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Common Sense: For Airlines, It May Be One Merger Too Many

August 16, 2013 by

Until this week, when the Justice Department filed suit to block the proposed merger of the airlines’ parent companies, it had been notably lax on airline mergers. What the antitrust division deemed acceptable — even beneficial — for Delta Air Lines and Northwest Airlines (in 2008), and Continental and United Airlines (2010), and Southwest Airlines and AirTran Airways (2011) now “threatens substantial harm to consumers,” the complaint says.

US Airways has been doubly unlucky. United abandoned a merger deal with US Air in 2001 after the Bush administration said it would file an antitrust suit. And the head of the Justice Department’s antitrust division, William Baer, said this week that the department might have sued to block US Airways’ 2006 hostile bid for Delta if US Airways hadn’t abandoned the takeover. (US Airways did get approval to acquire America West in 2005.)

The government “abandoned the framework it used in approving the last three airline mergers,” said Paul T. Denis, a partner at Dechert LLP, which is representing US Airways. “In some ways, the complaint is a throwback to the 1970s,” before market-oriented economic analysis led to a broad revision in antitrust policy. “Now they’re saying those prior mergers were anticompetitive. That’s surprising. But even if they believe that, it’s not relevant to whether this merger will have an adverse effect.”

US Airways and American have come out fighting. The government “got this one wrong, very wrong,” Richard Parker, an antitrust litigator at O’Melveny Myers and former director of the Federal Trade Commission’s antitrust arm, the Bureau of Competition, said at a news conference on Wednesday. He stressed that only a judge could block the merger and vowed to take the case to trial. But perhaps the airlines shouldn’t have been so surprised by the lawsuit — and shouldn’t be quite so eager for a courtroom showdown.

“It’s a different regime, different standards and a different time,” said Herbert Hovenkamp, professor of law at the University of Iowa and widely regarded as a dean of the antitrust bar. The relevant question may not be why the department moved to block the American-US Airways deal, but why it approved the United-Continental merger — a move it now seems to regret.

William J. Baer, the associate attorney general in charge of the antitrust division, told me this week: “We consider every merger one at a time. Here, we had a proposed merger that would reduce the legacy carriers from four to three. That’s not the same as six to five, or five to four. That logic would get you from two to one pretty quickly.”

And while he said he couldn’t comment on the earlier airline mergers, since he has been the antitrust chief for just seven months, “if you look at the net effects, what we’ve seen is a reduction in capacity and higher prices, and not the benefits that were promised.”

Whatever the recent precedents, the proposed American-US Airways merger violates the Justice Department’s merger guidelines, which the Obama administration finally seems to be taking seriously. The merger would substantially reduce competition because “there are too many routes that would create a monopoly or oligopoly,” Professor Hovenkamp said.

According to the Justice Department, the American-US Airways merger would substantially reduce competition in over 1,000 city pairs served by the two airlines. Among the more egregious examples it cited are Charlotte, N.C.-Dallas; Charlotte-Durango, Colo.; Dallas-Philadelphia; and Kahului, Hawaii- Tampa, Fla. It said the merger would create four out-and-out monopolies, albeit on secondary routes, including three that serve St. Croix in the Virgin Islands. And it said the merger would reduce competition on more than 1,000 routes.

It’s pretty clear what happens when concentration increases substantially on a route between two cities. After Continental and United merged, the combined airline accounted for 79 percent of the service between O’Hare International Airport in Chicago and George Bush Intercontinental Airport in Houston. During a three-month period after the merger, fares on that route were 57 percent higher than they were three years earlier, according to the aviation industry Web site PlaneStats.com. United’s fares overall increased 16 percent in the same period.

Article source: http://www.nytimes.com/2013/08/17/business/for-airlines-it-may-be-one-merger-too-many.html?partner=rss&emc=rss

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After Record Year, Airbus Predicts Orders to Drop

January 17, 2012 by Leave a Comment

Despite signs of a deepening slowdown in Europe and North America and waning airline industry profits, however, executives at the European plane maker and its parent, European Aeronautic Defense and Space, said they were confident the group’s performance would continue to buck the broader economic downtrend.

“With our increased backlog of orders, our net cash, EADS has the capacity to resist if there is a worsening of the world economy,” said Louis Gallois, the EADS chief executive.

He added that the group expected a “significant” improvement in profit this year and planned to hire 9,000 employees, mostly in Europe, as it ramped up production to keep up with demand.

Airbus recorded net orders for 1,419 commercial jets in 2011, up from 574 in 2010, giving it a market share of 64 percent by volume, or around 54 percent by list-price value. Deliveries of new jets reached 534, up 5 percent from the previous year.

Airbus’s bumper year was due mainly to a rash of orders for a revamped version of its top-selling A320 single-aisle jet equipped with more fuel-efficient engines. Airbus started marketing the plane — the A320neo, which stands for new engine option — in late 2010, more than six months before Boeing followed suit with a rival product, the 737 MAX, last summer.

