02 June 2010

The Real Reason for New United Merger- Too Big To Fail

Perry Flint who is the Editor for Air Transport World in his editorial this month used an expression I had seen before but have really rather ignored it until the stark reality of hit me. I admire Perry for his insight and I think he illustrated this with the following extract from the above mentioned editorial.

.... proposed merger between United Airlines and Continental Airlines, announced ... The latter (event) illustrates a natural, if perhaps unintentional, response .... Create an airline that is too big to fail, because the consequences of such a failure would be a massive and sustained dislocation of the transportation system that would rebound on the political leaders judged to be in charge at the time.

The amount of noise that is still being pushed in support of the merger such as this article in GLG News didn't leave me any option but to comment accordingly:

"I have to disagree with the analysis. My basic objections reach three points.

1. The economies of scale seem to be paramount to consumer freedom of choice

2. The discussion does not take into consideration that the airlines may act irrationally. As we have seen that the airlines do not optimize their operations even when they have the chance to. Thus to assume that they will act rationally and in the most economic efficient manner is not borne out by history or constraints within their own structures let alone within the market

3. This analysis does not take into consideration the disincentive of the remaining market for new entrant players.

I would also like to comment on one other subject.

It is not the US governments responsibility to help the US carriers compete on a global basis. That is highly inefficient economically. Rather the US government should be focused on the domestic market which benefits the majority of the US population (85:15) is the conventional model. To increase competition domestically it would be a good idea to both lift the investment cap - from 25% and 49% effective control - and allow non-US controlled airlines to operate "fairly" within the US market. Provided that reciprocity was fair and equal.

Thanks for reading"

However the objections now being raised in Congress show that there is a valid reason for fighting it now rather than waiting for the next downturn when the resulting carrier just might be "Too Big To Fail"

And what do you think?


(With thanks to the Grauniad for the Jetstar Image)

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