidation is good for all the airline stocks we cover.
Crissey and The airline industry remains a financial mess with no
Grasmick 2010 major US airline earning its cost of capital.”

“unambiguous positive” (Chase 2010), most investors view consolidation as

a means to reduce capacity and improve profitability. Therefore, we expect
that:
Hypothesis 1: The merger results in positive abnormal returns for

the target airlines.
Hypothesis 2: The merger results in positive abnormal returns for
the acquiring airlines.
Data and Method

We collected the daily closing indices of the Standard and Poor’s (S&P)
500, Dow Jones Industrial Average (DJIA), and AMEX Airline Index (XAL),
an index of major US and foreign airlines,1 and the daily closing share
prices of six full-service airlines: America West and US Airways, Delta and
Northwest, and United and Continental. We initially collected data for
three periods: ±60 trading days around the merger rumor date, ±60 trading
days around the merger announcement, and ±60 trading days around the
completion of the merger. Due to the overlap of the ±60–trading day period
around the merger rumor date and the ±60–trading day period around the
merger announcement date, we dropped the merger rumor’s 121–trading
day observation window from the analysis.
We used the stock price of the acquiring airlines after the merger,
following the delisting of the acquired airlines. We conducted internet
searches to identify any rumors regarding the merger; the official merger
announcement date; the actual merger date; and events that might be
expected to affect the share prices of the airlines involved in the merger
such as approval of the merger by shareholders, board of directors, and
regulators as well as discussions with labor groups and approval by unions.
Abnormal returns are returns that are different from those consid-
ered appropriate using a model that generates “normal” returns (Brown
and Warner 1980), while abnormal returns over an event window measure
the impact of the event on the share price of the firm (Campbell, Lo, and
Mackinlay 1997). Brown and Warner (1980, 1985) argue that event studies
using daily stock returns and the market-adjusted returns model based on
standard parametric tests are straightforward and well specified.
We computed the abnormal returns using the S&P 500 as the bench-
mark index because the broader market is more representative of investors’
sentiments than the DJIA (Manuela and Rhoades 2013). Moreover, the per-
formance of the S&P 500 in all the 121–trading day periods considered in the
study reflects the performance of the DJIA in the same period. The graphs

show the stock price performance of airlines involved in M&As against the
S&P 500 using daily abnormal returns (DARs) and cumulative abnormal
returns (CARs), the sum of DARs over a period on n days, ±60 trading days
around the merger announcement date for a total of 121 trading days. We
also graphed the CARs and DARs ±60 trading days around the merger com-
pletion date to examine any share price movement that may suggest new
information as the merger nears completion.
We used the market-adjusted returns model (see equation 1), a linear
model that relates stock returns to market returns whose error term has
an expectation of zero and a variance equal to σ ε2it (Campbell, Lo, and
Mackinlay 1997), to compute for the DARs and CARs.
Rit = α i + βi R mt + ε it (1)
where Eε it = 0 and Varεit = σ ε2it
The market-adjusted returns model is specified as:
Ait = Rit − R mt for i = 1 to n (2)
where Ait is the abnormal return of stock i at time t, Rit is the return on
stock i at time t, and R mt is the return on the market index at time t; while
Pit and Pit − 1 are the prices of stock i at time t and t-1, respectively, and I mt
and I mt − 1 are the market indices at time t and t−1, respectively (Brown and
Warner 1985).
( ) ( )
Rit =  Pit − Pit −1 ÷ Pit −1  × 100% (3)
( ) ( )
Rmt =  I mt − I mt −1 ÷ I mt −1  × 100% (4)
Appendices A to H show the statistical significance, using the

t -statistics, of selected DARs and CARs of the six airlines. Statistical sig-
nificance indicates that new information exists, suggesting that the stock
market has been slow to reflect all relevant information in the airlines’
share prices (Fama 1991).
Beta (b) is a measure of market risk and the capital asset pricing model
(CAPM) argues that an increase in a firm’s beta increases its cost of capital,

resulting in lower present values of the firm’s future cash flows (Brealey,
Myers, and Allen 2011).
We used equation 5, based on the ordinary least squares market model,
to compute the stock betas of the six airlines; where βi is the beta of stock
i, the ratio of the covariance of the rates of return of stock i and the market
to the variance of the market return, ri is the rate of return of stock i, and
rm is the rate of return of the market (Brealey, Myers, and Allen 2011).
cov( ri , rm ) (5)
βi =
var( rm )
Results and Analysis

America West Airlines acquired the bankrupt US Airways in September
2005, Delta Air Lines merged with Northwest Airlines in October 2008, and
United Airlines merged with Continental Airlines in October 2010.
America West and US Airways
America West (AWA) and US Airways (UAIR) officially announced their

merger on May 19, 2005.2 On September 13, America West sharehold-
ers approved the merger agreement with 95.5 percent in favor and three
days later the US Bankruptcy Court approved US Airways’ application
for Chapter 11 bankruptcy protection and reorganization.3 The shares of
America West and US Airways traded for the last time on September 26,
closing at USD 8.70 and USD 0.16, respectively. America West officially
acquired US Airways on September 27, 2005, but adopted the US Airways
Group name, which trades under a new symbol LCC, closing at USD 19.30
on the official merger date.
America West investors reacted positively to the news of a merger
with US Airways (see fig. 1), outperforming the S&P 500 by more than
7.5 percent on merger announcement and the following trading day (see
appendix A). The CARs of America West’s share price outperformed the
S&P 500 for most of the 121–trading day period, resulting in more than
65 percent appreciation of its stock price on the 60th trading day follow-
ing the merger announcement, which suggests that investors consider
America West’s planned acquisition of US Airways beneficial to its share-
holders. America West’s share price also outperformed the XAL, resulting
in more than 55 percent appreciation of its stock price from the 40th to the
60th trading day following the merger announcement. The CARs from the
40th to the 60th trading day are significant at the 5 percent and 10 percent

