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Archive for April, 2008

Now that Continental has turned down suitor United, the latter is weighing a desperation move: merging with US Airways to create the world’s new largest airline (surpassing Delta-Northwest, assuming that goes through). The airlines may announce a tie-up within the next fortnight. Therefore, it’s time for another Merger Mania 2008 antitrust evaluation.

As you’ll remember from several months ago, there are a few key criteria by which the Justice Department will assess this merger:

  • Would a merger result in a significantly more concentrated market?
  • Would a merger raises concern about potential adverse competitive effects?
  • Would competitors be likely to enter concentrated markets in a timely manner and sufficiently to deter or to counteract the competitive effects of concern?
  • What efficiency gains does a merger offer?
  • But for a merger, will either party to the transaction would be likely to fail?

United and US Airways are unlike Delta-Northwest and United-Continental in that they are both concentrated in similar parts of the country: the West, the Northeast, and the South. Look at the map below:

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  • The big news of the day is that — contrary to many expectations — Continental Airlines has decided not to pursue a merger. CEO Larry Kellner conveyed the board’s decision in a letter to employees yesterday. This is probably the best decision Continental could have made here. [AP via MSNBC; see also PlaneBuzz and Today in the Sky]
  • The Italian government’s €300 million “bridging loan” to flailing Alitalia is coming under European Commission scrutiny as “illegal state aid.” [ATW Daily News]
  • The Senate has reached a compromise on the long-awaited FAA reauthorization bill by raising business-jet fuel taxes to increase that sector’s share of funding for the national airspace system. [Aero-News.Net]
  • Foreigners are photographed and printed when they enter the United States . . . and now Homeland Security wants the same when they leave. And they want the airlines to do it. [BNET Travel Industry]

Image credit: Flickr user Cubbie_n_Vegas. Used through a Creative Commons License.

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“. . . wrote St. Paul, ‘but not all things are profitable.’ And so it is with the proposed merger of Delta Air Lines and Northwest Airlines.”

My new op-ed on the Delta-Northwest merger is up on American.com.

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Joke circulating among Northwest pilots: “They’re going to incorporate elements of both corporate identities in the merger. From Delta, we get ‘Delta.’ From Northwest, we get ‘Airlines.’”

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Notes: I am leaving out redundant passages, which often occur in congressional hearings. Unless something is in quotation marks, it is a paraphrase of what a speaker is saying. Editorial comments are so noted.

The antitrust task force of the House Judiciary Committee is having a hearing to assess airline competition and the proposed merger between Delta and Northwest. Representative John Conyers (D-Mich.) is presiding. His opening remarks are meant to put the discussion in context. Claims to have an open mind. “We’ve had a recent history of widespread deregulation. . . . [Since deregulation,] We’ve gone from a highly competitive structure to an oligopoly.” Lists the typical litany of airline woes. “Culture where business executives have opted frequently to, resorting to bankruptcy to avoid their labor obligations” while enriching themselves. “So we live in a time when organized labor and the idea of collective bargaining are faced with some pretty stiff barriers to organization . . . aided and abetted by an administration that usually sides with business on major issues.” Mentions income inequality, lack of health insurance, poor retirees. [What does this have to do with airline competition? -ed.]

Conyers says that the antitrust division at the Justice Department approves mergers “right and left,” claims it has not blocked or modified any merger in the last seven years. “All I’m suggesting is we need to consider where this merger will take us. I’m afraid that if [it] is approved, it will result in a cascade of other mergers — United-Continental, American-US Airways. . . . If the merger is rejected, we could end up with more airlines in bankruptcy, negating more union contracts.”

Questions to be addressed: Is there a rush to process this merger? What guarantees can we give NWA pilots that they will not be disadvantaged by merger? How will merger affect hub communities, small communities, and the flying public.

Now we get to Steve Chabot‘s (R-Ohio) opening remarks. He praises Delta’s contribution to the Cincinnati-area economy and recites the litany of financial challenges to the airline industry. “Free market principles tell us that competition is what makes markets thrive.” (He adds that Cincinnati has the highest fares in the country. [Lack of competition -ed.].) Wants to talk about “fair pricing” policies.

Now Lamar Smith (R-Texas). Delta-Northwest would be one of the world’s largest airlines but would not dominate aviation. Gets the distinction between city pairs and nonstop city pairs wrong. (More on this later.) Steve Cohen (D-Tenn.), my old congressman, says that his main concern is the NWA hub in Memphis. “We lost our free throws; we don’t want to lose our hubs.” Jim Sensenbrenner (R-Wisc.) expresses his concern over NWA’s stake in Midwest Airlines, his popular hometown carrier.

Conyers introduces Northwest CEO Douglas Steenland. [Is it just me or does he look like Dr. Z? -ed.] Then John Lewis (D-Ga.), a merger fan, introduces Delta’s Richard Anderson.

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As expected, the British Competition Commission released its interim report on competitive effects of BAA’s ownership of several UK airports (accounting for more than 60 percent of UK travelers), including most of the capacity in greater London and lowland Scotland. The conclusion?

The CC is inclined to the view that common ownership of the BAA airports is a feature of the market that adversely affects competition between airports and/or airlines. It is also inclined to the view that shortage of airport capacity, government policy and the regulatory system for airports might also be features that adversely affect competition or exacerbate other features which do so.

Among the key points in the CC’s very long report, which I plan to digest over the next couple of days, is the conclusion that the capacity constraints at BAA’s London airports have impaired competition, as BAA has not made necessary improvements to make its properties more competitive with one another — partly a result of insufficient government support for airport expansion. The CC also suggests that CAA, the British aviation regulator (sounds like BAA, but BAA Ltd. is a private company), might have regulated BAA too lightly.

The document is not a final recommendation or report; rather, it “set[s] out our current thinking in some detail” and requests further comment. The CC is expected to release a final report and recommendations in August.

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Delta CEO Richard Anderson and Northwest CEO Doug Steenland will be on Capitol Hill Thursday to testify before the following congressional panels:

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