Oberstar on mergers: “Hell no!”

In a BusinessWeek op-ed, House Transportation Committee chairman James Oberstar (D-Minn.) has come out firmly against airline mergers involving the big six.

Yet this latest round of rumored mergers, which includes a United-Continental scenario, as well as a Delta-Northwest combination, is significant. It would mean further consolidation in the airline industry, further reductions in choice for consumers, and probably fewer flights, fewer jobs, and higher fares.

I think Oberstar’s jumping the gun here. The Justice Department will do a full review of any proposed merger. (See here, and see my analyses of Delta-Northwest and United-Continental.)

Deregulation held out the promise of a market-driven industry that would give rise to a host of new entrants, bringing more competition, lower fares, and better service. The immediate aftermath of deregulation saw the expected flurry of airline startups and new market service. That activity, however, was short-lived.

Actually, deregulation did bring new entrants to markets, introduce more competition, and lower fares. Service may or may not have improved (premium service certainly has), but you get what you pay for. Lower fares are a form of better service. And what does he mean by “short-lived”? Changes in the industry have been pretty much constant since 1978. There has never been any shortage of airline startups and new service. It’s a very dynamic industry, and since deregulation, that has redounded to consumers’ benefit.

Meanwhile, the surviving carriers fattened up on the carrion of the failed and failing airlines.

This is a profoundly slanted view of competitive commercial activity. It imports visceral imagery to manipulate the reader into an emotional response — exactly what we don’t need in these discussions.

Delta’s home hub is Atlanta. Its most popular route is Atlanta-Orlando. Although Delta does not dominate service into and out of Orlando International Airport the way it does at Atlanta’s Hartsfield-Jackson, the airline does dominate the Atlanta-Orlando route, and Atlanta is the most popular point of origin for flights to Orlando.

He neglects to mention that AirTran operates nonstop between Orlando (its headquarters) and Atlanta (its main hub) about twenty-six times per day. Not that a merger with Northwest would change this situation anyway.

Two years later, United and US Airways announced plans to merge. I called on the Secretary of Transportation and the Assistant Attorney General to examine the merger vigorously, to look beyond the merger itself, and to consider the domino effect it would set in motion as other airlines sought to merge in order to compete.

So you trusted the Justice Department to wisely handle the situation then. So why throw a monkey-wrench into deals before they’re even announced?

Yet, I refuse to believe more mergers are the answer. Mergers may mean short-term profits for investors, but they inevitably mean long-term losses for workers and consumers. The merged carrier is never greater than the sum of its parts. It is always less, often much less.

Here, Oberstar is partly right. He is wrong that airline mergers have never produced value — there are any number of combinations that created strong, competitive national carriers (e.g. Northwest Orient and Republic or Delta and Western). But institutional investors like hedge funds have an interest in goosing the airline’s stock price, which merger talk does. They don’t necessarily care whether a merger produces long-term value.

We now have six major national network airlines in three alliances. Mergers that created value tied together networks to create national airlines. I’m not sure that there are efficiency gains that outweigh the costs associated with a merger. If you’re a regular reader, you know that I tend to pour cold water on merger plans — not from a policy perspective but from a business perspective.

But even though I’m a merger skeptic, I can’t endorse Oberstar’s conclusion:

This is not what we were promised when we deregulated the airline industry in 1978. If Transportation and Justice will not act to cool this merger mania, then Congress should.

If there’s anything worse than a bad business decision regarding a merger, it’s a bad policy decision. Congressional interference would have unforeseen consequences.

Airline Consolidation? Hell No [BusinessWeek]

Photo by Flickr user duluthquism. Used through a Creative Commons license.