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SEAT 2B | By Joe Brancatelli

Merger Madness

Don't believe that companies have customers in mind when they decide to do combine resources.
Don't believe that companies have customers in mind when they decide to do combine resources. (Kirsten Luce - Bloomberg News)

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By Joe Brancatelli
Portfolio.com: Business Travel
Tuesday, January 22, 2008; 12:00 AM

I began to dislike and distrust the big airlines on February 1, 1987, a date that still lives in business-travel infamy. Like thousands of others, I was stranded by Continental Airlines on the day that it attempted a "big bang" merger with its Peoplexpress, New York Air, and Frontier Airlines subsidiaries.

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On President's Day weekend 1987, at Newark Airport, Continental's terminal was overwhelmed with angry, abandoned travelers, mishandled luggage, and dazed and confused employees. I literally ran into Continental's top flack, doggedly picking his way through the huddled masses, handing out his business card, serially apologizing, and asking travelers to write him with their particular tales of woe.

Some months later, I found myself at Continental's Houston headquarters, staring across a desk at Lou Jordan, the executive in charge of the merger.

"We were losing $1 million a day running the airlines as separate operations, and Frank [Lorenzo, then C.E.O. of Continental] gave me 30 days to make a merger happen," he explained.

Did he stop to consider the potential effect on passengers?

"Like I said," Jordan snapped, "I had 30 days to do a merger. I didn't have a lot of choices."

I learned the lesson of airline mergers then: They are never good for travelers. Airline bosses do what is expedient for them. Customers, airports, employees, and the communities they serve are just inconvenient distractions along the way.

Consider the industry's most recent foray into mergers. In September 2005, America West and the old US Airways combined forces. More than two years later, the "new" US Airways is an operational nightmare. Its computer and website woes have forced passengers to rebook flights, wait in long lines for boarding passes, or cancel trips altogether. Cutbacks in the frequent-flyer program and bad in-flight service have driven away many of the airline's most profitable and elite frequent customers. The airline has recorded several quarterly profits but, for most months in 2007, it also reached record lows for on-time performance and record highs for lost baggage.

Keep all this in mind as you consider the merger mania gripping the airline industry. Delta Air Lines and Northwest Airlines, each just months out of Chapter 11, are talking about a deal. Delta is also discussing a merger with United Airlines, whose bosses have been shopping the carrier ever since it limped out of bankruptcy in February 2006. American Airlines and Continental, the other remaining "legacy carriers" that can trace their corporate DNA to the regulated airline era before 1979, seem less eager to play, but they'll probably be drawn into the fray as a defensive tactic.

The merger frenzy of 2008 is driven by a nearly perfect storm of negativity. None of the carriers predicted-or hedged for-$100-a-barrel oil, and fuel is the largest item on an airline balance sheet. Stock prices are tanking. Over the past 52 weeks, shares of the legacy carriers have fallen between 30 and 80 percent. The old-line airlines have been pulling out of domestic markets, battered by lower-fare competitors, such as Southwest, JetBlue, and AirTran. One of their most profitable redoubts-trans-Atlantic routes-opens to new competition in the spring. They are awash in debt and depressed employees, can't borrow to finance replacements of their aging fleets, and are facing a slowdown in demand as the economy slows. Mergers seem to be one way out.

But mergers won't help the airlines. At least, they never have before.

The conventional wisdom on the efficacy of airline combinations was dutifully reported in a Reuters dispatch last week: The legacy companies view mergers "as a way to stabilize the industry by allowing carriers to cut costs, reduce capacity, and raise fares."


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