70%
AWA - S&P daily
AWA - S&P cumulative
60%
AWA - XAL daily
AWA - XAL cumulative
50%
40%
30%
20%
10%
0%
-60
-56
-52
-48
-44
-40
-36
-32
-28
-24
-20
-16
-12
12
16
20
24
28
32
36
40
44
48
52
56
60
-8
-4
0
4
8
-10%
-20%
Figure 1 Stock Performance of America West (AWA) ±60 Days around the
Merger Announcement on May 19, 2005, against the S&P 500 and XAL
levels (see appendix A), suggesting that some investors benefited from the
merger announcement.
Capital markets reacted quickly to the announcement of a merger
between America West and US Airways. The CARs on US Airways’ stock
price underperformed the S&P 500 in the 60–trading day period prior to
the announcement date (see fig. 2), indicating that investors are skeptical
on its planned merger with America West, perhaps due to US Airways’
Chapter 11 filing. The abnormal returns on the announcement date and
the following trading day are highly significant (see appendix B), suggest-
ing that US Airways’ investors with more information than the market
regarding the planned merger benefited from this knowledge. While US
Airways’ share price recovered on the announcement date, rising more
than 60 percent from the previous trading day, its share price lost more
than 23 percent on the next trading day and the CARs underperformed the
S&P 500 in the 60–trading day period following the announcement date
(see fig. 2 and appendix B). The performance of US Airways’ stock price
against the XAL is similar to its performance against the S&P 500, fall-
ing almost 60 percent in the 60–trading day period following the merger
announcement.
As with the positive investor reaction on the news of America West’s
planned merger with US Airways (see fig. 1), investors reacted positively to

80%
UAIR - S&P daily
UAIR - S&P cumulative
60%
UAIR - XAL daily
UAIR - XAL cumulative
40%
20%
0%
-60
-56
-52
-48
-44
-40
-36
-32
-28
-24
-20
-16
-12
12
16
20
24
28
32
36
40
44
48
52
56
60
-8
-4
0
4
8
-20%
-40%
-60%
-80%
Figure 2 Stock Performance of US Airways (UAIR) ±60 Days around the

Merger Announcement on May 19, 2005, against the S&P 500 and XAL
70%
AWA/LCC - S&P daily
AWA/LCC - S&P cumulative
60%
AWA/LCC - XAL daily
AWA/LCC - XAL cumulative
50%
40%
30%
20%
10%
0%
-60
-56
-52
-48
-44
-40
-36
-32
-28
-24
-20
-16
-12
12
16
20
24
28
32
36
40
44
48
52
56
60
-8
-4
0
4
8
-10%
Figure 3 Stock Performance of America West (AWA) 60 Trading

Days before the Merger on September 27, 2005, and Stock
Performance of the US Airways Group (LCC) on the Merger
Date and 60 Trading Days after the Merger against the S&P
500 and XAL
the completion of the merger. America West’s stock price outperformed

both the S&P 500 and XAL in the 60–trading day period prior to the merger
(see fig. 3), appreciating 45 percent, indicating that America West’s share-
holders benefited from its acquisition of US Airways, perhaps due to the
resolution of uncertainty regarding the merger (Halpern 1983). A number

of DARs and CARs of America West are significant in the 60–trading day
period before the merger (see appendix C), indicating that the stock market
reacted slowly to firm-specific events (Fama 1991), which allowed some
investors to earn abnormal returns.
The break in the line graphs in figure 3 indicates that the share of the
merged entity traded under a new symbol, LCC, starting September 27,
2005, the date of the merger. The US Airways Group’s CARs after the merger
shows an increasing trend, outperforming the S&P 500 by more than
50 percent on the 60th trading day following the merger, closing at USD
36.51 from the USD 19.30 closing price on the merger date, an almost
90 percent increase. The DARs and CARs of US Airways Group against the
XAL show a similar trend, outperforming its industry due to the upbeat
market reaction to the merger.
Figure 4 shows the declining trend of US Airways’ CARs in the 60–
trading day period prior to its effective merger with America West,
underperforming the S&P 500 by more than 120 percent the day before the
merger, although its DARs outperformed the S&P 500 from the eighth to
the sixth trading day before the merger (see appendix D). While US Airways
shareholders suffered losses prior to its merger with America West, their
fortunes changed under the merged airline, consistent with the results of
earlier studies indicating that abnormal returns persist after the merger
(Agrawal, Jaffe, and Mandelker 1992; Franks and Harris 1989; Lang 2000).
60%
UAIR - S&P daily
40% UAIR - S&P cumulative
UAIR - XAL daily
20% UAIR - XAL cumulative
0%
-60
-56
-52
-48
-40
-36
-32
-28
-20
-16
-12
-44
-24
12
16
20
28
32
36
40
48
52
56
60
24
44
-8
-4
0
8
4
-20%
-40%
-60%
-80%
-100%
-120%
-140%
Figure 4 Stock Performance of US Airways (UAIR) 60 Trading Days

before Its Acquisition by America West on September 27, 2005,
against the S&P 500 and XAL

