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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