Will Mergers Fly?
Airlines want to cut costs and lift stock values, but lawmakers worry about higher prices and the potential loss of jobs and service.

By Del Quentin Wilber
Washington Post Staff Writer
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.

Sen. Johnny Isakson (R-Ga.), who fiercely fought US Airways' bid for Atlanta-based Delta, said in an interview that he was not necessarily against mergers. With high oil prices, he said, it might be time for airlines to join forces.

Isakson said, however, that he was working to ensure that any merger would protect jobs in Atlanta. He added that lawmakers representing areas that have airline hubs and headquarters feel the same way. Delta is negotiating with Northwest Airlines of Minneapolis and United Airlines of Chicago, according to people familiar with the talks.

"My parochial interest is to ensure that Delta's headquarters and its name remain in Georgia," he said.

Another complication the carriers face on Capitol Hill are the words of a well-liked Delta executive. In meetings last year, Delta's then-chief executive Gerald Grinstein warned lawmakers that a merger would almost certainly spark other deals. That would lead to less service to some communities and potentially higher ticket prices, he told them, according to the lawmakers.

At the Senate hearing Jan. 24, Grinstein foreshadowed the dangers in allowing the industry's six major carriers to join forces.

Grinstein asked the senators: "Are you better off with more hubs or with fewer hubs? Because if you approve this, and what you are approving sets such a low standard, how are you going to say no to Continental and United? How are you going to say no to Northwest and American? You will devolve into three network carriers. And once that happens, you won't get the same level of service."

In an interview then, Grinstein also said he was skeptical of airlines combining because "the track record of good mergers is hard to find."

Pointing to Grinstein's comments, several lawmakers said they found it ironic that Delta, now seeking a partner, so fiercely fought a merger last year.

Grinstein, who retired from Delta in September, lives in Washington state and could not be reached for comment. A Delta spokesman declined to comment, as did representatives for Northwest and United.

Despite the thorny political landscape on Capitol Hill, airline executives believe the time is still right to put a deal together, some analysts and consultants said.

One reason: They believe they will have an easier time passing regulatory muster under the Bush administration than its successor.

Transportation Secretary Mary E. Peters, who would advise the Justice Department on the affects of an airline merger, signaled that the executives are probably right.

Citing the economic challenges facing the industry, Peters said in an interview that she believes "there is going to be some consolidation. "To the greatest extent that we can let the market work unfettered, the better off we are as a country," she said, adding that her agency would weigh each proposal on a case-by-case basis.

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