The beta of America West for the 61–trading day period [−60, 0] leading
to the merger announcement is 2.62 while its beta for the 61–trading day
period [0, 60] from the announcement date is 1.38, indicating that America
West’s share price volatility almost halved. While Turner and Morrell (2003)
argue that the CAPM underestimates the beta of airline stocks, the lower
beta of America West following its merger with US Airways resulted in a
lower cost of capital, suggesting that the present value of its future cash
flows increased (Flouris and Swidler 2004).
US Airways’ beta in the 61–trading day period [−60, 0] before the
announcement is −0.75 while its beta in the 61–trading day period [0, 60]
after the announcement is 0.01, implying that while its shares moved in the
opposite direction against the S&P 500 before the merger announcement,
there was hardly any movement in its share price following the merger
announcement. US Airways’ beta in the 60–trading day period before the
merger completion is 2.75, perhaps due to the uncertainty regarding the
merger because US Airways is under Chapter 11 bankruptcy protection and
reorganization.
The beta of America West for the 61–trading day period [−60, 0] leading
to the completion of the merger is 0.87, while the beta of the US Airways
Group (LCC) for the 61–trading day period [0, 60] from the merger comple-
tion date is 0.96. That the beta is virtually unchanged before and after the
merger indicates that while the beta of the merged airlines (LCC) slightly
increased, perhaps due to America West’s acquisition of a bankrupt airline,
investor perception is generally settled and positive.
Delta Air Lines and Northwest Airlines
Delta (DAL) and Northwest (NWA) announced their merger on April 14,
2008, and extended their bargaining agreement with pilots, giving them
3.5 percent equity stake.4 The pilots agreed on a joint contract on June
24 and approved the collective bargaining agreement on August 11.5 The
merger won regulatory approval from the European Union on August 7,
while the US Department of Justice (DOJ) approved the merger on October
29, 2008, effectively merging the two airlines.6 The merged airline is also
called Delta Air Lines and trades using the symbol DAL, Delta’s symbol
prior to the merger.
Investors reacted negatively to the news of a Delta and Northwest
merger (see figs. 5 and 6). While the DARs of the two airlines’ share prices
tend to fluctuate around zero, the CARs of Delta’s share price underper-
formed the S&P 500 by at least 50 percent, losing almost half its value, from
USD 10.48 to USD 5.28 per share, in the 60–trading day period following
the merger announcement, while the CARs of Northwest’s stock price
underperformed the S&P 500 in the same period, losing 44 percent of

its value, from USD 11.22 to USD 6.30. While the slowing US economy in
the last quarter of 2007 (see table 3) may have complicated the impact of
the merger announcement on the share prices of both airlines, the share
prices of Delta and Northwest also underperformed the XAL, suggesting
that the collapse of the share prices of both airlines can be attributed to the
merger announcement. This is because investors tend to associate larger
airlines with massive losses due to the weakening demand for airline travel
40%
20%
0%
-60
-56
-52
-48
-44
-40
-36
-32
-28
-24
-20
-16
-12
12
16
20
24
28
32
36
40
44
48
52
56
60
-8
-4
0
4
8
-20%
-40%
-60%
DAL - S&P daily
DAL - S&P cumulative
-80%
DAL - XAL daily
DAL - XAL cumulative
-100%
Figure 5 Stock Performance of Delta Air Lines (DAL) ±60 days

around the Merger Announcement on April 14, 2008, against the
S&P 500 and XAL
40%
20%
0%
-60
-56
-52
-48
-40
-36
-32
-28
-20
-16
-12
-44
-24
12
16
20
28
32
36
40
48
52
56
60
24
44
-8
-4
0
8
4
-20%
-40%
-60%
NWA - S&P daily
NWA - S&P cumulative
-80%
NWA - XAL daily
NWA - XAL cumulative
-100%
Figure 6 Stock Performance of Northwest Airlines (NWA) ±60

Days around the Merger Announcement on April 14, 2008,
against the S&P 500 and XAL

Table 3/US Gross Domestic Product and Personal Consumption Expenditures,

2007–2008
Growth Rate
2007 2008
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
GDP 0.5% 3.6% 3.0% 1.7% −1.8% 1.3% −3.7% −8.9%
PCE 2.2% 1.5% 1.8% 1.2% −1.0% −0.1% −3.8% −5.1%
Source: US Bureau of Economic Analysis.
as the growth of the US gross domestic product (GDP) falters and personal
consumption expenditures (PCE) slow down.
The substantial losses in the share prices of Delta and Northwest indi-
cate that the market has a negative view of the merger, which may result in
higher costs due to more capacity and departures at a time when demand
for airline travel may be weakening due to the slowing US economy.
A number of negative DARs and CARs of Delta and Northwest are signifi-
cant (see appendix E), indicating that shareholders lost more than the aver-
age losses in the S&P 500. The CARs of Delta and Northwest drifted to the
positive region from the 56th to the 33rd trading day and from the 60th to
the 36th trading day, respectively, before the merger announcement (see
figs. 5 and 6). However, the CARs of the two airlines eventually drifted to
negative territory as their share prices underperformed both the S&P 500
and XAL, indicating that the general sentiment of the market on the Delta
and Northwest merger is negative.
While market reaction to the announcement of a merger between
Delta and Northwest is negative, investor perception changed in the ±60
trading days around the effective merger date. The returns of Delta and
Northwest share prices outperformed the S&P 500 and XAL (see figs. 7
and 8). Perhaps the DOJ approval and the agreements reached with pilots
and other labor groups reassured investors, changing their initial nega-
tive view of the merger and driving the stock price of Delta to more than
USD 10.00 for 36 trading days in the 60–trading day period following the
merger, an appreciation of at least 25 percent from the USD 7.99 closing
price on merger date. Northwest’s stock price closed at USD 11.22 on the
merger announcement date and closed at more than USD 11.22 on seven
trading days before the merger, reaching USD 12.03 on the sixth trading day
prior to the completion of the merger. The positive trend in the CARs of
Delta and Northwest around the merger date suggests that the change in
investor perception may be due to the imminent completion of the merger,
when all uncertainty about the merger has been resolved (Halpern 1983).
The significant DARs and CARs around the merger date also indicate that

