A final word from guest blogger and airline industry analyst Vaughn Cordle:

By Vaughn Cordle, CFA / Managing Partner, AirlineForecasts, LLC

Bob Crandall’s suggestion to change bankruptcy and labor laws should result in less destructive fare competition. However, mergers still work best for the network airlines because profitability will still be inadequate even if the laws are changed. Mergers allow the network airlines to divert from a slow liquidation flight path that ultimately end in failure and it allows the scale and scope economies required to compete globally.

The six network airlines reported $70.4 billion in net losses over the last decade that can be attributed to excess seat capacity and a desire to maintain market share. Excess capacity must be viewed within the context of managers’ strong desire to maintain market share, which results when network airlines attempt to maintain the scale and scope economies required to compete in both international and domestic markets. Moreover, relative costs increase when airlines shrink as fixed costs are spread over fewer seats.

Based on our analysis of mergers and industry profitability post-merger, we conclude that network airline mergers will not allow the larger airlines to maintain prices profitably above competitive levels for a significant period of time. This is the “market power” definition that the DOJ uses when assessing whether or not to approve a merger – it’s not the only criteria, but it’s an important one.

In the final analysis, the industry tends to produce seat capacity beyond the level that would allow the industry to earn a rate of return that attracts and maintains shareholder support. I term this phenomenon the “destructive growth prerogative”. Without capacity discipline – and this requires an elimination of excess capacity in the system – the industry will continue to destroy economic and shareholder value and, as a result, the quality of the product will only get worse.

Excess capacity can be defined two ways: within the context of required profitability and in terms of passenger load factors. I make the case for profitability that excess capacity is best defined as that capacity that exists above a level that would allow the industry to break even on capital costs over a full business cycle. The last business cycle, from GDP peak to trough, was a 10-year economic cycle that ended in 2009. During this cycle, the industry produced, on average, 6.4% capacity above that which would have allowed it to earn a normal profit (figure 1).

Stated differently, the industry undercharged the product by 10.5%, which in turn resulted in $68.7 billion (in 2009$) in reported net losses. These losses represented 5.5% of total revenue, and the average load factor for the decade was 76%. Based on the actual price elasticity of demand and the revenue level required to earn a normal profit, the average passenger load factor would have increased to 82%, which would have resulted in 18% of the industry’s seats unoccupied. This level of excess seat capacity would have provided sufficient unused capacity to accommodate all demand related to factors other than abnormal or emergency peaks.

It’s likely that passenger load factors in the low 80s are the natural limit for the network airline. Unfortunately, network airlines are forced to offset higher costs with higher load factors. Higher load factors naturally result in more uncomfortable flights and lower service quality, because the ratio of flight attendants to passengers is reduced. The network airlines lost $70.4 billion over the last decade and undercharged for the product by 12.6% on average. The network (mainline ex-regionals) airlines captured 76% of the total revenue out of the 54 passenger-carrying airlines that existed in the decade ending with 2009.

The reality is that the airlines have been unable – collectively – to raise fares sufficiently to earn their cost of capital or even to earn a normal profit. Why? Because the industry has produced a seat capacity above that level required to earn a profit, and it’s almost impossible for a network airline to compete against the low-cost model that doesn't have legacy debt and costs and a productivity advantage relative to the network’s hub-and-spoke model. Higher cost network airlines must compete on price to stop the downward spiral in market share loss and viability. To cede market share, to the degree required to earn a normal profit, results in a downward spiral in size that ultimately results in the loss of shareholder support and failure.

Bankruptcy (and the threat of bankruptcy for AA) has forced the suppliers (e.g., labor) and creditors to renegotiate agreements so as to allow the network airlines to emerge as businesses with only the chance to survive and compete. If bankruptcy laws are changed in a way that forces failed businesses to liquidate, it would force suppliers and creditors to accept terms that could keep the business alive – outside of a bankruptcy court.

Big-network airlines are much smaller today than they were ten years ago, as they have ceded market share to faster-growing and lower-cost airlines. As an example, and including the TWA and Reno acquisitions, AA represents 16% of the total systemwide available seat miles today versus 26.3% in 1992. This represents a 38% loss in relative market share over the 16 years. If UA and CO merge, the combined airline will have 22% of the total systemwide capacity (17.7% of the domestic), which is not much more than UA’s 20% in 1998 (17% domestic). Mergers work best for all of the network’s stakeholders, because failure results in the loss of jobs and investments.

Mergers must be related to the alternative scenarios, which, in the case of the networks, would have been failure or even a greater loss of economic value and jobs. When mergers fail to produce an adequate financial return, this does not indicate a level of performance that is any worse than the alternative or status quo scenario, which in most cases would have been an outright failure, or even much worse, returns on capital.

AA’s acquisitions of TWA and Reno could be considered financial failures, but the losses would have likely been higher for AA if it had continued its destructive fare competition with these two airlines. We have argued that shareholders, employees, and consumers benefit when DL/NW and UA/CO merge because the longer-run alternative is failure. The air transportation product quality has followed financial performance down, and adequate investment is not possible without adequate profitability. If the merger does not work, the employees and shareholders suffer, but less than they would without the merger. Given the smaller size of the network airlines today, a merger between CO/UA will not increase market concentration to a level that allows above-competitive returns, only an improvement in returns. Robust competition will continue to result in below-capital cost (and broader market) returns for the airlines collectively, especially in the domestic market and especially for the network airlines over a full business cycle.

While it is difficult to make the merger valuation case based on hypothetical alternative scenarios, we can make reasonable estimations of revenue and earnings based on a reasonable set of assumptions. Higher market caps do provide value in the form of purchasing power that acts as a currency to reward labor and shareholders. Moreover, the cost of debt is reduced as the market value of equity is increased, which in turn reduces the average cost of capital and improves economic returns.

The merged airlines’ market cap increases due to cost and revenue synergies, not from raising fares or reducing service. Cost synergies of $1 billion or more can be shared with all stakeholders and revenue synergies of approximately $1 billion are from enhanced scope economies (i.e., enlarging the network and traffic flows) – not from raising fares. $2 billion in cost and revenue synergies can be divided among all stakeholders. Benefits to the consumer come in the form of one-stop shopping for the business traveler from a newly merged company that can afford to improve the product. For example, load factors could be lower if an airline is more profitable, and this improves service quality.

