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Posts Tagged ‘united’

I bet you’re thinking, how would a bailout of the “big three” U.S.-based automakers — General Motors, Ford, and Chrysler — affect a bailout of the airline industry? Tellingly, a few observers have compared the situation with the car-makers (Scene: Washington. Detroit: Give us big money money; our bankruptcy is your DOOM. Congress: Sure, always happy to help the UAW, but let’s install a car czar to apply industrial policy and oversee green car production.) with the airline bailout in 2001. A while back, I warned that as troubles persist in the airline industry, we should look out for a revival of the Air Transportation Stabilization Board. A recent Wall Street Journal article by Paul Ingrassia holds up the ATSB as a model for Detroit:

If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.

That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. uniThe Stabilization Board did its job — selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers — and even returned money to the government.

William Swelbar provides a little more background:

On multiple occasions, United applied for an ATSB-backed loan prior to its decision to file for bankruptcy protection in late 2002. The ATSB continually found that United had failed to file a business plan that was sustainable. Ultimately United filed for bankruptcy protection and continues its restructuring today. The ATSB simply was not prepared to provide United a bridge loan to nowhere. Today, United is in a much better place as a result. Not out of the woods completely, but the prospects for tomorrow are much brighter.

The travel industry disintegration after 9/11 was an unexpected external shock, but for airlines like United, it unmasked the unsustainable labor obligations and management decisions that were obscured in the heady boom time of 1999-2001. Some airlines, the ATSB determined, could do with a small loan guarantee in order to get through a rough time not of the airlines’ making. But for legacy carriers with legacy cost structures, a bailout would only postpone the reckoning to come, possibly making the pain worse later. United, Delta, and Northwest all needed a run through bankruptcy court. (I’ll say that United did not do enough to help itself in bankruptcy court. For example, management threw out silly ideas like Ted and didn’t simplify its fleet sufficiently.)

What does this have to do with Detroit? As I said back in June, the times today do not call for an airline bailout. Nor do they call for a bailout for Detroit. The big three’s special pleading notwithstanding, its problems are due entirely to bad management and extraordinary concessions to labor unions. As Swelbar adds, “It is my hope that we do nothing unless a radical transformation of the legacy issues that make the auto industry non-competitive are insisted upon.”

So where does that leave the big three? Exactly where legacy airlines were left: in bankruptcy court. Michael Levine — an aviation policy expert, natch — points out in today’s Wall Street Journal, “GM as it is cannot survive without long-term government life support. If it gets that support, it can’t change enough and won’t change fast enough. Contrary to [GM CEO Rick] Wagoner’s brave declaration, bankruptcy is an option. In fact, it’s the only option that merits public support and actually has a chance at succeeding.”

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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:

(more…)

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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. (more…)

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As part of Merger Mania 2008, United and Continental are now in talks to merge. United has been eager to merge with someone — anyone — for a few years now, but Continental has been reluctant to do so, preferring to remain profitably independent and well-managed unless industry-wide consolidation forces its hand. There are any number of challenges to a merger, from labor to systems integration, but one of the biggest hurdles is the Justice Department’s antitrust division, which can put the kibosh on any proposed matchup. I previously wrote about the criteria the department uses to evaluate proposed mergers, so let’s look now at how a United-Continental merger would stack up.

As far as reducing competition in markets or city-pairs, United and Continental are unique in that all their hubs — save the smallest in a combined carrier, Cleveland — are in markets with two or three major airports and/or with lots of network and discount airline competition: (more…)

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