It was the fourth consecutive year that Airbus had outpaced its rival. Boeing last week reported net orders for 805 planes in 2011 and 477 deliveries.

With its marketing effort for the 737 MAX now in full swing, Boeing has begun to narrow the gap with the A320neo, with more than 1,000 orders and commitments from 15 customers, including American Airlines and Southwest Airlines, as of Jan. 5. Airbus has booked 1,226 orders so far for the A320neo.

Airbus expects new jet orders of between 600 and 650 planes in 2012.

Some analysts have expressed concern that the protracted sovereign debt crisis in Europe could disrupt financing for new jet purchases. Stricter capital requirements may edge some of the region’s more vulnerable banks, particularly in France, out of the aircraft finance business.

But Thomas Enders, the Airbus chief executive, said European customers represented only 16 percent to 17 percent of the 570 planes Airbus expected to be delivered this year, while North American customers represented 11 percent.

More than half of 2012 deliveries were destined for airlines in Asia, including a substantial share from the booming air travel markets in China and India, he said.

“Our business model is already heavily focusing on the growth markets, particularly in Asia and the Middle East,” Mr. Enders said. While he conceded that French and other European banks appeared to be retreating, at least temporarily, from jet financing, “there are more and more Japanese, Chinese and now Scandinavian banks as well that are interested” in filling the financing gap.

More airlines have also begun to tap the corporate bond markets for cash as well.

John Leahy, head of sales for Airbus, dismissed concerns about a financing shortfall in the near term, saying that financing for about half of the planes set for delivery this year had already been secured. “The first half of the year is already locked in, and a good portion of the second half as well,” he said.

“There are no white tails planned for 2012,” Mr. Leahy said, using the industry term for planes that end up with no owner and no logo painted on their tail fins if airlines cannot get the loans to pay for them.

On the advice of its auditors, Airbus did not include in its 2011 order tally a landmark deal for 130 single-aisle jets announced last summer with American Airlines, whose parent company, AMR, filed for Chapter 11 bankruptcy protection in late November.

Mr. Leahy said American’s chief executive, Thomas W. Horton, had committed to follow through with the purchase, but said a U.S. Bankruptcy Court judge was not expected to formally approve the deal before 2013.

Article source: http://feeds.nytimes.com/click.phdo?i=f8019c5cf607ee03aaf854dceb1c3cf0

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Delta-Northwest Merger’s Long and Complex Path

May 19, 2011 by Leave a Comment

Airline mergers are complex and tough to pull off — witness the troubled marriage of People Express and Continental Airlines in the 1980s or the continuing problems in integrating America West and US Airways six years after their merger. So when Delta Air Lines acquired Northwest three years ago, executives knew they would have to resolve major labor, technology and financial issues.

What they had not fully anticipated were the thousands of tiny details that go mostly unnoticed by passengers but can make the difference between a successful merger and a failed one.

All airlines have their own way of doing things, developed over time and through labor negotiations. All have specific working rules, flying procedures, maintenance schedules and computer programs. And all have their own cultures. Delta always thought of itself as the gracious host. Hence its flight attendants poured the requested drinks. Northwest was the practical carrier; its attendants just handed over the can.

“It was like Noah’s ark out here,” said Peter Wilander, an executive at Delta responsible for in-flight services. “We had two of everything.”

Delta executives agreed earlier this month to discuss the minutiae of the Northwest merger to make the broader point that combining two airlines is an incredibly difficult task. The Delta-Northwest tie-up is now widely seen as a success, and that view laid the groundwork for two other, more recent mergers: United Airlines with Continental last fall and Southwest Airlines and AirTran, which was completed just last week.

“If you look at the history of mergers, the assumption was that you couldn’t do them successfully,” said Richard Anderson, Delta’s chief executive. “Everybody had come to the conclusion that these things are too big, too complex and too unwieldy to manage.”

Delta’s merger with Northwest was announced in April 2008 and closed in October of that year after receiving regulatory and shareholder approval. And yet it still took 14 more months for the airlines to fly as a single carrier, in January 2010.

Delta scored a major point by getting its pilot unions to agree to a common contract by the time the merger closed. Many analysts said this gave the airline a critical advantage by getting a crucial labor group on board from the start.

But that did not put an end to Delta’s labor issues. Flight attendant representatives accused the airline of using intimidation tactics after they lost a bid to unionize the carrier’s work force in November. The matter is under review by the National Mediation Board, which could call a new election.

Meanwhile, flight attendants from Delta and Northwest continue to work under separate contracts, each with their own work rules, and they cannot be scheduled to fly on the same airplanes.

And some merger-related work is still going on. The last Northwest plane was repainted only six weeks ago. Delta expects to spend another year completing an inventory of all airplane parts and maintenance procedures into a new database.

Each airline has hundreds of different technologies that book seats, print tickets or dispatch crews that need to be integrated. Failure here can leave thousands of travelers without a seat if bookings are misplaced.