Public policy should be about helping the U.S. airlines compete on a global basis, and it should not be exclusively focused on increasing competition so that a single stakeholder, the consumer, benefits. Other stakeholders, including small communities, labor, and capital providers should be considered, because all stakeholders must be satisfied if the airline is to be viable and worthy of longer-term investment. Without the returns required to increase the market cap, the airline is not worthy of investment. Hence there is a required rate of return that must satisfy the shareholder.

We contend that customer benefits and service quality increase when mergers [and alliances] occur at the end of the worst decade in history for the industry. Our market concentration work (HHI) leads us to conclude that the U.S. airline industry has too many airlines and that the system can profitably support only three network airlines, not five or even four. The logic behind this conclusion comes from an examination of the market concentration since 1977 and industry profitability and the correlation between the levels of earnings required to earn the cost of capital over a full business cycle.

There is an optimal level of airlines at any given point in the business cycle, and ebb and flow will naturally occur in the number of competitors as the economy expands and contracts over time. We can state with the benefit of 20/20 hindsight what the number of competitors and market concentration should be in order for the industry to break even on capital costs. As an example, the equivalent of four equally sized [large] airlines was added during the long business cycle ending with 2007. This was a natural byproduct of a strong and expanding economy. However, approximately 4% of that GDP growth and 5% of air travel demand during the period of 2002-2008 was a function of a credit bubble built on a house of (derivatives and debt) cards (pun intended). The upshot is that the recovery will not include that credit-bubble component of growth, and this means the industry needs fewer airlines during the upcoming decade.

We fully agree that U.S. carriers – and thus U.S. jobs – are being sacrificed in the name of ideology, an ideology that has yet to fully develop into a set of coherent policies as it relates to U.S. competitiveness in foreign markets. U.S. carriers are disadvantaged internationally because a level playing field does not exist in terms of labor laws and gate/slot restrictions and even in terms of balance sheet debt, seat costs, and service quality. The U.S. network airlines have the worst service quality, the most over leveraged balance sheets, the lowest returns on assets, and the oldest aircraft and workforce. Moreover, they are not cost competitive in the U.S. domestic market.

Open Skies results in more competition and an even greater market share loss, over time, for the U.S. airlines, hence the need for larger, stronger, and more fit U.S. network airlines that can compete with regard to service and price. This is not possible, given the current market structure of the U.S. airline industry.

Mergers will allow UA, DL, CO, NW, and even US and AA to compete more effectively on a global playing field that is not level. Without the mergers, we make the case that the network airlines continue down a slow liquidation path that weakens the industry’s ability to produce a product that can satisfy all stakeholders, including the small communities and capital providers that require healthy network airlines.

To read more mergers best solution for network airlines

Recently, Vaughn Cordle and two colleagues have written contesting my views on consolidation. In my view, they are wrong --- here’s why.

I think arguing that “excess capacity” should be defined as the amount of capacity that should be withdrawn to permit break even at current fares is nonsensical, and in the long run would leave aviation – and any other scheduled transportation system – with so little capacity that it would be unusable for those who need to make unplanned trips and to change plans at will – notably the business travelers so essential to economic vigor. To be useful, a scheduled transportation system needs to have sufficient unused capacity to accommodate all demand other than abnormal or emergency peaks, and I think there is general agreement that in a network system, load factors above 80% result in important spokes being fully utilized too often to meet that definition. Excess capacity is the capacity offered but unused – not the amount that exceeds what will earn a profit at existing fares. By Cordle’s definition, any industry that loses money should continue to consolidate and eliminate capacity until it finally reaches profitability at existing tariffs – all without regard to whether the level of service provided is adequate. If we followed that mantra for long, we would soon have shortages of virtually everything.

The reality is that the airlines have been unwilling – collectively – to raise fares sufficiently to earn their cost of capital. To date, society has seen fit to shelter failed players by allowing them to recoup in bankruptcy, to shelter labor from the consequences of its actions and to deny the airlines the ability to provide support for one another as they did with the Mutual Aid Pact. Now society seems to be coalescing around the idea that it would be better to allow continuous consolidation until we finally get to a point where there are few enough carriers that they can raise prices enough to cover costs – without considering whether the smaller universe of providers will choose to offer a level of service insufficient to provide the country with an adequate network or raise prices sufficiently to earn supra normal profits.

None of this makes sense to me

Now, as to the three premises on which my case is supposedly built:

1. The Cordle group is correct on this one – merges don’t always work. In fact, various studies suggest that between 75% and 100% of mergers don’t work. When they don’t work, the folks most damaged are employees and stockholders. Management generally does just fine – particularly senior management. In the case of airline mergers, if they don’t work the employees and stockholders suffer and if they do work, customers are charged higher prices and are subject to whatever level of service the survivors choose to offer. Given these realities, I think government has some responsibility in the matter.

2. Cordle claims that mergers create value, but offers no proof points. I understand that the merger will “create value” if one defines value as the market cap and if one further assumes that the market cap will rise because the merged carriers can either reduce service or raise prices. But I do not think that raising the market cap of commercial ventures should be the goal of public policy

3. Finally, Cordle disputes the contention that mergers result in fewer customer alternatives, which flies in the face of what has already happened. An examination of the major international markets in which the alliances have effectively driven out competition establishes the fact that consumers in those markets do have fewer alternatives. And in response to my contention that the LCCs will continue to compete aggressively, Cordle appears to believe that even more consolidation will then become desirable by observing that “this supports the need for additional network mergers, so as to increase industry pricing power”. And he goes on to assert that “the system can only profitably support three large networks, not four or five” but offers no proof points. One wonders if, next year or the year after, these folks will contend that the system can support only one large network!!

Having concluded their discussion of the premises on which my argument supposedly rests, the group goes on to assault my view that the U. S. should negotiate a level playing field internationally, deriding the argument as obsolete. I suppose, from that statement, that the Cordle group thinks it is ok for China, having agreed to accept a U. S. carrier from Chicago, to offer AA completely impossible time slots. The Chinese action was, and remains, completely incompatible with the agreement between the U. S. and China, and simply replicates what many foreign governments have done for years – namely, do a deal and then refuse to make operating agreements compatible with the agreement. The result is that U. S. carriers have been and are being competitively disadvantaged, which I think is outrageous. Open Skies is anything but, and will be an empty policy until the U. S. government begins to realize that U. S. carriers – and thus U. S. jobs – are being sacrificed in the name of ideology.

As to service to small communities, the Cordle group offers no support for the notion that larger networks will be more anxious to serve than todays. In fact, much of the service to small cities that exists today owes its existence to the extremely competitive nature of the networks that provide service – each being unwilling to yield traffic to another. In a world of fewer networks, it stretches the imagination to believe that any network will willingly continue to pay regional carriers fixed amounts to carry unprofitable traffic to a network that lacks effective competition from its larger points. Larger networks will, in my view, be lots more willing to discontinue unprofitable short haul service than today’s carriers.

