Why Airline Mergers Don't Fly

With the state of the airline industry currently, one has to wonder: Where did the profits go?
With the state of the airline industry currently, one has to wonder: Where did the profits go? (Larry Downing - Reuters)
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By Daniel Sorid
Portfolio.com: Business Travel
Tuesday, April 29, 2008; 10:49 AM

In a melodramatic scene from the 1985 movie Rocky IV, the elite Soviet boxer Ivan Drago coldly assessed the wan and beaten body of his American opponent, Apollo Creed: "If he dies, he dies."

Antitrust regulators must worry they'll come across like a bureaucratic version of Drago if they were to stand in the way of the airline industry as it rushes to consolidate. Surely no one could be so cruel and uncaring, as to let the injured die without offering a little help, a little hand up, a little love?

Airlines today look so sad, so shriveled up. Where did the profits go? First the 2001 terrorist attacks, now $120 barrels of oil? United Airlines just lost how much in the first quarter? Half a billion? Oh, it's just too painful. We can't let the airlines die. If they want to combine into three jumbo airlines, so be it. If they merge, they merge.

When Delta Air Lines agreed to buy Northwest Airlines last week, the better to reduce capacity and raise fares, nary a peep of protest was heard. When United failed to woo Continental Airlines into a similar arrangement over the weekend, the news knocked $100 million off United's market value┬┐until United announced that it was in advanced merger talks with US Airways.

It may seem that the idea of headlong airline consolidation is a slam dunk. But not everyone is going along with the idea.

"The only thing that changed is the airlines are broke because the price of oil is high and they'd like to make more money," said Borenstein, who is now a professor at the Haas School of Business at the University of California, Berkeley.

"That's not a particularly tough-love view," Borenstein added. "That's pretty much a standard view among economists. You don't let firms merge just because they're losing money."

Others echo the notion that competition isn't the issue. Elizabeth Bailey, a professor at the Wharton School of the University of Pennsylvania said the airline industry's problem isn't having six or seven major carriers, it's high fuel prices.

"In normal times, this number of carriers is able to make money," Bailey said. "Things were looking pretty good for the last two or three years."

With the Bush administration's deal-friendly Justice Department in charge until January 20, 2009, hardly an antitrust concern has been raised in the past month of merger mania in the airline industry.

Delta's agreement to buy Northwest has set the airlines scrambling like desperate singles at a square dance. Money-losing United is especially in the grip of merger fever. "Consolidation is underway; ensuring you have the right partner is everything," United Airlines chief executive Glenn Tilton said over the weekend.

Borenstein said airline C.E.O.'s have a window of opportunity to get a deal done, and they are desperate to act before it closes.

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