The Wall Street Journal-20080116-Business World- Why Airline Mergers Now-
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Business World: Why Airline Mergers Now?
Consolidation in the air is once again in the air, so to speak. But is the business case for airline mergers any stronger today than two years ago, when this column rained on a similar parade?
US Airways' Doug Parker, ironically one of the most consistent voices in favor of consolidation, recently offered in a conference call a hymn of praise to his competitors for aggressively cutting capacity to protect margins despite softening traffic.
He placed his finger accurately on the recurrent source of airline grief -- too many seats chasing too few passengers in a travel slump. Downturns in the last 15 years have twice wiped out all the profits the industry earned since Wilbur and Orville put wings on a bicycle. Yet now Mr. Parker says his fellow skippers' latest efforts to keep available seats in line with demand represent a "pivotal and probably momentous change in our industry."
If airlines are able (for once) to maintain margins in a slump, what's the urgency of consolidation? Good question.
Mergers have been touted for decades as a cure for airline woes. But the costs and pain of a merger -- including labor strife and incompatible fleets and maintenance routines -- are borne by the merging parties, while the alleged benefits -- less competition, higher fares -- are shared equally by competitors.
Why be the sucker in this scenario?
A few costs at headquarters and the gate might be reduced, but how would a merger cut fuel or crew costs? Planes already are flying 80% to 85% full, leaving little scope for consolidation of passenger loads.
And parking planes in the desert is a quicker, cheaper way to reduce capacity in a travel recession. It's hard to see how consolidation would help much here, in the short term anyway.
So why the merger talk?
United's Glenn Tilton has been a chief perpetrator, but United has been at a loss about how to control costs (read pilots) well enough to avoid falling back into bankruptcy. And Delta is under pressure from hedge funds to seek a deal with either United or Northwest, though Delta's board could yet shrink from a tie-up. Both airlines are special cases -- with shareholders and/or executives eager to trigger a "liquidity event" to get out of their stock positions.
Yet now comes the backflip. On the radar screen are two new motivations for mergers -- one good, the other a national disaster in the making.
In March, a new "Open Skies" arrangement with the European Union will allow U.S. carriers to fly at will across the Atlantic, and between European airports. Somebody somewhere in airline suites undoubtedly is thinking how to get ahead in the scramble to reorganize his feeder networks and international gateways to capture a bigger share of this high-margin traffic.
Another reason mergers may finally be on the in-flight menu is a less happy one -- the U.S. air travel system's catastrophic devolution toward capacity-rationing by delay.
Blame the FAA. Over the past 20 years, the agency has been utterly defeated by its own bureaucratic and budgetary unsuitability to manage the complex technological upgrades required to keep pace with traffic growth. The consequences are already visible. Network airlines are withdrawing service, even profitable service, from smaller cities because it displaces more profitable traffic at congested hubs.
Airline execs have been predicting for years that rationing was just around the corner. The corner has arrived. The agency simply can't accommodate the billion passengers that, at current growth rates, would be seeking to fly in 2015. Economic prosperity and travel demand no longer will determine the size of the aviation market. There will only be as much flying as the FAA's antiquated systems can permit.
Ill is the wind that doesn't blow somebody a kiss, and such an environment is naturally more conducive to oligopoly pricing. Straitened capacity and growing politicization of the process by which take-off and landing slots are meted out will tend to favor incumbents over startups and interlopers, such as the low-cost carriers that once kept fares down and undermined any claim that consolidation among the majors might bring less competition.
Blame Congress. Presidents of both parties have argued for liberating the ATC system from the congressional budget morass, but Congress is loath to give up its vast patronage privileges. William Ris, head of government relations for American Airlines, points to a related problem: Lawmakers "react first as customers and only secondly as policy makers."
Congressional leaders fly constantly, and are no more analytical than the arthritic grandmother stuffed into seat 23A about the reasons for delays and cancellations. Instead, we get angry hearings blaming the airlines for "overscheduling." We get people like Chuck Schumer haranguing Delta for canceling service to Binghamton. We get Barbara Boxer telling airlines when they must taxi back to the terminal and let passengers get off a plane whose takeoff has been delayed, though the cause of delays is usually the ATC system.
Blame the airlines. The major carriers have gone AWOL in the fight for a reformed FAA. After 20 years of frustration, they no longer lobby or argue the case within hearing of the public. When the final meltdown occurs, expect the big incumbents cheerfully to repair to a congressional smoke-free room and divide up the system's limited capacity to the benefit of the big incumbents.
