29 May 2010

UA+CO - The Debate Rolls On

The wonderful battle that will keep us entertained for many months has just been joined. UA+CO went from the UA+US potential merger in less than four weeks to a full blown merger announcement by the New United pair on May 03. Now the dust has had some time to settle we can start to sort the elements out and see who sits on which side of the debate.

On the positive side sits obviously the airlines themselves. They have brought in a whole cadre of experts to support their position. Many of the experts are from the macro economic fold whose view is that the failure to merge will result in disadvantaged players so they tend to look at the bigger picture in the hope that the little issues can be resolved with exceptions. The basic economic argument is that the US market can only support three big airline alliance networks. If you would like the read the paid for analysis from Airline Economics click on the link. I suggest you do read it as it provides good ammunition for both sides of the argument, and its a good document to read anyway.

Also aligned with this position is the Department of Transportation which fervently believes in Big Airline. If you want some evidence of this look no further than their recent rulings and awards.

From a certain perspective it seems that the past 100 years of airline transport might have been an aberration in some people's eyes but you can't fault the millions of people who worked in it and pioneered the (mostly) safe and reliable utility service model that we have today. Not to mention the millions more who have invested in it.

So on the opposition side are the soon to be disadvantaged Houstonians (and others who will feel the pain like Ohio) and the likelihood that the DoJ will flex its muscles to either kill, hobble or delay what could be inevitable. And then there is Mr Oberstar. The Senior Congressman from Minnesota. he is the most powerful man in Congress in aviation interests. He staked his position in an Op-Ed piece in USA Today of all places on May 13th. One week earlier he had formally asked US DoJ to block the merger. Seeming to support him, on the House side, Judiciary Committee Chairman John Conyers says he "wants more specific answers after getting a letter from the two airline CEOs that he found lacking in specific answers."

One notable voice to come out in opposition is former AA Chairman Robert Crandall. Still as Acerbic as ever just celebrated his 12th anniversary of his retirement from AA's top position (May 20th 1998). But so far things are pretty quiet and it would seem that most of the focus is on who does what next - clearly Mr Parker and Mr Arpey are probably chatting via crackberries about forming what would then become the largest US airline.

And let me add one element to the fire of the debate. Oberstar was suitably less than vocal during the NW+DL discussions as he used his position to secure more concessions from DL for his home state of MN. He made some suitably mumbled comments that he could use later to justify his position that he did put up SOME opposition to the original merger that resulted in new Delta. Did the rot set in then? partially in my view. But to some extent this form of consolidation/concentration power was inevitable. That doesn't make it right or proper.

So let me return to the issue of the economic argument. I don't see anyone on the pro merger side saying much about Southwest. Surely the arguments being made fail at the evaluation of WN's position in the market. They started at zero and became the largest US Airline in the main organically unlike its larger brethren who ALL had some major merger in their history. It also consistently blows away the competition in profitability. All without any alliance (except for that somewhat quirky Transtar experiment in the 1980s and the even stranger ATA short lived alliance. But these were marketing agreements and as I have noted before we can still expect to see some of these from every player.

Nor do I buy that the GDSs exert so much influence (one of the older merger arguments) that this is a factor in the urge to merge. Virtual Interlining is now possible and is already in practice by individuals and systems.

Therefore in my view the argument that economics make this the only way to go fail on a large number of points. But - the practice of not allowing an airline to fail in bad times yet to merge in good times in my view is inconsistent.

The possibility for increasing competition can be seen in such proposed arrangements as the cosying up of partially Lufthansa owned JetBlue's relationship with AA and other airlines. The approved route and facility swap between Delta and US Airways is yet another example.

I am of the opinion that the merger of UA and CO will lead to an increased concentration which in turn will result in a reduction of service totally and quality (assuredly). We need good old fashioned competition to keep the market honest. Allowing CO and UA to merge their operations totally as opposed to allowing perhaps a lesser alliance such as one that currently exists with the A++ anti-trust immunity would hurt competition. It is a decision that for me is a bridge too far.

The alternatives are acceptance or rejection of the companies proposed merger. I think that the current level of alliance is more than adequate to maintain competition within the market. If the merger is allowed to proceed then the US consumer will be disadvantaged. At the end of the day that must be the determining factor.


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