Why Mergers? Why Not?
By Carl Finamore

America’s popular TV program the “Dating Game” is off prime time but wipe that frown off your face because it’s making a come back. No, not the Hollywood version.

This time it’s Wall St. parading out well-groomed suitors with deep pockets. The object of their desires – major air carriers. Personally, this doesn’t get my hormones flowing. However, manicured investors are absolutely turned on by the idea.

It’s understandable. Airlines promise a good night out and are the cheapest date in town. It is conservatively estimated that major carriers saved $11 billion in bankruptcy from 2002-2005.

As a result, their waistlines are trimmer and leaner than ever and their wallets full. This makes airlines quite attractive to jet-set investors. Claiming the lowest profit rate among the majors at 2%, UAL still posted a $334 million 3rd quarter profit – a 76% increase over a record set the previous quarter.

Wall St.’s long-standing advice to reduce airline competition is fueled even more by the phenomenal growth in oil prices.

 

Thus, squeezing more passengers into smaller aircraft flying less often to cities now served by several carriers is seen as a good fix to keep aircraft full, profits up, and expenses down.

Of course, this policy would negatively impact the public.

The last round of significant mergers occurred in 1985 when there were around 20 major airlines in the USA. Two years later, half of them vanished, including brand names like Western Airlines, PSA, Ozark, Republic, AirCal, and Piedmont.

Aided by government deregulation of airlines, carriers reorganized their operations. A significant number of smaller cities in the country lost regular service overnight. Without facing much competition, cramped-cabin commuter carriers eventually moved into regional markets charging dramatically higher ticket prices.

The situation remains the same today.

A 45-minute round trip fare from small market Sacramento to San Francisco, listed on UAL’s website,  costs 25% more than a 3.5 hour San Francisco to Chicago flight.

Now, big-money investors’ eager for airlines to merge want to also makeover major urban Hub Service to be far less competitive. Of course, this will have the same impact experienced in smaller markets after the last wave of mergers several decades ago – higher ticket prices.

A case can be made for mergers, but not under conditions set by Wall St. when it advocates fewer employees, fewer seats, and fewer routes. We airline workers already know what it means when investors seek to lower costs in their mad dash for profits, completely disregarding our interests.

 

We advise the public to buckle up and take extreme caution when hearing money managers make their case. You may be next.