GogglesPisano
Pawn, in game of life
- Joined
- Oct 20, 2003
- Posts
- 3,939
Nice to see not every pundit is buying into this hype. Hopefully cooler heads will prevail and it will all go away.....
From BusinessWeek.com
Consolidation Stays on the Runway
Expectations of airline merger mania may be overblown. Local opposition, antitrust laws, and issues of control may keep airlines taxiing
by Dean Foust
For years, pundits have predicted a sweeping wave of consolidation in the airline business that would pare down the roughly 130 carriers that now fly the U.S. skies to a smaller group of companies. When US Airways Group (LCC) announced a hostile bid for Delta Air Lines in mid-November, it looked as if the long-awaited day of consolidation might finally occur (see BusinessWeek.com, 11/16/06, "Delta Creditors Man the Cockpit"). And published reports on Dec. 13 that United Airlines (UAUA) and Continental Airlines (CAL) were also in talks further fed speculation that merger mania was now at hand.
There are some powerful incentives for airlines to combine. Despite cutbacks by the major carriers in recent years, the industry is still glutted with too many planes flying too many routes between too many hubs—all of which conspire to crimp airline profits. "I believe the value of mergers is undisputed: There's still too much capacity in this industry," says Roger King, an airlines analyst for CreditSights, an institutional research firm based in New York. "Some of these hubs and routes need to be taken out and mergers are a way to do that."
Feeling the Pressure
And if one major merger occurs, other carriers may feel an urgency to partner up to make sure they're not left behind with an inferior route structure and too few expansion opportunities. "I think this is clearly a situation where no one wants to be left out," says Robert Fornaro, president of AirTran Holdings (AAI), the parent of AirTran Airways, which on Dec. 13 made an unsolicited $288 million bid for Midwest Air Group's (MEH) Midwest Airlines. "You can debate the merits of consolidation, but if it happens, no one wants to be left out," (see BusinessWeek.com, 11/16/06, "Now Boarding: Merger Mania").
But for all of the logic behind some of these deals, there are also several reasons not to consider consolidation a foregone conclusion—at least not on a scale that the fee-chasing investment bankers behind the news leaks would like to see. Before any airlines can partner up, they would first have to negotiate an imposing gauntlet of opposition: Pilots' unions who fear job losses and less opportunity for promotion when their airline combines with another. State lawmakers and attorneys' general who worry that mergers would result in the closing of smaller hubs like Charlotte, N.C., and Cleveland, and cutbacks in flights to smaller markets like Augusta, Ga., or Butte, Mont.
And not least, airlines will have to convince antitrust regulators who fear that mega-mergers like US Airways-Delta and United-Continental might result in sharply higher fares for consumers and monopoly control of too many airports. Indeed, experts note that the Justice Dept. already has a history of blocking large-scale mergers, as it did when it filed suit to block a proposed marriage between US Airways and United back in 2000, and similarly, when it blocked Northwest Airlines in 1998 from buying a controlling stake in Continental. "I think we could see several attempts at mergers, but I'm skeptical as to how successful they will be because of these antitrust issues," says Scott Hamilton, an aviation consultant in Issaquah, Wash.
Bankruptcy Blues
For their part, some airline executives would be quick to note that their industry has bled billions in red ink over the past five years, in part as the flying public enjoyed historically low fares. Many executives believe regulators could be appeased, if only with the argument that carriers that are larger and more financially stable will be less apt to fall into bankruptcy—and in turn, dump their pensions on the taxpayer-backed Pension Benefit Guaranty Corp. That's what most every airline who has filed Chapter 11 in recent years has done. "Consumers may be worried about higher fares, but they should think about how much bankrupt airlines are costing them every time they write the taxman a check every April 15th," says Gordon Bethune, the retired chairman of Continental.
Still, other industry watchers believe that argument by itself may not be sufficient to persuade antitrust officials. While acquisitive airlines will certainly volunteer to sell off overlapping routes—as US Airways has done in its bid for Delta—the prospect of further consolidation leaves fewer and fewer airlines able to step forward and scoop up the crumbs. Hamilton notes that if Continental and United were to join, the combined airline would likely offer to divest Continental's hub in Guam as a move to protect United's superior network in the Pacific Rim. But Hamilton believes that no other airline would likely bid for Continental's Guam franchise—a prospect that would leave United and Continental executives unable to convince regulators that competition was being maintained. "The fewer carriers there are, the fewer competitors that are left to pick up any divested assets," says Hamilton.
But even before any deals reached the desks of Justice Dept. officials, experts believe the airlines would first have to overcome political opposition from a Democratic Congress, as well as state officials terrified of losing jobs and air service into smaller markets. Rep. James L. Oberstar (D-Minn.), who is poised to become chairman of the House Transportation and Infrastructure Committee in January, has signaled his concern that combining the airlines could erode competition and increase fares. (On that concern, Oberstar opposed the United-US Airways merger in 2000).
Expect Delays
But the bigger political threat may come from state politicians who would likely sue unless airlines made concessions that protected hubs and service. "Every attorney general in every state is going to say, 'I'll oppose your deal unless you guarantee that you won't reduce flights over the next five years,' " predicts Mike Boyd, an aviation consultant in Evergreen, Colo. While state officials may not prevail in such suits, they could nonetheless snarl the mergers in court long enough to eventually force frustrated airline executives to walk away from a deal.
And not least, another obstacle to consolidation is the thorny issue of which management team runs the combined airline. Continental and United have approached each other periodically over the past several years about a potential marriage, but have always parted ways when neither side was willing to cede control to the other management team. "These executives have pulled their airlines through 9/11, in some cases bankruptcy, they're just starting to show profits again, and their [stock] options are up," notes King. Which means that the kabuki dance within the airline industry could continue for a while longer.
