Toward a consolidation of the European Airline Sector: the potential merger between ITA and LuftHansa

The purpose of this study is to assess the impact of Lufthansa's bid to acquire the Italian airline ITA Airways. On the basis of different scenarios, we aim to estimate the impact on the supply of air products and on consumers. To simulate the impact of such a merger on the European market, we rely on standard structural models of demand and supply used in the empirical IO literature. Since Berry (1994), many papers have used them to estimate demand in various sectors, including the airline sector, mostly at the US level. In particular, Berry et al. (2006) use a random coefficients model to study the role of hubs, while Berry and Jia (2010) compare the years 1999 and 2006. We want to compare the variation in consumer surplus and equilibrium fares under different scenarios. In particular, we need to model different possibilities for the range of products offered by the new merged entity. We also want to compare these scenarios with others in which ITA Airways could have merged with another airline, such as Air France. In our paper, in our attempt to simulate the impact of the merger on consumer surplus and fares, we face an additional challenge due to the possibility of repositioning the products offered by the competitors of ITA Airlines and LuftHansa. A particular feature of the European market is the presence of many low-cost carriers. These airlines are more likely to react to a reduction in the number of competitors and we need to model their strategies too.