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Posts Tagged ‘Merger Mania 2008’

The Justice Department announced today that its Antitrust Division has found that “the proposed merger between Delta and Northwest is likely to produce substantial and credible efficiencies that will benefit U.S. consumers and is not likely to substantially lessen competition.” This clears the way for Delta and Northwest to merge officially. It was not an unexpected decision.

Justice says that the combined airline will face competition from other carriers on the “vast majority” of its nonstop routes. Furthermore, it adds, “the merger likely will result in efficiencies such as cost savings in airport operations, information technology, supply chain economics, and fleet optimization that will benefit consumers. Consumers are also likely to benefit from improved service made possible by combining under single ownership the complementary aspects of the airlines’ networks.”

I’ll reiterate what I said about the merger back when it was announced: There was no reason to block it on business or policy grounds, but the business case for merging was weak.

The Associated Press reports that the merger faces a lawsuit set to go trial next week in San Francisco. See also my previous blogging on the Delta-NWA tie-up and “merger mania 2008.”

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J. P. Morgan has updated a report assessing the liquidity and balance-sheet health of U.S. airlines, and it finds Northwest Airlines second most likely to file for reorganization under Chapter 11 bankruptcy. If you’ll recall my introduction to airline antitrust, the Justice Department looks more kindly on a merger if one of the parties is about to fail. But in answer to the above question, a potential Chapter 11 by NWA would not move its merger with Delta along because it does not meet the following conditions:

1) the allegedly failing firm would be unable to meet its financial obligations in the near future; 2) it would not be able to reorganize successfully under Chapter ll of the Bankruptcy Act; 3) it has made unsuccessful good-faith efforts to elicit reasonable alternative offers of acquisition of the assets of the failing firm that would both keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger; and 4) absent the acquisition, the assets of the failing firm would exit the relevant market.

Northwest may be cash-flow-weak right now, but it’s nowhere near ready for the “failing firm” provision of the Horizontal Merger Guidelines. Nothing to see here, folks.

Airline bankruptcy ranking [Sky Talk]
BOTBS Version 2.0 [PlaneBuzz]

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[Alfred] Kahn and the [Civil Aeronautics Board] were facing not just one but three airline mergers in the summer of 1978. In addition to the battle for National, Continental Airlines and Western Air Lines had filed for approval to merge, and two local service carriers — North Central Airlines and Southern Airways — also wanted to combine forces.

Kahn was deeply troubled by all this merger activity. After all, the CAB has in practice given carriers virtual carte blanche to serve any domestic markets they wanted. “This is the last time in the world anyone needs to merge to gain new routes,” the CAB chairman told a reporter later that summer. “We are strongly motivated to let anyone fly wherever they want. But instead of grasping the opportunities we’re offering, this disease, this psychology, is getting abroad that airlines ought to merge.”

– Barbara Sturken Peterson and James Glab, Rapid Descent: Deregulation and the Shakeout in the Airlines (New York: Simon and Schuster, 1994).

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The main — and really only — important reason for publicly held airlines to merge is to increase the value for investors. The idea in the industry is that a theoretically well-designed merger will increase this value, which is why big airlines are pursuing tie-ups so ardently. Along comes Moody’s to throw a well-deserved wrench into the gears: mergers in the airline industry could result in lower credit ratings, an analyst wrote. Giant airline mergers are risky undertakings, and investors would be wise to avoid them. So, instead of merger talk goosing the stock price of an airline, it might doom it. Worse credit means less financing for a deal, and airline mergers require lots of cash — hard to come by in an industry with declining liquidity.

Delta and Northwest investors resisted the merger fervor, but talk of an even less auspicious United-US Airways pairing rose. Lowered credit ratings may put a big damper on continuing negotiations.

Moody’s: Airline Consolidation Could Hurt Credit Ratings [Dow Jones via CNN]

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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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“. . . 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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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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From Mike Boyd’s weekly update:

7,100+
Based on an independent Airports:USA analysis, the number of overlapping markets technically represented by the merger of Delta and Northwest, defined as city pairs where a consumer can possibly book either carrier.

14
Out of the top 100 overlapping markets, the number (other than routes connecting existing DL/NW hubs) where the combined market share of the new carrier will increase by more than 2 percentage points. The majority are under 1%.

0
As of today, the number of airports where combining Delta and Northwest will result in single-carrier monopoly service.

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