Delta’s chief information officer, Theresa Wise, said the airline had to merge 1,199 computer systems down to about 600, including one — a component within the airline’s reservation system — dating from 1966.

The challenge, she said, was to switch the systems progressively so that passengers would not notice. Ms. Wise, who has a doctorate in applied mathematics, devised a low-tech solution: she set up a timeline of the steps that had to be performed by pinning colored Post-it notes on the wall of a conference room.

A major switch happened when the new airline canceled all Northwest’s bookings and transferred them to newly created Delta flights in January 2010. It required computer engineers to perform 8,856 separate steps stretched out over several days.

Article source: http://feeds.nytimes.com/click.phdo?i=9ee3673b7efa50753441b86bd943798c

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Quake and Fuel Expense Cut Into Carriers’ Revenue

April 22, 2011 by Leave a Comment

The rise in jet fuel prices — up 50 percent in the last year — has been particularly tough, airline executives said. And even though the airlines have repeatedly resorted to fare increases this year, higher fuel costs have largely eroded their revenue gains. Fuel now accounts for about 40 percent of an airline’s costs, up from about 30 percent last year.

Still, analysts pointed out that the negative picture largely masked the fact that the struggling industry remained on a slow path to recovery, in large part because of a rebound in business travel.

Deutsche Bank expects carriers to post a cumulative loss of about $1 billion with overall revenue of $30 billion for the last quarter. The carriers are still expected to post a profit for the full year, a measure of the industry’s gradual recovery that began in 2010.

While airlines said travel demand was still strong, they feared it might slow down later this year if fuel prices kept rising. Both American Airlines and United Continental said they were now considering small cuts in their capacity.

So far this year, the airlines have also successfully increased fares seven times out of 11 attempts. The latest effort was initiated this week by Delta Air Lines, whose increase in coach fares by $10 for a round-trip ticket was matched by other airlines, according to FareCompare.com.

With airlines merging, there are also fewer competitors willing to undercut prices to gain market share. Southwest Airlines, which has not usually followed fare increases in the past, has participated in all the successful increases in ticket prices this year.

Southwest, in reporting its results on Thursday, said it expected its acquisition of AirTran to close on May 2. It was one of the few carriers to have a profit in the first quarter. Most others, including American Airlines and United, lost money in the period.

“I have to confess that I don’t like fare increases for our customers, but they are necessary in this soaring fuel environment,” Gary Kelly, the chairman of Southwest, said in a conference call. “I don’t feel like we’ve reached a tipping point.”

Airlines have also laid out plans to pare capacity. United Continental, in the midst of merging the two airlines’ operations, has said it planned to cut its seats by 1 percent by May and 4 percent by September. Jeffery A. Smisek, the chief executive of United Continental Holdings, said he was determined to further slash capacity if fuel prices remained high.

“These are very tough times,” Mr. Smisek said in his conference call on Thursday. “We are faced with the sobering reality of resizing the entire business. We must reduce our costs as we reduce our capacity. In this volatile environment, every new route requires a stronger business case.”

“With high fuel prices, we have raised our fares, which reduces demand,” Mr. Smisek said.

The operations of United Airlines and Continental Airlines posted a loss in the first quarter as a sharp increase in fuel costs largely offset gains in revenue, the parent company announced Thursday.

The loss was $213 million, or 65 cents a share, for United Continental Holdings, the company created by the airlines’ merger. That compares with a consolidated loss of $183 million, or 58 cents a share, in the same period last year, before the merger.

Revenue rose 11 percent, to $8.2 billion. But fuel costs surged nearly 35 percent, to $2.8 billion.

Southwest reported Thursday that its first-quarter profit was $5 million, down from $11 million in the period last year. Its revenue rose 18 percent, to $3.1 billion.

Alaska Airlines, too, had a profit of $74.2 million, up from $5.3 million in the period last year.

American Airlines on Wednesday reported a loss in the first quarter of $436 million, or $1.31 a share, compared with a loss of $505 million, or $1.52 a share, in the quarter a year ago.

Delta Air Lines will report its earnings next Tuesday.

The earthquake in Japan, which is one of the world’s largest airline markets accounting for 10 percent of global travel, has sharply cut into business travel for American carriers. The drop coincided with the start of business alliances between American Airlines and Japan Airlines, or JAL, and United Airlines with ANA.

Separately, US Airways filed a lawsuit against Sabre Holdings, the nation’s largest distributor of airline tickets, accusing it of “anticompetitive and anticonsumer practices.”

The lawsuit is the latest salvo in the airline industry’s effort to sell tickets directly to travel agents, to reduce their distribution costs, which have historically been centralized by global distribution systems like Sabre.

Also this week, American Airlines sued Travelport, another of the distribution systems, as well as Orbitz, for similar reasons.

US Airways said in its suit that Sabre had been “aggressively” suppressing the ability of travel agents to book tickets directly with airlines.

A Sabre spokeswoman said that the company was aware of the actions of US Airways and was reviewing the lawsuit.

Article source: http://www.nytimes.com/2011/04/22/business/22air.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,