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Posts Tagged ‘mergers’

TEMPE — US Airways chairman and CEO Doug Parker opened the airline’s annual media day with remarks on the state of the airline industry, pointing out financial, political, and labor-related challenges in the year ahead and calling on airline managers to change the way they think about industry competition.

Parker has long been an apostle of consolidation in the industry, leading America West to take over US Airways in 2005 and attempting to take over Delta in 2006-07. He pointed out today that no single airline has more than a 25 percent share of the U.S. airline market. “In a network business, that’s a lot of fragmentation. It’s a fragmentation that makes it hard to produce returns for shareholders,” he continued. “More [integration] will produce even more value.” He said that US’s hostile takeover of Delta attempt spurred the Delta-Northwest merger, and he added that whether US Airways is in mergers or not,  the airline will benefit: “Where the real value occurs is the reduction of fragmentation.”

As for government affairs, Parker said that “this is a business that is overtaxed, that is in many ways overregulated.” In what I interpreted as a veiled reference to House transportation chairman Jim Oberstar (D-Minn.), who has declared war on airline consolidation and networking, he said: “We have many in congress who view aviation as a public good.” Airlines have to focus on little issues like service to individual congressional districts. Congress, he said, wants to harness the industry to serve its own interests. [Not unlike most other industries, these days --ed.]  The regulatory picture looks bleak, he said. “This one is probably not going to get better. . . . The best we can do on this one is hold the line. . . . Our message through 2009 is ‘do no harm.’ Let us compete, leave us alone.” (more…)

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A Reuters item from Friday offers up a factual error that betrays a very shallow understanding of the potential for airline “merger mania 2009.” The factual error doesn’t actually appear to be in the original Reuters piece (here as it appeared on Friday; if the error originally appeared in the Reuters item, then it has been corrected but not flagged with an erratum) but rather in a paragraph added in the International Herald Tribune‘s version of the story yesterday, here: “Other sizeable U.S. airlines that could potentially be involved in mergers are US Airways, Southwest Airlines, Northwest Airlines and Jet Blue Airways.” This assertion is based on what exactly? It’s not reported in the Reuters item, so I really have no idea why it was inserted. It’s as if some copy editor had a general idea of some U.S. airlines’ names and threw them in. I am amused by the inclusion of Northwest, a wholly owned subsidiary of Delta, in a list of airlines looking to merge. I am even more amused that the IHT has not had the good sense to correct this error on its site, and that Today in the Sky is uncritically citing the story. Way to go, news media!

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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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Herb Kelleher, the legendary founder of Southwest Airlines, proponent of low fares, and friend of deregulation, delivered the Charles A. Lindbergh Memorial Lecture tonight at the National Air and Space Museum in Washington, D.C. He reflected on his long career in aviation, on the fundamentals of Southwest, and offered a few comments about the future of the airline industry. As usual, Kelleher’s lecture was full of humor — most of it at his own expense.

Kelleher recounted a number of critical moments in Southwest’s history, from the four years of litigation just to get started to the fight to operate out of Dallas’s Love Field. When Southwest launched with $26 fares, its competitors undercut the price by half. Kelleher said that he would still offer the same fare, but that every customer would get a bottle of whiskey. “We became the largest liquor distributor in the state of Texas!” he chuckled.

Even though almost all the major airlines opposed deregulation, and although observers thought Southwest would get stomped in a competitive environment, Kelleher said, “Southwest Airlines supported deregulation of the airline industry throughout the 1970s.” A sign of deregulation’s success? When Southwest launched, only 15 percent of American adults had been on a commercial airline flight. Today, 85 percent have, although this is not only due to lower fares but also a growing economy and general better standards of living. (more…)

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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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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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Congress may usually cleave along party lines, but it often divides along local lines as well. We are seeing this bipartisan and narrow parochialism in congressmen’s response to the news of the Delta-Northwest merger. Congress is dividing along regional lines of business interest in support of or opposition to the tie-up. The dynamics of the merger mean that the headquarters’ home state is thrilled but that other states fear losses of hubs, jobs, and connections. Senator Saxby Chambliss (R-Ga.) is proud of his hometown airline: “Delta has met its challenges head on and is in a strong position to continue its service to people all over the world. The bottom line is Georgia has always been home for Delta and that is the way it should remain for many more years.” Representative John Lewis of Atlanta, on the other side of the aisle from Chambliss, was even more effusive: “This is a great step for Delta. It is a powerful combination that should help strengthen the air transportation industry in this country. . . . This merger should make it easier for people in Atlanta and around the nation to fly, and it preserves the Delta name. The Delta headquarters will remain in Atlanta, which helps protect the economy of the city during a time of recession.”

