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.
I guess the question this raises for me is what is the purpose of airline mergers? I never thought of them in terms of stock performance, but rather in terms of airlines simply trying to protect themselves from such economic factors as empty planes every time something goes wrong somewhere in the world. That doesn’t necessarily mean I think all mergers are good — I’ve escaped enough of them in my career — just that I understand it better among airlines than I do, say, among publishers. But I’m interested in knowing what you perceive as the flaw in airline mergers (other than, as you noted, it doesn’t seem to make service any better).
I’m not saying that there’s no value in airline mergers. Some are very fruitful in the long run. I’m merely calling attention to the euphoria of the markets and media, which breathlessly report every development as if it’s a good thing. Not all mergers are successful, and all mergers have significant drawbacks, most often associated with labor. Just trying to provide a counterweight to the merger mania out there.
Ah — the complaint is about media reaction, not the mergers. Thanks for clarifying. And to that, I’ll agree. It seems that today over-reacting to everything is the norm for the media. There is only panic or euphoria. And I definitely agree that not all mergers are good — and in fact I think few of them are. I just see them as being reasonable sometimes with airlines when half-empty planes from three airlines go to the same destination. But as you say, even that has drawbacks.
As for a counterweight to media — far too few of those out there, so balance away.