120%
DAL - S&P daily
DAL - S&P cumulative
100%
DAL - XAL daily
DAL - XAL cumulative
80%
60%
40%
20%
0%
12
16
20
28
32
36
40
48
52
56
60
24
44
-60
-56
-52
-48
-40
-36
-32
-28
-20
-16
-12
-44
-24
8
4
-8
-4
-20%
-40%
Figure 7 Stock Performance of Delta Air Lines (DAL) ±60 Days around
the Merger Completion on October 29, 2008, against the S&P500 and
XAL
80%
NWA - S&P daily
70%
NWA - S&P cumulative
60%
NWA - XAL daily
50%
NWA - XAL cumulative
40%
30%
20%
10%
0%
-60
-56
-52
-48
-44
-40
-36
-32
-28
-24
-20
-16
-12
12
16
20
24
28
32
36
40
44
48
52
56
60
-8
-4
0
4
8
-10%
-20%
-30%
Figure 8 Stock Performance of Northwest Airlines (NWA) 60 Trading

Days before Its Merger with Delta on October 29, 2008, against the
S&P 500 and XAL
knowledgeable investors benefited from the appreciation of the share

prices of Delta and Northwest (see appendix F).
The beta of Delta for the 61–trading day period [−60, 0] leading to the
merger announcement is 1.55, while its beta for the 61–trading day period
[0, 60] from the announcement date is 2.81, indicating that its stock price

volatility almost doubled following the announcement of its merger with

Northwest. This may be due to the negative market perception regarding
the merger at a time when demand for airline travel is weakening as the
US economy falters (see table 3). The higher beta suggests that Delta’s cost
of capital increased following the merger announcement, decreasing the
present value of its future cash flows that eventually resulted in the under-
performance of its share prices against the S&P 500 and XAL (see fig. 5).
Northwest’s beta is 1.31 in the same period [−60, 0] before the merger
announcement and 3.60 in the same period [0, 60] after the merger announce-
ment, indicating a more volatile share price, perhaps due to Northwest’s
greater dependence on its international operations, which may decline as
the GDP and PCE slow down (see table 3). Northwest’s beta in the 60–trading
day period leading to the merger is 1.10, comparable with Delta’s, indicating
a positive investor perception on its merger with Delta, reflecting the posi-
tive trend of its CARs against the S&P 500 and XAL (see fig. 8).
The beta of Delta for the 61–trading day period [−60, 0] leading to
the merger completion is 0.94, indicating that its stock price volatil-
ity decreased substantially between the announcement date and merger
date. The decrease in Delta’s beta reflects the change in investor percep-
tion leading to the completion of the merger (compare fig. 5 with fig. 7).
Delta’s beta increased to 1.12 in the 61–trading day period [0, 60] following
the merger, however. The slight increase suggests that investor uncertainty
persists regarding the larger operations of Delta following its merger with
Northwest at a time when demand for airline travel may be decreasing as
the US economy weakens, as well as the uncertainty regarding the inte-
gration of the two airlines’ operations, management, and workforce. The
higher beta, nevertheless, did not prevent Delta from outperforming the
S&P 500 and XAL (see fig. 7), indicating that shareholders have a generally
positive view of the merger.
United Airlines and Continental Airlines
The board of directors of United (UAL) approved a stock-swap merger

agreement with Continental (CAL) on May 2, 2010, announcing the agree-
ment the following day.7 The European Commission (EC) and the DOJ
approved the merger on July 29 and August 27, respectively.8 The share-
holders of United and Continental approved the merger on September 17
and on October 1, 2010, United completed its acquisition of Continental.9
The merged entity is also called United Airlines and trades as UAL, United’s
symbol prior to the merger.
Shareholders of United reacted positively to the news of a merger
with Continental (see fig. 9) while Continental’s shareholders were more

c autious, although the stock price outperformed the S&P 500 by more than
30 percent at the end of the 60–trading day period following the merger
announcement (see fig. 10). The CARs of United and Continental against
the XAL show a similar trend, indicating that investors have a generally
positive view of the merger. United’s stock price peaked at USD 24.25 in the
60–trading day period following the merger announcement, an increase
80%
UAL - S&P daily
70% UAL - S&P cumulative
UAL - XAL daily
60%
UAL - XAL cumulative
50%
40%
30%
20%
10%
0%
-60
-54
-51
-48
-45
-42
-39
-36
-33
-30
-24
-21
-18
-15
-12
-57
-27
12
15
18
21
24
30
33
36
39
42
45
48
51
54
60
27
57
-9
-6
-3
0
3
6
9
-10%
-20%
Figure 9 Stock Performance of United Airlines (UAL) ±60 Days

