While executives at United and Continental maintain that their proposed merger was designed to win U.S. government approval, opposition and skepticism about the deal are mounting on Capitol Hill.
The most vocal opponent of the merger has been Rep. James Oberstar (D-Minn.), chairman of the House Transportation and Infrastructure Committee. That had been expected, given his long-held opposition to any airline merger.
But other key congressmen are also starting to question the merger, which could become a convenient populist target in a tight election year.
Reps. John Conyers Jr. (D-Mich.), the Judiciary Committee chairman, and Henry Johnson (D-Ga.), chairman of the Judiciary Subcommittee on Courts and Competition Policy, last week released a joint statement voicing serious concerns about the number of jobs that could be lost through the merger and demanding more information about the deal’s impact on the airlines’ respective route networks, gates and workforces.
The statement berated the airlines for failing to provide information the lawmakers had requested about the merger. Many of their questions appeared to arise from labor union concern.
"The companies refuse to provide adequate assurances that they will protect the benefits of all union employees if and when the merger occurs and the workforces are combined," Conyers and Johnson said.
Specifically, Conyers and Johnson said they asked whether the merged airlines would guarantee that they "would offer employees the higher of the two companies’ salary structures and benefits."
"We further asked the companies to guarantee that no employee’s pension plan would be reduced or eliminated. Unfortunately, in our view, the companies promised only to negotiate a salary structure and benefit package ‘best for the combined company as a whole.’ This does not provide sufficient assurance that the companies are committed to protecting the salaries and benefits of their hardworking, union workforces."
Conyers and Johnson zeroed in on how the announced plan of Continental and United to move the headquarters of the merged airlines to Chicago would affect United’s operations in Texas.
"We are concerned that the companies did not provide specific information concerning the job reductions that may occur in the Houston area as a result of the merger and the subsequent transfer of the headquarters," the congressmen said.
"Merely stating to the committee that they expect ‘relatively few job losses’ is not sufficient given the current state of the economy," they added.
Conyers and Johnson also questioned how the airlines’ respective hubs would survive a merger intact, as the carriers have said they would.
"Some have speculated that the merger will lead to the closing of one or more hubs, which would have a devastating impact on flyers and businesses in affected communities," they said. "We asked if the companies would commit to retaining all of its hubs. The companies refused to do so, instead saying that they needed to ‘maintain the flexibility to make business decisions.’"
The lawmakers made it clear that they expected more candor and details from airline executives at a committee hearing scheduled for June 16.
On the Senate side, the Antitrust, Competition Policy and Consumer Rights Subcommittee of the Judiciary Committee held a hearing last week to examine the impact of the proposed merger on consumers.
Meanwhile, the Senate Commerce, Science and Transportation Committee had scheduled a hearing for May 27 to examine the implications of mergers and consolidations and the financial state of the airline industry. However, because of voting schedule conflicts, that hearing had to be postponed at the last minute.
It’s difficult to know what impact, if any, congressional opposition might have on the merger’s chances of being approved. While lawmakers have no official sway over the Justice Department’s decision to sanction or disapprove of the merger, industry analysts said that as key Democrats dealing with a Democratic administration, Oberstar, Conyers and Johnson wield sufficient political clout to influence Justice’s thinking.
For example, they pointed out, Congress is largely credited with halting the recent Air Force decision to award its new tanker contract to an Airbus team, which would have given the European manufacturer an opening for a U.S.-based freighter plant, after Boeing-supporting lawmakers raised a fuss.
Meanwhile, the proposed merger also continued to fan debate among industry analysts and experts.
Last week, Paul Mifsud, former vice president of government affairs for KLM and now a political strategist, joined Vaughn Cordle and Carlos Bonilla, managing partners of the consultancy AirlineForecasts, in issuing an analysis of opposition to the merger.
"Allowing one or more large network airlines to fail — the implicit alternative if mergers are taken off the table — is not a practical solution for the stakeholders of those airlines, and it doesn’t solve the industry’s problem of inadequate profitability and severely damaged balance sheets," they wrote.
In their analysis, the trio listed what they saw as the three primary premises for merger opposition, then offered responses to each:
• Mergers don’t always work: "We agree but would argue that it is not government’s job to second-guess commercial thinking. We would, however, note that the likelihood of success is reduced if the merger is delayed or if the approval requires the shedding of too many assets."
• Mergers don’t create value in and of themselves but only cannibalize market share: "Mergers which better align carriers with both national and global markets do create value, particularly in an era of global alliances."
• Mergers result in fewer customer alternatives and are harmful for consumers: "This is proved wrong by the large numbers of domestic and international competitors that will remain."
But others in the travel industry remain unconvinced.
"Some analysts argue that three major network carriers are all that the U.S. market can handle, if supply is to be right-sized to demand for the purpose of enabling these carriers to recover their cost of capital over a full economic cycle," said Kevin Mitchell, chairman of the Business Travel Coalition.
However, Mitchell said, "These same analysts agree that due to low barriers to entry for low-cost carriers — equipment, crews, capital — there will always be excess capacity in their view, and airlines will never represent attractive long-term investments.
"These two arguments are contradictory. Mergers and consolidation, aside from a near-term valuation play, are not usually effective industry solutions and could cause significant problems for many stakeholders."
Further, Mitchell said, "With three mega-network carriers and their alliance partners acting as a single buyer, there is the risk of these groupings exercising monopsony power, driving pricing for all manner of services below competitive levels."
Monopsony is a form of market imbalance in which a single buyer faces many sellers. It is the mirror-image of a monopoly, a situation in which one seller faces many buyers.
At risk in the United monopsony, Mitchell said, "are travel agents, global distribution systems, airports, food service providers, labor, equipment manufacturers and many other services providers. As a consequence, it could be easier by an order of magnitude for these behemoths to shift distribution and other costs to the consumer."
This report appeared in the May 31 issue of Travel Weekly.