Omitted from all the discussion is the impact of forcing carriers to compete to the lowest possible price point, encouraging every form of cost reduction including outsourcing of maintenance and other tasks, and the impact on public costs which is imposed by absorbing the obligations of carriers that have gone bankrupt. While I do not have good data on all this, I think it is clear that at least 6,000 very good jobs would come back to the U. S. if all the maintenance that has gone offshore were performed in this country. Moreover, the PBGC has absorbed about $13 billion in pension obligations and bankrupt carriers have eliminated at least $2 billion in retiree medical obligations. Our public policies have encouraged the behavior that has led to these results, and is – in my view – way less than adequate.

The bottom line of all this is that I believe more airline mergers will reduce consumer choices and increase travel prices. Prices must go up if we are to have a viable aviation system, since carriers must be profitable in the long run. In my view, there are better ways to accomplish that goal, including modification of our bankruptcy and labor laws, more effective international agreements and where necessary, a bit of regulation.

This guest post is from Hubert Horan, a 25-year industry veteran and independent aviation consultant based in Phoenix. He was responsible for the development of the original Northwest-KLM alliance network, and has been directly involved with dozens of industry mergers, alliances and restructurings.

The argument behind the airline consolidation movement of the last five years is very simple. Free market competition simply doesn’t work when it comes to airlines. Since the big airlines like Delta and United haven’t made strong financial returns, we need to declare that deregulation was a failure, and allow Delta and United to sit down with the Federal Government and agree on an industry structure that will give them the artificial pricing powers and protections from future competition so they can make more money. The pro-consolidation posts in this series illustrate the explicit anti-market thinking. Swelbar says the legacy of deregulation is 32 years of economic waste. Both Swelbar and the Cordle/Mifsud/Bonilla paper make direct “market failure” claims—airlines could never make money in open markets because they will always pursue market share and growth-for-growth’s-sake, and this will always produce uneconomic excess capacity. Delta and United are innocent victims of rapacious bargain-demanding consumers and the low cost airlines catering to them, and government needs to step in and shift market power back into their favor.

The counter-arguments are also simple. These mergers fail all basic efficiency/competitiveness tests. Recent mergers have already created billions in anti-competitive pricing power and current mergers like AA/BA, United/Continental and the US-Japan antitrust immunity cases are designed to create more. They will not improve Legacy carrier cost structures as the huge implementation costs overwhelm the very limited scale economies. The capital markets haven’t invested a dollar in any of these combinations, because they know they won’t produce meaningful efficiency gains. Even the United/Continental press release touting the merger admits that it won’t have any material impact on cost competitiveness. They will not fix any of the industry’s actual problems, such as excess capacity, high oil prices, high tax burdens, declining productivity, barriers to cross-border competition or other forms of government protectionism in international markets. None of the international consolidation since 2004 resulted from “market forces” (more efficient airlines displacing less efficient airlines), it was strictly due to large airlines petitioning government officials for reduced competition. Dramatically reduced competition not only harms consumers in the short term, but destroys the pressures needed to drive continual improvements in industry efficiency in the long term.

Airlines were deregulated because regulated cartels—a fixed set of domestic airlines protected from new market entry by the CAB and a nearly fixed set of international airlines cartelized via IATA—stifled innovation, entrenched badly run incumbents, rewarded political lobbying skills more than efficiency or service quality, and produced lousy productivity growth and financial performance. Deregulation addressed the innovation, productivity problems globally, and solved most of the entrenched incumbent and political interference problems domestically. But the Legacy network carriers remained wedded to the strategies of past decades and have not adapted well to a world with more limited demand growth and increased low cost competition.

The airline consolidation movement is a counter-revolution against liberal, free-market competition, against the idea that that winners and losers ought to be decided by consumers and investors and not by governments, and against the idea that airline competitive structure should maximize overall industry efficiency and consumer welfare, and not the short-term profits of individual companies. Swelbar’s argument is that all of the innovation and productivity gains stimulated by market competition should be dismissed as worthless because the people running United and Delta haven’t been able to produce strong profits recently. The Cordle/Mifsud/Bonilla paper doesn’t see the weak profits of these individual companies as evidence of the ongoing “creative destruction” of weak companies, but as evidence that market competition has failed.

Transactions such as United/Continental cannot be viewed in isolation as they are part of a well-planned consolidation process (which Swelbar, Cordle, Mifsud, and Bonilla clearly support) designed to merge all of the world’s large network airlines into just three competitors, based on the three Collusive Alliances originally established on the North Atlantic. The three alliance cartel will control 100% of the trans-Atlantic and trans-Pacific markets, and (protected by impenetrable entry barriers) will be able to raise prices and cut services at will. They will also control the 70% of the domestic market where low cost airlines cannot compete. “Alliances” per se are not the issue. Longstanding alliance functions such as simple codesharing and frequent flyer reciprocity pose no antitrust issues. The issue is when alliance antittrust immunity is used to create the market power needed to sustain anti-competitive pricing.

The potential gains from sustainable pricing power are huge, especially in international markets, although they don’t become clear until a few years after the mergers that made them possible. In 2003 there were still 11 large competitors on the North Atlantic, and the top 3 carriers only had 47% of the market. In 2008 top 3 concentration had risen to 80% and carriers achieved over $5 billion in pricing gains solely attributable to increased market power driven. Those anti-competitive gains will continue to rise since the elimination of competition from Continental, American and Iberia has pushed concentration over 90% and small carriers such as Virgin Atlantic have no hope of surviving independently. The process of merging 26 independent trans-Pacific competitors into the same three Collusive groups began last year.

For many years six Legacy network airlines competed both domestically and internationally, but none could survive without significant international operations. Thus when the DOT blessed the consolidation of all trans-Atlantic competition into just three competitors they handed huge market power to the three alliance airlines (Delta, United and American) and issued a de facto death sentence to companies #4, 5 and 6. Delta exercised this market power by forcing carrier #4, Northwest, to accept a merger where Northwest shareholders were only paid for the cash Northwest had on hand, with Delta getting all of Northwest’s physical and brand assets essentially for nothing. The United/Continental merger will directly eliminate carrier #5, and is designed to cripple or kill carrier #6, USAirways, the most efficient of the Legacy network carriers. The battle for survival between US Legacy carriers is not being decided on the basis of low costs or network strength or service quality, but by regulatory distortions that granted artificial market power to inefficient (but politically savy) large incumbents.

