Will Mergers Fly?
Tuesday, January 22, 2008
Even before any of the nation's major airlines make formal overtures that could lead to mergers, lawmakers from both parties are voicing concerns about the potential pitfalls of consolidation.
Merger talk, which is always simmering in the airline industry, gained renewed attention in recent weeks after media reports described Delta Air Lines' efforts to negotiate a merger with one of two other major carriers.
Airline executives at several major carriers believe they should attempt a merger in coming months, according to some consultants and analysts. Mergers could boost stock prices and allow carriers to cut some costs to offset higher fuel prices while expanding route networks.
On Capitol Hill, however, pro-labor Democrats are in charge of both houses of Congress and have heard repeated complaints from airline unions about pay and benefits cuts in recent years. At the same time, executives have been given bonuses and stock options. Democrats said they worry that mergers would only enrich the executives while hurting union employees. They also said that one merger would likely spark a round of industry-wide consolidation that then would lead to job cuts, reduction in service to small communities and higher ticket prices. The airlines already have been criticized for declining on-time performance and other customer-service woes.
"Generally, airline mergers are not good for airline employees or consumers," said Rep. Jerry F. Costello (D-Ill.), chairman of the House aviation subcommittee, adding that he would hold hearings into any announced deals. "When airlines merge, it means there are fewer airlines, less competition and higher prices. They cause me grave concern."
Sen. Byron L. Dorgan (D-N.D.) expressed similar misgivings, saying, "I don't think any of the airline problems are going to be solved by airlines getting bigger."
Although lawmakers play no official role in the regulatory process, their attitudes can influence the ability of air carriers and financial backers to finish deals.
During a Senate hearing last year that focused on a hostile takeover of Delta by US Airways Group, it was clear that Democrats were leery of the deal. What may have been more striking were the comments made by pro-business Republicans, including Sens. Ted Stevens of Alaska and Trent Lott of Mississippi, who expressed concerns about how mergers might affect consumers. Such questions and the clear lack of political support helped derail the merger, analysts said.
"The politicians at that hearing poisoned that merger," said Vaughn Cordle, the chief analyst at Airline Forecasts. "They torpedoed it."
Analysts and lawmakers said those skeptical attitudes have not abated and could complicate carriers' efforts to gain the political assistance they might need to win over regulators.
"I'm a free-market guy, but I have mixed emotions about mergers," Rep. John Mica (R-Fla.), the ranking Republican on the House Transportation Committee, said in a statement. "Some benefits may come from consolidation, but I worry the loss of competition would be a negative for consumers."
Local politics comes into play, too, throwing another complicated element to the mix.