People who think they know a lot about the
airline business are saying that we're on the verge of a wave of
mergers and acquisitions.
Of course, we've been
told several times before that we're "on the verge," but recent
events suggest that we may finally be about to cross
Powerful forces seem
to be coming together in a way that makes 2008 look like the year
of the real deal.
It appears that
Delta, for example, is not merely interested in finding a merger
partner but in exploring two particular partners: Northwest and
United. These happen to be the two U.S. carriers with the strongest
networks of Asia-Pacific routes and the most access to the
restricted markets of China and Japan.
We don't believe
that's a coincidence.
Also, all three
carriers have been cleansed by bankruptcy, which turned some of
their lenders and creditors into worried investors. Pardus Capital
Management, a hedge fund that took equity positions in both United
and Delta, has been talking about the need for airline
consolidation for several months. We don't believe Pardus has been
competition intensifying and the U.S. economy on the verge of a
stall, and with no end in sight for rising fuel prices, airlines
must explore all of their options, which increases the likelihood
that some will choose to merge.
And it's not just
U.S. airlines that are looking at strategic options. Air France,
which has already acquired KLM, is looking for a way to acquire and
preserve the Alitalia brand, and Lufthansa just acquired a minority
stake in JetBlue. As the world's governments begin to relax airline
ownership restrictions, there's likely to be more cross-border
investment, not less.
One grim certainty in
this haze is that, in the U.S. at least, real-world airline mergers
have always been inferior to the pen-and-paper variety in terms of
the consumer benefits, at least in the short term. That could be
particularly true these days.
It is often claimed,
for example, that mergers eliminate excess capacity and improve
efficiency. But with domestic load factors in the 80% range and
capacity on the decline, there's not a lot of "excess," as that
term is commonly understood.
however, the term "excess capacity" is sometimes used to mean
"unprofitable capacity," and there does seem to be a lot of that.
Eliminating it means fares will rise.
As for efficiency,
the airlines may be reaching a point of diminishing returns. For
years they have been streamlining themselves with restructurings
and endless operational tweaks to cope with rising fuel prices.
Given all that has gone before, we suspect that any payoff from a
merger is not likely to be huge.
Another cause for
concern is the sheer size of these deals. Past experience with
airline mergers has shown that the bigger they get, the messier
they get -- for employees, consumers and communities. It always
takes a while for the big benefits to kick in.
But as we have said
before in this space, it may be time to take the long view. The
U.S. travel industry -- indeed, the U.S. economy -- needs better
airlines, and U.S. travelers deserve better airline service. We
need profitable, world-class carriers and an airline industry that
is no longer the butt of TV talk show jokes.
If it takes a few
mergers to get us from here to there, then we're prepared to
swallow hard and accept a few mergers, even though we're reasonably
certain that the journey to the other side of this verge won't be