around the Merger Announcement on May 3, 2010, against the
S&P 500 and XAL
40%
CAL - S&P daily
35%
CAL - S&P cumulative
30%
CAL - XAL daily
25%
CAL - XAL cumulative
20%
15%
10%
5%
0%
-60
-56
-52
-48
-44
-40
-36
-32
-28
-24
-20
-16
-12
12
16
20
24
28
32
36
40
44
48
52
56
60
-8
-4
0
4
8
-5%
-10%
-15%
Figure 10 Stock Performance of Continental (CAL) ±60 Days around

the Merger Announcement on May 3, 2010, against the S&P 500
and XAL

of almost 10 percent, three days before the EC gave its nod to the merger
while Continental’s share price peaked at USD 25.65 in the same period,
indicating a positive investor sentiment on the merger. A number of posi-
tive DARs and CARs of United and Continental are significant ±60 trading
days around the announcement date (see appendix G), suggesting that
well-informed investors benefited on the merger announcement as a result
of the airlines’ stock returns outperforming the S&P 500 and XAL.
United’s stock returns fared better against the S&P 500 than against the
XAL (see fig. 11) around the merger date, indicating that most airline stocks
outperformed the broader market in the same period. This may be due to
the improving economic situation in the United States in 2010 as the GDP
shows sustained growth with a robust expansion in PCE compared with the
previous year (see table 4), resulting in higher demand for airline travel.
Table 4/US Gross Domestic Product and Personal Consumption Expenditures,

2009–2010
Growth Rate
2009 2010
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
GDP −5.3% −0.3% 1.4% 4.0% 2.3% 2.2% 2.6% 2.4%
PCE −1.6% −1.8% 2.1% 0.0% 2.5% 2.6% 2.5% 4.1%
Source: US Bureau of Economic Analysis.
35%
UAL - S&P daily
UAL - S&P cumulative
30%
UAL - XAL daily
UAL - XAL cumulative
25%
20%
15%
10%
5%
0%
-60
-56
-52
-48
-40
-36
-32
-28
-20
-16
-12
-44
-24
12
16
20
28
32
36
40
48
52
56
60
24
44
-8
-4
0
8
4
-5%
-10%
Figure 11 Stock Performance of United Airlines (UAL) ±60 Days around Its
Merger with Continental on October 1, 2010, against the S&P 500 and XAL

The stock returns of Continental show a similar trend, reflecting the

trend of United’s stock returns in the 60–trading day period before the
merger (compare figs. 11 and 12). A number of positive DARs and CARs of
United and Continental are significant ±60 trading days around the merger
date (see appendix H), suggesting that investors benefited from the merger
as indicated by the airlines’ stock returns outperforming the S&P 500
and XAL.
The beta of United in the 61–trading day period [−60, 0] leading to the
merger announcement is 2.02, while its beta in the 61–trading day period
[0, 60] from the announcement date is 1.93, indicating that its stock price
volatility slightly improved following the announcement of its merger with
Continental. This suggests that United’s cost of capital slightly decreased
following the merger announcement, increasing the present value of its
future cash flows, resulting in stock returns that outperformed the S&P
500 and XAL (see fig. 9). Continental’s beta is 1.84 in the same period before
merger announcement and 1.75 in the same period after merger announce-
ment, reflecting a slight improvement in its share price volatility, which
also resulted in stock returns that outperformed the S&P 500 and XAL
(see fig. 10). Continental’s beta in the 60–trading day period before the
merger is 0.25, indicating that its share prices barely moved as the merger
nears completion.
15%
CAL - S&P daily
CAL - S&P cumulative

10%
CAL - XAL daily
CAL - XAL cumulative

5%
0%
-60
-56
-52
-48
-44
-40
-36
-32
-28
-24
-20
-16
-12
12
16
20
24
28
32
36
40
44
48
52
56
60
-8
-4
0
4
8
-5%
-10%
Figure 12 Stock Performance of Continental Airlines (CAL) 60 Trading

Days before Its Merger with United on October 1, 2010, against the S&P
500 and XAL

The beta of United in the 61–trading day period [−60, 0] leading to the
merger is 1.40, indicating that its stock price volatility decreased between
the merger announcement and merger completion. United’s beta decreased
further to 1.25 in the 61–trading day period [0, 60] following the merger,
indicating an improving investor perception of the merger as the US econ-
omy recovers (see table 4).
Conclusion
This article has examined the impact of M&As around the merger announce-
ment and merger completion dates using an event study methodology on a
121–trading day observation window.
The impact of the merger announcement on the acquiring airlines’
share prices is mixed. The stock returns of America West and United
outperformed the S&P 500 and XAL, while the stock returns of Delta under-
performed both indices due to the weakening demand for airline travel at
the time of the announcement of its merger with Northwest.
The impact of the merger announcement on target airlines is also
mixed. The stock returns of US Airways underperformed the S&P 500 and
XAL due to its Chapter 11 bankruptcy protection and reorganization at the
time of the announcement of its merger with America West. The stock
returns of Northwest also underperformed both indices due to the weaken-
ing airline travel demand as the US economy faltered in the first quarter of
2008. The stock returns of Continental outperformed both indices, indicat-
ing investor confidence in its merger with United, at a time when the US
economy has started to recover in 2010.
The impact of the merger on the acquiring and target airlines’ share
prices is generally positive. The stock returns of America West (which
became the US Airways Group after acquiring the bankrupt US Airways),
Delta, and United outperformed the S&P 500 and XAL, indicating investor
confidence. The stock returns of Northwest and Continental also outper-
formed the two indices, indicating a positive market perception; while the
stock returns of US Airways underperformed both indices, perhaps due to
its Chapter 11 bankruptcy protection and reorganization, which an immi-
nent merger with America West may not resolve.
The more positive reaction of the market around the merger c ompletion
date compared with the market reaction around the merger announcement
date suggests that new information is available as the merger nears com-
pletion. The results indicate that market perception on the M&As improved