This ongoing creation of anti-competitive market power has been totally dependent on DOT’s complete disregard for longstanding antitrust law, precedent and evidentiary requirements in all recent antitrust immunity cases. Instead of conducting the market power test required by the Clayton Act, DOT simply asserted that North Atlantic markets were highly contestable, ignoring overwhelming evidence of dramatic pricing shifts, and ignoring the fact that there has been no successful new entry in this market in 23 years. Instead of demanding the verifiable, case-specific evidence of public benefits required by law, DOT granted immunity on the basis of the fraudulent claim that reducing competition automatically lowers fares in connecting markets by 15-25% regardless of market or competitive conditions. The DOT has indicated that it intends to use the same reasoning to evaluate the current applications to reduce competition in the US-Japan market by 50%. DOT claims that consumer interests are fully protected as long as three large airline competitors remain somewhere in the world, even though it has not conducted any analysis of international competition since 1999. None of the consolidation that has occurred since 2004, or will likely occur due to United/Continental and the US-Japan cases would have ever occurred under free-market conditions with normal enforcement of longstanding antitrust rules. It only occurred because the DOT was willing to subvert its responsibilities to consumers in order to engineer an airline industry structure designed to produce artificial market power for United and Delta.

When the Soviet Union collapsed, the Soviet national monopoly carrier Aeroflot was broken into over 100 smaller carriers, with the future structure of airline competition left to the market. United today is far bigger than Aeroflot ever was, but claims it needs to merge with Continental because it isn’t big enough to operate efficiently. In every antitrust immunity case, DOT places huge value on synergies from increased scale and network scope, but places no value whatsoever on market contestability or preserving the competitive pressures that drive innovation and improved productivity and prevent oligopoly price increases and service cuts. Perhaps United, Delta, DOT and the other advocates of global airline consolidation ought to tell the former Soviet republics that emphasizing dynamic market competition was a dreadful mistake, and consumers would be much better off if those airlines were merged back together.

Detailed evidence documenting the claims here about anti-competitive pricing impacts and the DOT’s failure to follow longstanding antitrust law requirements can be found in testimony submitted in the BA/AA antitrust case under docket DOT-OST-2008-0252-3394 and -3389.

Guest bloggers rebut the case against mergers made by former American Airlines CEO Bob Crandall and House Transportation and Infrastructure Committee Chairman James Oberstar:

May 27, 2010

Paul Mifsud / Carlos Bonilla / Vaughn Cordle, CFA

A number of themes keep surfacing from different participants in this discussion.

The first theme (see Bob Crandall) is that excess capacity doesn't exist. We want to be clear that we are not using this term in a subjective manner, but rather that we are working from a quantifiable definition. In the airline industry excess capacity is capacity over-and-above the level compatible with the industry earning its cost of capital over a full business cycle.

To earn its cost of capital over the most recent business cycle (2000-2009), the industry would have had to raise fares for the average seat by 11%. Calculating consumer demand response over this decade (as prices rise, consumer demand falls, known as the price elasticity) we see that this price level is consistent with 7% lower capacity (holding load factors constant). Hence, the definition of excess capacity.

The second theme (see both Congressman Oberstar’s and Bob Crandall’s comments) is that more mergers cannot be counted on to remedy the industry’s ills. For reasons we laid out in our white paper we believe that absent mergers the only alternative is the slow liquidation we are already witnessing.

Allowing one or more large network airlines to fail – the implicit alternative if mergers are taken off the table -- is not a practical solution for the stakeholders of those airlines and it doesn't solve the industry’s problem of inadequate profitability and severely damaged balance sheets.

This opposition to mergers is based on three premises:

• The first is the mergers don't always work. We agree, but would argue that it is not government’s job to second guess commercial thinking. We would, however, note that the likelihood of success is reduced if the merger is delayed or if the approval requires the shedding of too many assets.
• The second is that mergers don’t create value in and of themselves but only cannibalize market share. In fact, mergers which better align carriers with both national and global markets do create value, particularly in an era of global alliances.
• The third is that mergers result in "fewer customer alternatives" and are harmful for consumers. This is proved wrong by the large numbers of domestic and international competitors that will remain. Bob makes the point that low cost carriers (LCCs) will continue to "aggressively" compete against the networks. While this is true, we would add that given the LCC market penetration we anticipate over the next several years, network pricing power will be reduced even further. This supports the need for additional [network] mergers, so as to increase industry pricing power. The system can only profitability supports three large networks, not four or five.

Bob Crandall did talk of the need to "Negotiate a level playing field internationally." This was the AA mantra in Crandall's day. That argument is obsolete. Now there is Open Skies with Europe, Japan, India and much of the rest of the world. This administration, like the three before, has embraced this policy. Is he suggesting this policy be rescinded, ATI be removed and alliances disbanded? We will argue that the US network carriers have neither the capital nor clout to unilaterally provide for this nation's need for global access.

Congressman Oberstar is concerned about small communities that will lose air service. We argue that this will particularly be the case if industry consolidation is precluded. It takes viable and healthy large network airlines to serve small markets. LCCs have shown little interest in providing this service.

Finally Congressman Oberstar believes that the Delta/Northwest merger created an impetus for additional mergers in the industry. We believe that additional mergers are the result of the same pressures that led to the Delta/Northwest merger.

While the consumer has benefited from the fall in airfares, the industry has suffered. In today's dollars, the industry lost $70 billion over the last decade. Other stakeholders, however, must also be considered, including those small communities and the capital providers. We have grown so used to this industry losing billions of dollars year after year that we have become inured to the threat those losses pose to the service we want. If something cannot continue forever, it won't.

There are areas we agree on. For example, we agree that updating our infrastructure is a valid goal, but we'll note that it is far in the future before it can be achieved.

Mergers are not the ideal solution, but are better than the alternative, which is a continuation of the downward spiral in product quality and viability and the loss of even more small market services.

When Delta Airlines and Northwest Airlines merged in 2008, I warned that the deal would create great pressure for other large airline mergers.

Now Continental and United have announced an urge to merge. The new airline would be the world’s largest airline, surpassing Delta, which gained the title when it merged with Northwest. Delta grabbed the title from American, which took the honor after its absorption of TWA. If allowed to happen, the planned merger of United and Continental will move the country a major step closer to an airline system dominated by a handful of mega-carriers.

This is the exact opposite of what I voted for when I supported airline deregulation in 1978. Deregulation promised robust competition and innovation – not consolidation of the industry into the hands of a few dominant carriers.

