The toxic tango of United and US Airways

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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Continental content to go it alone, and more

• 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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“All things are lawful. . .”

“. . . 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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The NWA legacy

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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All politics is local: liveblogging the Delta-Northwest hearings

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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UK Competition Commission: BAA is baad for competition

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.

• Full “emerging thinking” report [PDF]
• Executive summary [PDF]

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Anderson and Steenland to hit the Hill

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

• House Judiciary Committee, Antitrust Task Force, April 24, 10:30 a.m., Rayburn 2141.
• Senate Judiciary Committee, Subcommittee on Antitrust, Competition Policy and Consumer Rights, April 24, 2:00 p.m., Dirksen 226.

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Some random numbers on Delta-NWA

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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Berlusconi cuts of Alitalia’s nose to spite face

Because he doesn’t approve of the Air France-KLM bid for Alitalia, incoming prime minister Silvio Berlusconi is shopping the airline around . . . and resuming talks with Aeroflot. [ATW Daily News]

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The WSJ takes up airline mergers, and more

Today’s Wall Street Journal has several articles on the FAA, the Delta-NWA merger, and other issues, but three in particular are worth pointing out:

• Holman Jenkins takes issue with the claim that mergers are the ticket for the perennially unprofitable airline industry. He argues that instead airlines should be allowed to fix prices to maintain reliable service, rather than shooting themselves in the feet through rough-and-tumble competition. “Crudely, when profits are scarce,” he writes, “carriers would be free to collude over fares and routes in order to maintain service levels without bleeding each other to death.”
• Richard Anderson (CEO of Delta) and Doug Steenland (CEO of Northwest) offer refutations of six myths about mergers. Unfortunately, their refutations are not compelling. “Thanks to our complementary route networks, we will keep all of our hubs open”? There’s no reason to keep Memphis open if the much bigger hub in Atlanta serves nearly all the Memphis destinations already; ditto for Cincinnati and Detroit. “The transaction will make employee pensions and benefits more secure.” But no matter how you decide or arbitrate a seniority-list merger, you’ll negatively affect the benefits of thousands of crew members.
• Personal travel columnist Scott McCartney offers a more realistic (and pessimistic) view of the merger: “Airline mergers often mean travel headaches for customers — and they often don’t work so well for the airlines involved, either.” He’s got more, and it’s good stuff.

And now, on to other news:

• EasyJet and Ryanair are withholding some of the higher fees charged by the operator of London’s Heathrow, Gatwick, and Stansted airports, BAA [ATW Daily News]
• Airbus calls for China to participate in aviation emissions reductions. [Xinhua via Planenews]
• On that note, here’s a surprise I’m going to look into soon: the FAA claims that the U.S. is very close to carbon-neutral aviation growth. [ATW Daily News]
• Soviet-made aircraft, many of which cannot be certified by the European Aviation Safety Agency, may soon be banned in the EU. [Russia-IC via Planenews]
• As part of new Taiwanese president Ma Ying-jeou’s promised thaw with Beijing, cross-Strait flights will begin this summer for the first time. [ATW Daily News]

Image source: “Or what about one of those black and white ink portraits you see in all the rich-guy newspapers? Well, apparently they’re not rich enough to afford any color. Or even solid lines!” [LINK]

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