as the effective merger date approached when all uncertainty regarding the
merger has been resolved (Halpern 1983).
Appendices
Appendix A shows selected DARs and CARs of America West’s share
prices. Three asterisks indicate that the abnormal return is significant at
the 1 percent level (highly significant), two asterisks at the 5 percent level,
and one asterisk at the 10 percent level. The complete 121−trading day period
of America West’s DARs and CARs (± 60–trading days around the merger
announcement on May 19, 2005) is available upon request from the corre-
sponding author.
Appendix B shows selected DARs and CARs of US Airways’ share prices.
Three asterisks indicate that the abnormal return is significant at the 1 per-
cent level (highly significant), two asterisks at the 5 percent level, and one
asterisk at the 10 percent level. The complete 121-trading day period of US
Airways’ DARs and CARs (± 60–trading days around the merger announce-
ment on May 19, 2005) is available upon request from the corresponding
author.
Appendix C shows selected DARs and CARs of America West’s share
Appendix A / DARs and CARs of America West around the Merger Announcement
Day DAR CAR
−42 0.054* 0.018
−36 0.079*** 0.142
−12 0.052* 0.012
0 0.081* 0.062
1 0.076** 0.138
40 0.089*** 0.503*
41 0.047* 0.549*
42 0.031 0.580**
43 0.030 0.610**
45 0.030 0.597**
46 0.013 0.610**
47 0.011 0.621**
48 0.019 0.640**
49 −0.020 0.620**
50 0.019 0.639**
51 −0.008 0.631**
52 −0.001 0.630**
53 0.006 0.636**
54 −0.049** 0.587**
55 −0.018 0.569*
56 0.006 0.575**
57 −0.007 0.568*
58 0.009 0.577**
60 −0.020 0.557*

and one asterisk at the 10 percent level. The complete 121-trading day period
of America West’s and the US Airways Group’s (LCC) DARs and CARs
Appendix B / US Airways’ DARs and CARs around the Merger Announcement

Day DAR CAR
−59 −0.034 −0.026*
−46 0.179** −0.241
−21 0.223*** −0.287
0 0.606*** 0.272***
1 −0.232*** 0.040**
7 0.089 0.010*
10 −0.010 −0.044*
11 0.016 −0.027*
13 0.014 −0.014*
14 −0.016 −0.030*
15 −0.009 −0.039*
17 0.021 −0.032*
18 −0.002 −0.034*
19 −0.015 −0.049
21 0.035 −0.019*
22 −0.031 −0.051
23 0.011 −0.039*
24 0.022 −0.017*
25 −0.004 −0.021*
26 −0.011 −0.031*
27 0.025 −0.006*
28 −0.032 −0.038*
29 −0.131* −0.169
30 −0.123* −0.291
Appendix C / DARs and CARs of America West and the US Airways Group around
the Merger
Day DAR CAR
−59 −0.007 −0.011**
−58 −0.003 −0.015**
−57 0.009 −0.005**
−56 0.052* 0.046*
−55 −0.017 0.029**
−54 0.015 0.044*
−53 0.065** 0.109
−50 0.089*** 0.207
−49 0.047* 0.254
−20 −0.043* 0.196
−17 −0.044** 0.109
−11 0.063** 0.178
−8 −0.002 0.139
−7 0.071** 0.209
−5 0.065** 0.280
−4 0.036 0.316
−2 0.046* 0.355*
−1 0.023 0.378*
25 0.017 0.278
26 0.091* 0.369
59 0.002 0.591
60 0.031 0.622*

(± 60–trading days around the merger on September 27, 2005) is available

upon request from the corresponding author.
Appendix D shows selected DARs and CARs of US Airways’ share
and one asterisk at the 10 percent level. The complete 60–trading day period
of US Airways’ DARs and CARs before the merger on September 27, 2005 is
available upon request from the corresponding author.
Appendix E shows selected DARs and CARs of Delta’s and Northwest’s
share prices. Three asterisks indicate that the abnormal return is signifi-
cant at the 1 percent level (highly significant), two asterisks at the 5 percent
level, and one asterisk at the 10 percent level. The complete 121–trading day
period of Delta’s and Northwest’s DARs and CARs (± 60 trading days around
the merger announcement on April 14, 2008) is available upon request from
the corresponding author.
Appendix F shows selected DARs and CARs of Delta’s and Northwest’s
share prices. Three asterisks indicate that the abnormal return is
significant at the 1 percent level (highly significant), two asterisks at the
5 percent level, and one asterisk at the 10 percent level. The complete
121–trading day period of Delta’s (± 60–trading days around the merger on
October 29, 2008) and the 60–trading day period of Northwest’s DARs and
Appendix D / US Airways’ DARs and CARs before the Merger