Beyond encouraging future mergers, the proposed United-Continental merger itself presents problems. The two carriers’ networks overlap on 13 routes connecting some of America’s largest and most important markets. The two also overlap in a number of international markets.

The airlines argue that this merger is necessary for their survival. However, given the long history of ultimately unsuccessful airline mergers, no one knows whether this merger will succeed in bringing stability to this industry, or just lead to more consolidation and fewer choices for consumers.

Another guest post....

05 May 2010 / Paul Mifsud, Carlos Bonilla and Vaughn Cordle, CFA

AirlineForecasts, investment research firm, says mergers provide a market-driven restructuring solution that allows network airlines to compete with the emerging low-cost carrier business model.

AirlineForecasts investment research firm released a white paper by Paul Mifsud, Carlos Bonilla and Vaughn Cordle. The three industry experts argue that network airlines that provide access to global markets are in danger of slowly liquidating if they are not allowed to merge.

The U.S. airline industry can only support three large network airlines.

The announcement of a United-Continental Airlines merger renews interest in the legal, financial and political issues surrounding consolidation in the U.S. airline industry. Perspectives on these issues among the many industry stakeholders—consumers, communities, investors, suppliers, labor, competitors and politicians—vary, but it is clear that the corporate and governmental policies applied to these subjects affect not only these stakeholders, but also the national economy and the trillion-dollar travel and tourism industry that relies so heavily on a healthy, reliable air transportation network.

The purpose of this white paper, and those to follow, is to make the case for market restructuring of the U.S. legacy airlines and the industry in general through consolidation and network restructuring. In the U.S., such consolidation provides an important network foundation that—with the right corporate, labor and political leadership—sets the path to sustained growth and U.S. leadership in the development of the emerging 21st-century global air transport networks. Without this leadership and without further consolidation, we expect there will be at least one, and perhaps two, more failures among the network airlines, as well as several low-cost-airline failures.

It is important to recognize that the airline industry is composed of a variety of business models that satisfy distinctly different, though often overlapping, transportation needs. For simplicity’s sake we distinguish among network, low-cost and regional carriers.

American Airlines (AA), United Airlines (UA), Delta Air Lines (DL), Continental Airlines (CO) and US Airways (US) are the major U.S. network airlines. Using a broad mix of aircraft types, they gather passengers from small and large airports, domestic and international, and distribute passengers through hubs strategically located around the country. This model enables network airlines to accept passenger flows from other carriers' networks, so commercial relationships with regional carriers and international network carriers efficiently extend the network carriers' reach. The network airline model provides a vast number of communities, their business travelers, and visitors with global access to the world's markets. However, these network efficiencies come at the price: Complexity, legacy labor policies, outdated infrastructures, and poorly considered government policies (domestic and foreign) have resulted in lost efficiencies and higher costs for the network carriers.

Southwest, Jet Blue, Air Tran, Frontier and Spirit are examples of low-cost carriers (LCCs). The low-cost model also operates from hubs (called "focus cities" by some), but LCCs tend to operate limited types of aircraft, to feature point-to-point services, and to operate only between high-density domestic and cross-border airport markets. Simplicity, newer fleets, and a younger labor force that began work in a low-cost environment, as well as quick turnaround times for their aircraft, provide efficiencies that result in low fares. However, this model does not lend itself to serving low-density or small communities. Moreover, the extension of this model internationally, beyond a few cross-border routes with Canada, Mexico, and a few Latin American destinations, has yet to be proven, although Southwest’s large domestic market share makes it the most likely candidate to initiate long-haul international operations. We expect it to do so within the next five years.

Regional airlines such as Sky West, ExpressJet, Pinnacle, and Republic (the last a hybrid airline that also operates Frontier as a branded business) are "fixed-fee for departure" airlines that use a modified LCC model and operate smaller aircraft suitable for low-density airports. They connect at the hubs of network partner airlines pursuant to contract conditions that are subject to the often strict limitations of the scope clauses in the collective bargaining agreements of the network carriers. These carriers are specifically structured to link the smallest communities that receive air service with the network hubs.

All that said, in any discussion involving airline consolidation, there are a number of issues that should be put into perspective:

• DOJ policies related to their analysis of market concentration, product definition and potential market power in the air transport industry were first developed in the years just after deregulation in 1978 and have not been modified since. Simply stated, the policies are dated and stuck in the past.
• The years immediately following deregulation saw the proliferation of U.S. network carriers, most of which derived over 80% of their revenues from domestic air transportation. Combined, they provided a similar proportion of all U.S. domestic available seat miles (ASMs).
• Today, there are only five major U.S. network carriers and 28 LCC and regional airlines in the U.S., so there has been a considerable alteration in the composition of domestic competition. This has resulted in destructive price competition.
• The U.S. network carriers’ share of the domestic market (excluding regional ASMs) has been shrinking annually In 2009, Southwest, the largest LCC, continuing its faster relative growth trends, provided 14.6% of total U.S. ASMs, while DL provided 16.1% after the NW merger in late 2008 [Figure 1].
• UA and CO together provided 17.7% of the domestic ASMs in 2009. However, we ultimately expect to see a 5-10% reduction in combined capacity post-merger, which will reduce their market share and improve efficiencies. This outcome results because one of the major purposes of airline mergers is making routes more rational. For example, the pre-merger domestic shares of DL and NW, were 10.1% and 6.3%, respectively in 2008, but combined they had a 16.1% share in 2009.
• Given what we consider an appropriate amount of domestic ASMs produced post-merger, a AA/US combination would be approximately 19.6%, which is somewhat larger than UA (+CO), DL(+NW), and Southwest.

Figure 1:

2009 Market Share - ASMs and RPMs

In percentage terms

Our analysis of the trends over the last decade suggests that, without a new strategic direction and significant changes in the industry’s structure, AA and US will continue on the slow liquidation path to failure. Corporate, labor and government policies that ignore these trends risk reshaping the competitive landscape and America's access to the global air transport network far more adversely for stakeholders than the current consolidation trend that naturally led to mergers between UA, CO, DL, and NW.

Bad industry fundamentals: The prisoner’s dilemma

In game theory terms, the industry's problem represents the classic "prisoner's dilemma" because firm value, airline economics and passenger preferences provide strong incentives to cheat (by over producing to gain disproportionate market share and lower relative costs). These incentives are so great that the ability of the individual airline to profitably maintain seat production levels that optimally balance supply/demand is severely limited. The result is, collectively, the entire industry is laden with excess capacity. Excess capacity is at the heart of the industry's inability to earn its cost of capital.

