Wednesday, April 16, 2008

More Mergers?

Yesterday’s big announcement of a Delta/Northwest Airlines merger has already sparked industry observers to start speculating that more will be on the horizon.  According to a piece in today’s New York Times, yesterday’s announced merger “is likely to spur other carriers to go after the cost savings and global brand recognition required to survive amid soaring fuel prices and a weak U.S. economy.”  Currently, most speculation revolves around a potential merger of United Airlines with Continental.  However, other possibilities, such as a Continental and the Alaska Air Group should not be discounted.  While future merger talks seem likely at this point, John Pincavage, an airline financial advisor, told the Chicago Tribune that “[i]t’s a dangerous time to be making mergers when you're heavily dependent on exogenous variables over which you have no control [e.g., fuel prices] . . . . Make the wrong moves and you could be building a bigger Titanic.”

Not everyone is entirely pleased about the merger, of course.  Aside from the reports of labor disputes, some critics are wondering if the Delta/Northwest merger will translate into fewer choices and higher prices.  Yet, amidst the criticisms, there is a paucity of suggested alternatives.  Industry watchdogs and consumer groups want frequent, affordable, high-quality air service while simultaneously knocking the industry as a whole for being unprofitable.  On the other end of the spectrum, investors see the move towards consolidation as a necessary step in a volatile aviation marketplace.  Even if consolidation means fewer planes overall or the elimination of unprofitable routes, observers point out that the Delta/Northwest deal combines Delta’s strong Atlantic routes with Northwest’s Pacific network.  The outcome could be a more streamlined global service for consumers.  Additionally, both carriers’ relationship with Air France-KLM also opens up further possibilities for travelers.  While it is no doubt true that mergers can have adverse consequences for consumers, a “Gloom n’ Doom” scenario is not the only one available.

Surprisingly, one critical fact missing from most of the media discussion over airline mergers is the restriction on foreign ownership of U.S. carriers.  With the second stage of “Open Skies” talks between the U.S. and European Union set to begin in a month, it is important to take notice of the fact that the current environment for airlines in the U.S. practically begs for the removal of those restrictions.  As is evident from the news reporting itself, U.S. carriers are faced with a very limited number of options when it comes to mergers or even generating fresh capital.  Having access to the deep pockets of potential European investors could give them the protection they need to weather the storm of an economic downturn.  With EU Member States already announcing that they would cancel rights under the first “Open Skies” agreement should foreign investment restrictions not be eased, U.S. airlines may have some real hope of getting access to foreign capital.  Whether or not that access comes quickly enough is still an open question.  With more low cost carriers now staring at bankrutpcy or worse, even the smoothest talks may not be able to reach, sign, and execute an agreement before more fall by the wayside.

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