So, all the airlines are talking mergers. The investors–especially big institutional investors like hedge funds–are happy, because stocks tend to do a sort of happy-dance after a merger, and right now airline stocks are dancing to a dirge. With mergers, there are tons of issues to discuss: labor, antitrust, operations. Lots of people will make big money off airline industry consolidation. Although I remain skeptical that total consolidation is inevitable, there is at least one recent policy change that will probably make mergers easier. (I’d say what it is, but I have an article coming out on the subject and don’t want to scoop myself.)
I also remain skeptical of the added value of a merger. The new US Airways, the only major merger to go through in the past several years, is a case in point. For the first several months after the merger in September 2005, the stock price climbed. This usually happens to post-merger airlines; for some reason, the market is euphoric about them. The US Airways rally continued through 2006 and into 2007, during a failed bid by the airline to buy then-emerging-from-bankruptcy Delta. (The markets were hot about that one too, and analysts heralded the long-awaited industry consolidation. Oops.)
Then, throughout 2007, US Airways stock tanked. It performed abysmally, and the airline didn’t perform so hot either. It took a year and a half to merge the US Airways and America West reservations and booking systems. Its two pilot groups are nowhere near agreeing on a master seniority list, and morale among the old US Airways folks is plummeting. Keep in mind that America West’s management took over the most dysfunctional airline in the country when they bought US. Then throw in a summer of record delays, oil climbing up to $100 per barrel (and stepping on airline stocks all the way), and a looming recession, and the US Airways stock decline makes sense. One might ask, where’s the value? I suspect the hit to US isn’t in the rising costs of oil so much as in the challenges of the merger process. Once the initial stock euphoria–extended by the US Airways bid for Delta–ended, investors saw that the merger didn’t create as much value as thought.
So when the chattering classes go on about how great airline consolidation will be, check the numbers and the facts first. The happy-dance band only plays for so long.