More links from the Air Transport Association's SmartBrief, this time to comments by American Airlines CEO Gerard Arpey that the airline can compete on its own terms without merging:

NYT: http://www.nytimes.com/2010/05/20/business/20air.html?scp=2&sq=airlines&st=cse

WSJ: http://www.nytimes.com/2010/05/20/business/20air.html?scp=2&sq=airlines&st=cse

Chicago Tribune/AP: http://www.nytimes.com/2010/05/20/business/20air.html?scp=2&sq=airlines&st=cse

This post was sent in by Robert Mann, president of R.W. Mann & Company, an airline industry analysis and consulting firm located in Port Washington, NY:

A proper answer requires that we first step back and address the issue: "What must we do to ensure a viable national air transportation system?"

Addressing that question will first allow us to stabilize the US airline industry, preserve service to small communities and ensure overall customer utility and outcomes. Failure to do so means a continuing decline in network carriers - the only segment of the industry presently serving smaller communities and most international destinations - no matter how we rule on the merits of United-Continental.

Network carriers serve smaller American communities (mostly via capacity purchase arrangements with small aircraft operator partners) as well as large cities and the broadest range of international destinations, both with their own aircraft and via commercial alliances with global airline partners.

By contrast, expanding low cost / low fare carriers provide high frequency point-to-point service. Over the past three decades, they have provided a growing share of US industry capacity – but only in medium-sized and larger metropolitan markets that suit their business model, only a few of these being transborder markets. By design, most do not ‘interline’ passengers and baggage with other airlines, nor do they code-share extensively, some not at all.

Despite individual carriers’ significant rationalization of schedules and capacity and a slew of previously approved mergers, broad code-shares and anti-trust immune alliances – including several involving United and Continental – network carriers as a group have for three decades continued to lose share of US air travel consumer spending to expanding low cost, low fare and new entrant US carriers, and more recently to foreign flag carriers.

The resulting destruction of capital and jobs has left US network carriers in a seemingly perpetual, precarious, slow liquidation mode and has left more small communities isolated and reliant on Essential Air Service subsidy at significant taxpayer cost. The status quo is anything but a viable national air transportation system.

Whether or not we like the idea of mergers, code-shares, alliances and asset acquisitions/transfers, they do rationalize and stabilize by increments a still very fragmented and unstable industry. Importantly, consolidation has demonstrated that hoped-for efficiencies and a convergence in costs between network and lowest-cost business models can be achieved. Yet there is no evidence that consolidation has reversed the decades long trend of lower real dollar air fares.

Merger, alliance and asset transfer proposals – all forms of consolidation – have been the devil to get approved, leaving the industry fragmented and some network carriers at a distinct disadvantage to others, both domestically and in world markets, even in ostensibly ‘open-skies’ markets like the US-EU Atlantic aviation area, which further de-stabilize this segment of the industry.

It is impossible to eliminate disadvantage by unwinding prior deals and setting the clock back to the 1970s and the even more fragmented interline era, not to mention it would reduce utility and raise costs and prices to the flying public. Instead, what about completely leveling the playing field by allowing blanket merger, alliance and asset transfer authority? What would be the impact?

The result would be a multi-year consolidation of much of the US network airline industry to three larger and more stable carriers, each aligned with one of the three global airline alliances, Star, Skyteam and oneworld. Each would continue to employ small aircraft operator partners to provide the majority of their domestic and virtually all smaller US city service. Plus – importantly – consolidation would result in more stable niche network players (like Alaska Airlines) and a host of still rapidly expanding low fare / low cost carriers to vigorously compete in and discipline medium and larger city service and pricing.

True, this would result in further rationalization of network carriers’ schedules and capacity, with the hoped-for result being a so far elusive improvement in pricing power. This would be achieved via more aggressive revenue management, not likely by fare increases, due to continuing low fare carrier discipline. Fair to say that smaller US city and international markets would be the most at risk of average price rises. So continued monitoring may be warranted, much as DOT and BTS/RITA do today.

Why level the playing field? In the more than thirty years since deregulation, the nation’s air transportation system has come long way, yet the full economic benefits of a rational and comprehensive aviation policy have yet to be realized.

The industry is impeded by the self-induced drag of having failed over the long term to address in a coordinated way important transportation, economic and environmental policy issues. And we continue to face red herring issues such as perceived, shadowy national security concerns that surround proposals for foreign investment in and control of US air carriers, and the idea that any change would result in more jobs lost than continue to occur in this unstable industry.

Overall, the network airline industry continues to fail because we have failed to address critical policy issues that create significant uncertainty and business risk – in both domestic and international commerce – including by tilting the playing field in favor of a few carriers who ran the gauntlet and implemented approved mergers or anti-trust immuned alliances.

So to start, let’s complete phase one and truly level the playing field. Allow consolidation to stabilize the US network airline industry and thereby improve customer utility and outcomes. Let mergers, alliances and asset transfers proceed apace, including those across borders, the final frontier.

Let’s allow airlines to contribute unfettered to American business productivity, promoting greater efficiency. Allow growth in the aviation sector to create further consumer demand and skilled jobs through a strong multiplier effect. Monitor pricing in smaller markets, certainly, but we must move past “no”.

Yes, allow United and Continental to merge. And also allow Delta-US Airways slot transfers. Allow the long-delayed American-British alliance to go forward. Allow Richard Branson the right to unite his various global aviation brands. You get the idea.

But at the same time, require global aviation agreements that enable unrestricted foreign shareholding, transborder mergers and right of establishment under local safety oversight, economic and labor regulations, where today capital flows are limited and inferior anti-trust immuned alliances have been engineered and approved in their stead. At the same time, require the sunset by 2020 of all anti-trust immuned alliances.

Let those who argue for consolidation really risk their capital, not just hide behind anti-trust immunity and flags of convenience.

Here are links to two stories about US Airways CEO Doug Parker's remarks at Tuesday's Washington Aero Club luncheon. He challenges the notion that American Airlines will have to join forces with another airline to survive, criticizes the administration and congressional Democrats' anti-trust policy and endorses the Continental-United merger. The links are courtesy of the Air Transport Association's daily SmartBrief:

WSJ/Dow Jones: http://online.wsj.com/article/BT-CO-20100518-710700.html?mod=dist_smartbrief

Reuters: http://www.reuters.com/article/idUSTRE64H68220100518

Business Travel Coalition has long viewed airline mergers and industry consolidation with a good measure of skepticism regarding anticipated benefits for all stakeholders. While we are still working to formulate a public position on the proposed Continental (CO) – United (UA) merger, there are several areas of concern worth noting that suggest the antitrust analysis should go beyond the press release-spin that this is an end-to-end network combination that will drive benefits for all.

