Tuesday, April 15, 2008

March of Folly: Delta, Northwest Merger

Bad mergers make bad companies. This is especially true of the airline industry.
Still, Delta Air Lines and Northwest Airlines are entering an estimated $3 billion merger agreement.
While the companies' boards have agreed to the all-stock transaction, this pact must also get the nod from federal regulators.
Yeah, it probably will.
But should it? No way.
Below is an earlier post, which has been slightly edited and updated, explaining why airline mergers are more trouble than they're worth. This one is no exception

Another wave of mega-airline mergers is ready for take-off. But will Uncle Sam just go along for the ride? Let's hope not.
A proposed deal is in the works between Delta and Northwest. So is a similar link-up between United and Continental. And don't rule out American finding a partner, too.
Going forward, however, events are less certain and more dodgy. Indeed, there are enough serious questions and concerns dogging airline combines that it would not be a surprise if a new Administration--whether it was headed by John McCain, Barack Obama or Hillary Clinton--sought to kill these agreements as they seek federal regulatory approval.
OK, I'll concede that looks problematic right now. But, bear in mind, none of the current crop of leading presidential contenders is great buddies with Corporate America-yet. Moreover, they know that anti-airline merger sentiment is building among influential stakeholders, including the airlines’ rank and file, business travel advocates, Congress and the many of the beleaguered flying public.
For a new president, that's not a bad constituency to have on your side.
As a result, should the anti-trust approval process slop into next year, as expected, airline honchos will be yearning for the bygone Bush Administration--which tripped over itself to quickly approve any giant merger that came along. There are plenty of reasons to question the wisdom of approving any huge airline merger.
First and foremost, this nagging question: How does shrinking the number of major carriers from six to three promote competition and better serve customers? Is the plan to go from six badly-run airlines to three terribly-run operations?
Moreover, fewer airlines will mean decreased service in many markets and--get this--higher fares in those markets where post-merger service is increased, according to a recent U.S. News and World Report/Airline Weekly investigation.
How's that working for you?
By the way, at airports where service is expanded, expect an even greater number of delayed departures and arrivals because those facilities will be strained beyond capacity.
Proponents of airline mergers usually include top industry executives who are eager to cash out their ample stock options; fee-hungry Wall Street investment bankers and institutional shareholders looking for a fast return on their investment buck.
They tend to argue that mergers are the best way to shrink the industry and restore pricing power to the airlines, which cannot sustain a profit because of their heavy fixed costs and competition from low-cost discount carriers like Southwest.
Without mergers, some airlines may go bankrupt and out of business, they fear.
But, frankly, how does bankruptcy differ from a mega-merger that results in basically the same result? Because of these transactions, there are thousands of lay-offs, greatly reduce benefits, gutted pensions and other cutbacks. Isn't that a bankruptcy of a different stripe?
And if the past is any measure, airline mergers have not been rollicking success stories.
Most have resulted in larger airlines that provide deteriorating in-flight service, dirty planes and nasty customer relations.
Labor peace? Forget about it. That's long gone. The unions hate consolidations and are girding for battle, especially the pilots who are openly contemptuous of airline management.
Looking at the big picture, it's criminal that this country is held hostage to an undependable, antiquated air transportation system. Everyone realizes that to fix it, something radical needs to be done.
The airline industry despises talk of re-regulation. But buying into another round of air carrier mergers is not the answer, not even the short-term answer.
We don't know who's going to be Uncle Sam's proxy in the White House next year. But the winner gets to confront this crisis in the air.

(Illustration courtesy of ljcybergal's photostream on Flikr.com. This post first appeared in Feb. 12, 2008)


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