Day DAR CAR
−60 −0.123* −0.123
−58 0.095* −0.074
−33 −0.187*** −0.401
−28 −0.105* −0.525
−22 −0.160** −0.795*
−21 −0.057 −0.852*
−20 −0.139** −0.991**
−19 0.080 −0.911*
−18 0.026 −0.885*
−17 −0.036 −0.920*
−16 −0.033 −0.953**
−15 0.024 −0.929**
−14 0.051 −0.878*
−13 −0.098 −0.976**
−12 −0.027 −1.002**
−11 0.039 −0.963**
−10 −0.048 −1.011**
−9 −0.252*** −1.263**
−8 0.105* −1.158**
−7 0.301*** −0.857*
−6 0.296*** −0.560
−4 −0.152** −0.831*
−2 −0.104* −0.939**
−1 −0.301*** −1.240**

Appendix E / DARs and CARs of Delta and Northwest around the Merger
Announcement
Delta Air Lines
Day DAR CAR
−49 0.089** 0.146**
−46 0.062 0.169**
−45 0.022 0.191**
−44 −0.012 0.179**
−43 −0.016 0.163**
−27 0.085* −0.050
0 0.050 −0.311
1 −0.131** −0.441
6 −0.162*** −0.750
27 −0.148*** −0.884
30 0.070* −0.850
32 0.081* −0.818
Northwest Airlines
Day DAR CAR
−52 0.030 0.082**
−46 0.046 0.112**
−45 −0.006 0.106**
−44 0.002 0.107**
−2 0.122** −0.377
0 0.027 −0.322
8 0.103* −0.687
11 0.232*** −0.493
30 0.129** −0.762
37 0.130** −0.593
47 0.157** −0.592
59 0.293*** −0.468
CARs before the merger are available upon request from the correspond-
ing author.
Appendix G shows selected DARs and CARs of United’s and
Continental’s share prices. Three asterisks indicate that the abnor-
mal return is significant at the 1 percent level (highly significant), two
asterisks at the 5 percent level, and one asterisk at the 10 percent level.
The complete 121–trading day period of United’s and Continental’s
DARs and CARs (±60–trading days around the merger announcement
on May 3, 2010) is available upon request from the corresponding
author.
Appendix H shows selected DARs and CARs of United’s and
Continental’s share prices. Three asterisks indicate that the abnormal
return is significant at the 1 percent level (highly significant), two asterisks
at the 5 percent level, and one asterisk at the 10 percent level. The complete
121–trading day period of United’s (± 60–trading days around the merger

on October 1, 2010) and the 60–trading day period of Continental’s DARs

and CARs before the merger are available upon request from the
corresponding author.
Appendix F / DARs and CARs of Delta and Northwest around the Merger
Delta Air Lines
Day DAR CAR
−43 0.104* 0.000*
−42 0.006 0.007*
−41 0.132** 0.139
−31 0.217*** 0.295
−20 0.152** 0.209
−10 0.103* 0.344
−9 0.146** 0.489
1 0.169*** 0.581
2 0.134** 0.715
3 0.052 0.767
19 0.135** 0.602
26 0.130** 0.805
Northwest Airlines
Day DAR CAR
−43 0.112* 0.020
−42 0.005 0.024
−41 0.146** 0.170
−31 0.177*** 0.284
−20 0.167** 0.250
−13 0.102* 0.156
−11 0.080 0.274
−10 0.105* 0.379
−9 0.149** 0.528**
−8 0.035 0.563**
−6 0.083 0.635***
−5 0.048 0.683***
Appendix G / DARs and CARs of United and Continental around the Merger
Announcement
United Airlines
Day DAR CAR
−57 0.162*** 0.181
−45 0.094*** 0.265
−17 0.064** 0.369
−12 0.052* 0.503
−6 0.052* 0.478
0 0.010 0.457
21 0.100*** 0.557
50 0.012 0.617*
56 0.024 0.624*
57 0.000 0.624*
58 0.045 0.669*
60 0.010 0.658*
(Continues)

Appendix G / DARs and CARs of United and Continental around the Merger
Announcement (Continued )
Continental Airlines
Day DAR CAR
−57 0.091*** 0.043
−54 0.046* 0.066
−45 0.041* 0.090
−38 0.047* 0.085
−37 0.046* 0.131
−15 0.068** 0.127
−5 0.049* 0.117
0 0.010 0.121
5 0.040* 0.043
17 0.056** 0.166
21 0.085*** 0.218
41 0.042* 0.262
Appendix H / DARs and CARs of United and Continental around the Merger
United Airlines
Day DAR CAR
−59 0.034* 0.048
−57 0.032* 0.082
−52 0.037* 0.084
−48 0.045** 0.146
−38 0.035* 0.094
−8 0.051** 0.103
0 0.040** 0.149
4 0.032* 0.180
7 0.032* 0.219
13 0.065*** 0.239*
18 0.041** 0.303**
38 0.031* 0.282**
Continental Airlines
Day DAR CAR
−59 0.030* 0.057
−58 0.003 0.059
−57 0.030* 0.089
−56 0.013 0.102
−52 0.031* 0.089
−48 0.047** 0.140
−38 0.032* 0.085
−25 0.023 0.005
−24 0.025 0.030
−8 0.052*** 0.088
−2 0.018 0.079
−1 0.016 0.095
Notes
We would like to thank the anonymous referees for helping us improve the final version
of our paper. We would also like to thank Andrew Wilson and Izyan Ishak, our research
assistants, for helping us gather data and related information for our research.
This article is a revised and expanded version of a paper entitled “The Impact of
Airline Mergers on Shareholder Wealth” presented at the 16th Air Transport Research
Society World Conference, Tainan, Taiwan, June 27–30, 2012.
1. Index Options—Contract Specifications Airline Index—XAL, http://www.nasdaq
.com/options/indexes/xal.aspx (accessed April 25, 2014).