The concern over the Delta – Northwest proposed merger in 2008 that prompted BTC to testify in the House and Senate in opposition to it was that it would trigger radical consolidation to 3 mega carriers against a history of failed mergers while raising prices and reducing service. Soaring jet fuel prices and worsening airline financial results in 2008 effectively put consolidation on hold.

A CO-UA merger would likely cause an American Airlines combination with US Airways, and thus, 3 mega carriers would result. Even non-CO or UA executives publically exclaim, as non-merger participants, the benefits to their airlines from the capacity removed, and attendant pricing power achieved, by this proposed merger.

Rationale to support a CO-UA merger would include that in the 2 years since DL-NWA (1) low cost carriers have continued their growth, (2) network airlines’ balance sheets have continued to deteriorate, (3) jet-fuel prices are on the upswing again, (4) business travel volume and yields still have not recovered and (5) low cost new entry is poised to increase as parked aircraft and crews are available and capital markets are loosening.

Some analysts argue that 3 major network carriers are all that the U.S. market can handle if supply is to be right-sized to demand for the purpose of enabling these carriers to recover their cost of capital over a full economic cycle. However, these same analysts agree that due to low barriers to entry for low-cost carriers (equipment, crews, capital) there will always be excess capacity and thus airlines will never represent attractive long-term investments. These two arguments are contradictory. Mergers and consolidation, aside from a near-term valuation play, are not effective industry solutions and could cause significant problems for many stakeholders.

These analysts likewise argue that 3 strong national network airlines would provide effective competition for all consumers. However, this does not recognize the unique hub-market dominate structure of the industry and that corporations located in hubs do not have the ability to successfully play one supplier off against another as is the case in other industries. No one of these 3 national network carriers would be able to meet the vast majority of most corporations’ air travel needs, thus corporations’ parity at the negotiation table would be greatly impaired. In contrast, Boeing or Airbus can meet virtually 100% of an airline’s wide-body aircraft needs; thus, airlines benefit from near-perfect price competition with just two suppliers. Consolidation to 3 network carriers will enable these firms to further fortify their hubs to the detriment of corporate buyers.

With 3 mega-network carriers and their alliance partners acting as a single buyer there is the risk of these groupings exercising monopsony power, i.e. driving pricing for all manner of services below competitive levels. At risk are travel agents, global distribution systems, airports, food service providers, labor, equipment manufacturers and many other services providers. As a consequence, it would be easier by an order of magnitude for these behemoths to shift distribution and other costs to the consumer.

With 3 mega-network carriers and their alliance partners acting as a single seller there is the risk of these groupings exercising monopoly power, i.e. driving pricing for air services above competitive levels. For example, under current airline alliance antitrust immunity provisions, an alliance can refuse to deal with a corporate buyer unless that buyer agrees to deal only with the alliance, versus individual members. Radical consolidation would further strengthen these alliances in dealings with corporate customers driving down the value of their contracts.

With one less major network carrier, in an oligopolistic industry, the Coordinated Effects Doctrine becomes relevant as there would be one less veto vote available to reject system-wide fare increases. Once consolidated to 3 major carriers, concentration at the national, hub and city-pair market levels becomes less relevant as across-the-board fare increases would be much more easily facilitated.

Analysts argue that the alternative to mergers and consolidation is a slow liquidation for network carriers. Antitrust law does allow for the Failing Firm Doctrine under carefully specified conditions, however, the laws are not concerned with shareholders’ interests or the fact that an industry is unprofitable. Rather, antitrust laws are purposed to protect competition and the consumer against combinations that will likely lead to higher prices, less output and lower quality. Moreover, one or two failures would allow more efficient airline operators to acquire the assets and deploy them at higher and better economic uses to the consumer’s benefit. This outcome would be superior to structurally institutionalizing failed businesses on the backs of consumers.

Evaluation of the CO-UA proposed merger would need to assume the collapse of network carriers to 3. Remedies would need to be considered that reflect the unique competitive structure of the industry wherein in mega carriers would be able to easily wield their power against consumers as well as supply chain participants.

As we continue to study this proposed transaction, BTC welcomes the views of others with respect to the concerns raised above.

William S. Swelbar, a research engineer with the Massachusetts Institute of Technology's International Center for Air Transportation, send us this post:

After decades of destructive competition, consolidation is the logical next phase of evolution in the U.S. airline industry. This, after all, is an industry that lost $60 billion over the past decade – making folly of the goal of the 1944 Chicago Convention in charging the International Civil Aviation Organization to “prevent economic waste caused by unreasonable competition.”

Instead, the U.S. domestic passenger market produced plenty of economic waste over the past 32 years, affecting shareholders, lenders, employees and most other stakeholders. The only clear winner from the industry’s singular strategy of adding uneconomic capacity was the consumer.

Today, the legacy network carriers are focusing away from the bloodletting in the domestic market with an eye toward international flying. Too often, regulators and legislators and even some analysts see the global airline industry as somehow U.S.-centric. It is not. In aviation, the U.S. is one piece of a big puzzle that is influenced by global economic interdependencies, just as the U.S. economic recovery could be affected by events in Greece and possibly Portugal and Spain.

For the legacy carriers, this round of consolidation is more about preparing to compete with the world’s other big carriers as much as it is about competing with Southwest or AirTran or jetBlue. That’s why so many are shaping their networks and alliances to attract domestic and international bound passengers. The footprint established by the low fare carriers is now national in scope, while the fares they charge should be considered as much of a contributor to that fact that many smaller communities are losing air service as is the economy and the price of oil.

The 1978 Airline Deregulation Act clearly accomplished the goal of delivering safe and affordable air service to the masses. Today, airplanes are packed with flyers paying, on average, 55 percent less for a ticket when adjusted for inflation than they paid in 1978. Why? Because most U.S. airlines responded to deregulation in the 1980s and 1990s with a capacity-led business model that made cost control imperative. Some of today’s cost controls can be found in the outsourcing of maintenance or downguaging the size of airplanes to adapt to the realities of the marketplace.

For decades, the only way the industry knew how to grow revenue was to grow capacity. Airlines used the tools and methods that had their roots in regulation and were focused on estimating market share. Fundamental to that analysis was the belief that growing revenue meant the need to grow capacity – and most airlines did, even before demand warranted it.