From BusinessWeek.com
Consolidation Stays on the Runway
Expectations of airline merger mania may be overblown. Local opposition, antitrust laws, and issues of control may keep airlines taxiing
by Dean Foust
For years, pundits have predicted a sweeping wave of consolidation in the airline business that would pare down the roughly 130 carriers that now fly the U.S. skies to a smaller group of companies. When US Airways Group (LCC) announced a hostile bid for Delta Air Lines in mid-November, it looked as if the long-awaited day of consolidation might finally occur (see BusinessWeek.com, 11/16/06, "Delta Creditors Man the Cockpit"). And published reports on Dec. 13 that United Airlines (UAUA) and Continental Airlines (CAL) were also in talks further fed speculation that merger mania was now at hand.
There are some powerful incentives for airlines to combine. Despite cutbacks by the major carriers in recent years, the industry is still glutted with too many planes flying too many routes between too many hubs—all of which conspire to crimp airline profits. "I believe the value of mergers is undisputed: There's still too much capacity in this industry," says Roger King, an airlines analyst for CreditSights, an institutional research firm based in New York. "Some of these hubs and routes need to be taken out and mergers are a way to do that."
Feeling the Pressure
And if one major merger occurs, other carriers may feel an urgency to partner up to make sure they're not left behind with an inferior route structure and too few expansion opportunities. "I think this is clearly a situation where no one wants to be left out," says Robert Fornaro, president of AirTran Holdings (AAI), the parent of AirTran Airways, which on Dec. 13 made an unsolicited $288 million bid for Midwest Air Group's (MEH) Midwest Airlines. "You can debate the merits of consolidation, but if it happens, no one wants to be left out," (see BusinessWeek.com, 11/16/06, "Now Boarding: Merger Mania").
But for all of the logic behind some of these deals, there are also several reasons not to consider consolidation a foregone conclusion—at least not on a scale that the fee-chasing investment bankers behind the news leaks would like to see. Before any airlines can partner up, they would first have to negotiate an imposing gauntlet of opposition: Pilots' unions who fear job losses and less opportunity for promotion when their airline combines with another. State lawmakers and attorneys' general who worry that mergers would result in the closing of smaller hubs like Charlotte, N.C., and Cleveland, and cutbacks in flights to smaller markets like Augusta, Ga., or Butte, Mont.
And not least, airlines will have to convince antitrust regulators who fear that mega-mergers like US Airways-Delta and United-Continental might result in sharply higher fares for consumers and monopoly control of too many airports. Indeed, experts note that the Justice Dept. already has a history of blocking large-scale mergers, as it did when it filed suit to block a proposed marriage between US Airways and United back in 2000, and similarly, when it blocked Northwest Airlines in 1998 from buying a controlling stake in Continental. "I think we could see several attempts at mergers, but I'm skeptical as to how successful they will be because of these antitrust issues," says Scott Hamilton, an aviation consultant in Issaquah, Wash.
Bankruptcy Blues
For their part, some airline executives would be quick to note that their industry has bled billions in red ink over the past five years, in part as the flying public enjoyed historically low fares. Many executives believe regulators could be appeased, if only with the argument that carriers that are larger and more financially stable will be less apt to fall into bankruptcy—and in turn, dump their pensions on the taxpayer-backed Pension Benefit Guaranty Corp. That's what most every airline who has filed Chapter 11 in recent years has done. "Consumers may be worried about higher fares, but they should think about how much bankrupt airlines are costing them every time they write the taxman a check every April 15th," says Gordon Bethune, the retired chairman of Continental.
Still, other industry watchers believe that argument by itself may not be sufficient to persuade antitrust officials. While acquisitive airlines will certainly volunteer to sell off overlapping routes—as US Airways has done in its bid for Delta—the prospect of further consolidation leaves fewer and fewer airlines able to step forward and scoop up the crumbs. Hamilton notes that if Continental and United were to join, the combined airline would likely offer to divest Continental's hub in Guam as a move to protect United's superior network in the Pacific Rim. But Hamilton believes that no other airline would likely bid for Continental's Guam franchise—a prospect that would leave United and Continental executives unable to convince regulators that competition was being maintained. "The fewer carriers there are, the fewer competitors that are left to pick up any divested assets," says Hamilton.
But even before any deals reached the desks of Justice Dept. officials, experts believe the airlines would first have to overcome political opposition from a Democratic Congress, as well as state officials terrified of losing jobs and air service into smaller markets. Rep. James L. Oberstar (D-Minn.), who is poised to become chairman of the House Transportation and Infrastructure Committee in January, has signaled his concern that combining the airlines could erode competition and increase fares. (On that concern, Oberstar opposed the United-US Airways merger in 2000).
Expect Delays
But the bigger political threat may come from state politicians who would likely sue unless airlines made concessions that protected hubs and service. "Every attorney general in every state is going to say, 'I'll oppose your deal unless you guarantee that you won't reduce flights over the next five years,' " predicts Mike Boyd, an aviation consultant in Evergreen, Colo. While state officials may not prevail in such suits, they could nonetheless snarl the mergers in court long enough to eventually force frustrated airline executives to walk away from a deal.
And not least, another obstacle to consolidation is the thorny issue of which management team runs the combined airline. Continental and United have approached each other periodically over the past several years about a potential marriage, but have always parted ways when neither side was willing to cede control to the other management team. "These executives have pulled their airlines through 9/11, in some cases bankruptcy, they're just starting to show profits again, and their [stock] options are up," notes King. Which means that the kabuki dance within the airline industry could continue for a while longer.
