Airline mergers much nonsense

May 02, 2008|By JAY HANCOCK

If the definition of insanity is doing the same thing over and over and expecting a different result, book dates with a shrink for CEOs Richard Anderson and Doug Steenland.

They want to merge Delta Air Lines and Northwest Airlines to improve life (allegedly) for shareholders and consumers. The companies' stocks plunged after the merger was announced, so we know shareholders aren't crazy. Consumer groups raised heck, too, so they also know what they would be in for.

Let's hope antitrust regulators will be similarly clear-eyed. Letting Delta marry Northwest - or US Airways join United Airlines, which is reportedly in the works - will raise fares, strand secondary cities and make air service even worse, if you can believe that's possible.

Chances of operational success for either deal "are extremely remote, based upon history," says Kevin P. Mitchell, chairman of the Business Travel Coalition. "Customer service is likely to be a disaster for many, many, many years."

Too much concentration in any deregulated industry is a bad idea. It's really bad with companies that provide critical pieces of economic infrastructure. (Look at electricity companies.) It's triply terrible when the industry has a practically perfect record of bungling mergers.

US Airways' stock is about a fifth of what it was when it combined with America West. Thanks to union problems, the companies still essentially operate separately, although the merger closed almost three years ago.

Now with US Airways reportedly close to agreeing to merge with United, you have the same deal that the merger-friendly Bush administration rejected eight years ago. But we already knew airline executives learn nothing from history.

A combined Delta and Northwest would own 18 percent of the U.S. domestic market. United and US Airways would have 17 percent. Those aren't monopoly numbers, but reducing the top seven airlines to five would still give carriers much more leeway to raise prices.

A United-US Airways combo would be especially problematic for Baltimore and Washington.

US Airways handles a third of the passengers at Reagan National, many on the lucrative Northeast shuttle. United carries more than half the passengers at Dulles International. Market power and higher fares at those airports would give Southwest Airlines and other carriers at BWI Marshall room to raise fares, too.

A Delta-Northwest combo would almost completely sew up the business on certain high-traffic routes in the Midwest. And more hookups would follow if these two are approved. American, Continental and other competitors can normally be counted on to cry bloody hell when rivals try to combine. This time they're staying wonderfully silent, perhaps harboring their own urge to merge.

Without quite saying so, airlines argue that they deserve the ability to anti-competitively raise prices because they are losing millions. Fuel cost has soared. They didn't hedge the risk. Now they want the Justice Department to bless what would be illegal behavior by separate companies - price collusion - by ending the separation.

"The idea that we should give airlines better pricing power so they can make up their losses is something that was rejected by the Supreme Court back in the 1940s and is universally rejected by economists," says Severin Borenstein, a business and policy professor at the University of California, Berkeley. "There is only one good reason for airline mergers, and dozens of bad ones. The one good one is greater efficiency. And the evidence that these things actually produce greater efficiency is weak or nonexistent."

US Airways, the smallest of the four companies contemplating mergers, has almost 700 airplanes and 40,000 employees. It's hard to argue that that's too little to gain economies of scale.

You might make a good case for mergers if Congress agreed to open U.S. skies to foreign investors. Under present rules, foreign corporations can't own more than 25 percent of U.S. airlines and can't ship passengers from point to point inside the country.

Scrapping the rules would attract new players and lower the risk of buyout-bred oligopoly. But airlines (and their unions and trained politicians) would never allow that, so they shouldn't be allowed to team up and increase their dominance.

Steenland, chief of Northwest, and Anderson, boss of Delta, aren't really insane. With their stocks in the tank and their companies in trouble, they have to look like they're doing something. Playing merger footsie is the CEOs' preferred busy work. But what's right for the honchos is wrong for everybody else.

jay.hancock@baltsun.com

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