Everybody focused on “screen display.” Statistics showed that if an airline’s flight did not appear on the first few CRS screens of available flights in a market, that airline didn’t get as many bookings. The more sophisticated the global distribution system (GDS), the more important electronic “shelf space” became.

Only recently has the industry worked to rid itself of too much capacity brought about by this market share mentality – one result of the role of CRS/GDS bookings that made an airline seat a commodity.

Today’s consolidation is working to undo the capacity-added wrongs of the past. Consider labor. For too long, airlines carried uneconomic capacity, employed too many people and signed on to labor contracts that created unreasonable expectations for airline employees. That steady growth also created expectations that airlines were somehow required to serve smaller communities, even when demand did not warrant service and those routes could not be flown at a profit.

Much of this is still true. U.S. airlines have used bankruptcies and other restructuring efforts to cut capacity and increase productivity, but many did not go far enough. The real catalyst to capacity discipline was $147 oil. And that capacity discipline needs to continue if the industry is ever to get to a period where it earns at least its weighted average cost of capital.

Unlike other rounds of consolidation that focused primarily on network scope, scale, revenue and cost synergies, this round is different. Now the industry is looking at the balance sheet. The market rewarded Delta following its acquisition of Northwest with a market capitalization that exceeds that of United, Continental, American and US Airways combined. Consolidated carriers promise more stability to employees, shareholders and communities that benefit from the combined strength of the respective balance sheets.

Capital has smartened up. We do not see as much creative financing or unsecured lending as was common in the past. Assuming successful mergers, combined airlines will be able to raise capital more easily, carry their labor costs and offer passengers more choice of routes and destinations.

The U.S. market should not fear the “end to end” network consolidation like Delta – Northwest and the proposed United – Continental merger. The market has demonstrated time and again that where competition is vulnerable, a new entrant will exploit that vulnerability. Where there are market opportunities, there will be a carrier to leverage that opportunity. And where there is insufficient capacity, capacity will find the insufficiency.

Simply put, the legacy carrier model of the 1980’s and 1990’s does not work in today’s environment. Consolidation is a logical step to position airlines in a highly fragmented industry to better weather the financial challenges that have caused years of economic pain and a rising tide of red ink.

William Swelbar is a Research Engineer with MIT’s International Center for Air Transportation. He is also the manager of MIT’s Airline Data Project http://airlinedataproject.mit.edu and author of www.swelblog.com.

I believe there are benefits of consolidation for the two carriers for the reasons stated in their respective press releases: coordination of routes, ticketing, frequent flyer programs, access to larger route structure. I also think it strengthens their ability to compete in the global market and survive in the difficult economy today. Perhaps this alone is sufficient reason for the merger to go forward.

But I have difficulty finding a benefit for the traveller. Do we really believe this consolidation will increase choices? Do we expect it to maintain the current fare structure? Is service likely to improve with one consolidated carrier? Has past experience justified these claims? I am not convinced. I believe if the merger is approved we should at least not raise false hopes about the outcome for passengers.

The United States needs a vigorous and profitable airline industry. In my view, there are better routes to that objective than continued airline consolidation.

Almost everyone agrees that competition offers real benefits for both consumers and producers, and in most industries, we think competition is a good thing. In the airline industry, we seem to have concluded that there is too much competition (the politically correct term is excess capacity) despite the fact that load factors (the percent of seats occupied) is very high. Thus, 32 years after deregulation, many observers have concluded that eliminating competition by encouraging consolidation is good public policy.

That’s a far cry from the popular wisdom that prevailed when the Deregulation Act of 1978 “set the industry free” to provide the unrestricted competition advocates avidly sought. In the years since, the industry’s economic realities have mixed more poorly with laissez faire theory than anticipated, and results have been far more mixed than expected.

Granted, fares are down. Adjusted for inflation, fares have fallen from about 8 cents per passenger mile to about 4 ½ cents and consumers clearly enjoy being able to fly from A to B for less than they spend to have dinner or stay in a hotel. On the other hand, many consumers are clearly unhappy with current service standards and many other groups have found deregulation less than rewarding.

Airline investors, for example, have done very poorly. In the years since deregulation, the industry has lost more than $60 billion, and every major carrier except American has been in and out of bankruptcy (some more than once).

Employees have done poorly as well. More than 25% of the industry’s people have lost their jobs in the last decade alone and those still working earn wages and benefits far below levels that previously prevailed. Moreover, bankrupt carriers have cancelled more than $2 billion of retiree medical obligations.

Meanwhile, the country has lost something like 8,000 highly skilled mechanics jobs as airlines have sent their airplanes abroad for maintenance ( to companies and people supervised far less carefully by the FAA than domestic maintenance providers) and the PBGC (read taxpayers) has absorbed more than $13 billion in pension obligations renounced by the various bankrupt carriers.

Finally, lots of small cities have lost access to the nation’s airline network, thus making them far less attractive places for people to live and work. More than 100 cities in 25 states lost service in 2007 and 2008 alone, and in cities that still have service, aircraft size has diminished, frequencies have been reduced and per mile fares are far above the system average. – all of which has made it hard for them to preserve a vigorous business climate.

Still, it is clear than the industry must find a way to earn profits. Unless earnings improve, the industry’s threadbare balance sheet will not support the substantial, continuing investments it must make to sustain our domestic aviation system.

The key question, it seems to me, is whether consolidation is likely to increase the industry’s earnings while operating in ways consistent with the public’s desire for decent service and the nation’s need for a ubiquitous and profitable air transportation network. I think the answer is far from clear:

1. Airline mergers drive substantial capital investments, involve very difficult technical and personnel integrations and create complex organizational and management challenges. In this industry as in others, most mergers are much less successful than anticipated.

2. Airline mergers depend on revenue synergy – which is industry shorthand for taking customers from other carriers. In the natural course of things, those losing business will seek to recapture it – and by so doing, will undermine the “synergies” anticipated.

3. Finally, the logic of consolidation rests on the premise that consumers – having fewer alternatives --will pay higher fares and tolerate poorer service. History suggests that other alternatives will present themselves.

I think there are better alternatives. Among them are doing more to update and improve our aviation infrastructure (which would encourage innovation, improve service, save money and reduce fuel usage), revising our bankruptcy and labor laws to encourage or mandate a higher level of management-labor cooperation, changing our international aviation policies to assure appropriate opportunities for U. S. carriers, crafting public policy to encourage rather than discourage airline travel and imposing regulatory controls in appropriate circumstances.