2. Wikipedia, s.v. “America West Holdings,” http://en.wikipedia.org/wiki/Amer-

ica_West_Holdings; Dan Reed and Barbara De Lollis, “America West, US Airways
Merger Goes for a Tight Fit,” USA Today, May 19, 2005, http://www.usatoday.com/
money/biztravel/2005-05-19-merger_x.htm (accessed on June 10, 2011).
3. Wikipedia, s.v. “America West Holdings.”
4. Wikipedia, s.v. “Delta Air Lines–Northwest Airlines Merger,” http://en.wikipedia
.org/wiki/Delta_Air_Lines-Northwest_Airlines_merger; “Delta, Northwest Deal to
Create World's Largest Airline,” CNBC.com, April 14, 2008, http://www.cnbc.com/
id/24116243 (accessed on July 15, 2011).
5. “Delta/Northwest Merger,” CNBC.com, April 24, 2008, http://video.cnbc.com/
gallery/?video=721348818; “Delta and Northwest Pilots Agree on Joint Contract,” CNBC.
com, June 24, 2008, http://www.cnbc.com/id/25353835 (accessed on July 15, 2011).
6. Wikipedia, s.v. “Delta Air Lines–Northwest Airlines Merger” (accessed on July
15, 2011); Zoë Casey, “EU approves US airlines merger,” europeanvoice.com,
August 7, 2008, http://www.europeanvoice.com/article/2008/08/eu-approves-
us-airlines-merger/61985.aspx (accessed April 25, 2014); Martin Moylan, “Justice
Department approves Northwest-Delta merger Business,” mprnews.org, October
29, 2008, http://www.mprnews.org/story/2008/10/29/northwest_delta_merger_
approved (accessed April 25, 2014). http://www.cnbc.com/id/27440244/for/cnbc/.
7. Wikipedia, s.v. “United Continental Holdings,” http://en.wikipedia.org/wiki/
United_Continental_Holdings; Scott Mayerowitz, “Continental-United Airlines
Merger Could ‘Send Airfares Skyward,’” ABC News, May 3, 2010, http://abcnews
.go.com/Travel/united-airlines-continental-merger-means-higher-airfare-passen-
gers/story?id=10520290 (accessed on July 18, 2011).
8. Mergers: Commission approves merger between United Air Lines and C ontinental
Airlines, europa.com, http://europa.eu/rapid/press-release_IP-10-1010_en.htm
(accessed April 25, 2014); Jad Mouawad, “United-Continental Merger Clears Fed-
eral Hurdle,” nytimes.com, http://www.nytimes.com/2010/08/28/business/28air
.html?_r=0 (accessed April 25, 2014) ; Theresa Gutierrez, “Reports: Boards Approve
United-Continental Merger,” ABC News, May 2, 2010, http://abclocal.go.com/wls/
story?section=news/local&id=7418546 (accessed on July 18, 2011).
9. Wikipedia, s.v. “United Continental Holdings”; http://www.iam141.org/merger/
index.html (accessed on July 18, 2011).
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Merger Activity and Short-Run Financial Performance in the US Airline Industry

Author(s): Wilfred S. Manuela Jr. and Dawna L. Rhoades

Wilfred S. Manuela Jr. Transportation Journal, Vol. 53, No. 3, 2014

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Mergers and Acquisitions in the United States

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Airline Mergers and Acquisitions in the United States

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Source: Airline websites.

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a long-term success. Piedmont and US Airways, which merged in 1989, has

Table 2/Analysts’ Opinions on Airline Consolidation

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“unambiguous positive” (Chase 2010), most investors view consolidation as

Hypothesis 1: The merger results in positive abnormal returns for

Data and Method

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where Eε it = 0 and Varεit = σ ε2it

The market-adjusted returns model is specified as:

Ait = Rit − R mt for i = 1 to n (2)

Appendices A to H show the statistical significance, using the

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Results and Analysis

America West and US Airways

America West (AWA) and US Airways (UAIR) officially announced their

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Figure 2 Stock Performance of US Airways (UAIR) ±60 Days around the

Figure 3 Stock Performance of America West (AWA) 60 Trading

the completion of the merger. America West’s stock price outperformed

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Figure 4 Stock Performance of US Airways (UAIR) 60 Trading Days

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Delta Air Lines and Northwest Airlines

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Figure 5 Stock Performance of Delta Air Lines (DAL) ±60 days

Figure 6 Stock Performance of Northwest Airlines (NWA) ±60

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Table 3/US Gross Domestic Product and Personal Consumption Expenditures,

Source: US Bureau of Economic Analysis.

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Figure 8 Stock Performance of Northwest Airlines (NWA) 60 Trading

knowledgeable investors benefited from the appreciation of the share

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volatility almost doubled following the announcement of its merger with

United Airlines and Continental Airlines

The board of directors of United (UAL) approved a stock-swap merger

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Figure 9 Stock Performance of United Airlines (UAL) ±60 Days

Figure 10 Stock Performance of Continental (CAL) ±60 Days around

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Table 4/US Gross Domestic Product and Personal Consumption Expenditures,

Source: US Bureau of Economic Analysis.

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The stock returns of Continental show a similar trend, reflecting the

CAL - S&P cumulative

CAL - XAL cumulative

Figure 12 Stock Performance of Continental Airlines (CAL) 60 Trading

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Appendix B / US Airways’ DARs and CARs around the Merger Announcement