But others are not so happy. Representative Jim Oberstar (D-Minn.), the powerful chairman of the House Transportation Committee and from the state of the to-be-acquired NWA, has already come out against any mergers. Today he reiterated his opposition (“Other airlines and network carriers will not be able to withstand the potential power of the largest airline in the world; it will be a globe straddling, mega carrier.”) and pledged to use his full oversight power to question airline consolidation. Senator Amy Klobuchar (D-Minn.) sounded a populist theme in defense of NWA: “Today’s merger announcement is not just about Wall Street. It’s also about Main Street, including the best interests of our consumers, workers and local communities.” She added: “Minnesota’s economy is particularly tied to Northwest’s success,” and she promised to make sure that Minnesota retains the current facilities, jobs, and services that NWA houses there. Senator Norm Coleman (R-Minn.) was also skeptical. (more…)

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The press conference is streaming live at www.newglobalairline.com. It got started about 10 minutes late.

Richard Anderson (Delta CEO): this is a financially powerful merger. Also: it’s especially necessary due to record-high fuel prices. He claims Delta-NWA will be “better able to handle the volatility of fuel” than as standalone carriers. Transaction creates over “6,000 new city pairs.” HQ in Atlanta but will retain strong operational and executive presence in Twin Cities.

Doug Steenland (NWA CEO): “combination is focused on sustainable growth and expansion.” Delta-NWA will fly to every major business center in the world. “No hub closures. We remain committed to the communities we serve.” “As a result of our complementary, overlapping route network, competition in the airline industry will remain.”

Q&A:

  • Can NWA pilots scuttle the deal? Will Air France-KLM invest in the new Delta-NWA? Anderson: Air France is excited about seeing their European merger hook up with a comparable U.S. merged airline within the Skyteam alliance. Mentions antitrust immunity recently granted for Delta-NWA-Air France-KLM in transatlantic scheduling and fares. Mike Cooper of Delta: “we tried to bring pilot groups together at the beginning.” We have eight to nine months of regulatory processes to bring NWA pilots around. “Game changer” if they can do it, Cooper says.
  • Can Delta-NWA achieve profitability regularly? How can the combo offset rising fuel prices? Airline profitable in first year of operations. Expecting fuel prices to rise, so we’re planning for it.
  • How and when did the decision to merge first come up? Steenland: first serious discussions began in December.
  • How will merger affect airline service? Anderson: both airlines are at the top of airline quality [Ha! Northworst -ed.] The improved connectivity, he says, will improve the traveler’s convenience and experience. “Capital structure to continue to make significant investments to enhance the experience of our customers.” Steenland: focus of airline industry recently is not on premium service but on “survival.”
  • Why not shed hubs in Memphis and Cincinnati? Steenland: Memphis is smaller city, “but we’ve found the right size of operation in Memphis to make that hub profitable.” MEM is complementary to Atlanta. We can offer good service from these cities. [See here -ed.]
  • If oil had remained at $60, would merger have happened? Anderson: “sound strategic basis” for merger regardless of oil price. Creates first airline in the United States with truly global scope and seamless ties.

Sorry — that’s the end of this liveblog. I had technical difficulties that cut off the broadcast until picking up at the very end. I’ll have more commentary on this later.

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Merger Mania 2008 is back and kicking. Delta and Northwest have announced their merger plan. See this Bloomberg story for more. I’ll have more on this later, but for now, you can look back at my overview of the DL-NW antitrust issues. After the failure of the two airlines’ pilot groups to agree on a framework for merging seniority lists, labor issues will continue to complicate the deal. The NWA pilots have vowed to “aggressively oppose” the merger.

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BREAKING NEWS: Delta and Northwest’s pilot groups were unable to come to agreement about a merged seniority list. Delta MEC chairman Lee Moak announced the breakdown of negotiations today in a letter to Delta pilots. Without a merged seniority list, a merger might still go through (companies can force master seniority list mergers, as I’ve written before), but moving forward without agreements from labor means the merged airline’s management has to spend time, money, and energy on important operational issues that might have been resolved up front, like US Airways has been doing for the past two years.

What does this mean for industry consolidation? Mergers are probably off. It was reported that United-Continental was ready to move forward as soon as Delta-Northwest was announced (due to Northwest’s golden share in Continental), but that combination will now be scuttled. In the end, I fear that the merger mania was really a plan to goose stock prices, not actually create value. The hyped capacity cuts are coming anyway, thanks to airlines needing to shed planes and routes that don’t make money at $110/barrel oil (see Mike Boyd’s current weekly commentary). With capacity cuts coming to an already-trim industry, I don’t see the added value of mergers anymore. RIP, Merger Mania 2008.

Hat-tip to Things with Wings, where I first caught this story. After the jump, choice excerpts of the letter.

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