March 29, 2016 Airline Genealogy

The Liberty Gazette

March 29, 2016

Ely Air Lines
by Mike Ely and Linda Street-Ely

Linda: Reflecting on topics we’ve covered in this space, from the well-known to the obscure, I realized we hadn’t touched much on airline acquisitions and mergers, be they deals proposed or deals closed. The negotiations are fascinating, but the paperwork can be oh so boring, so I wondered if we could discuss it here without putting you to sleep. Let’s take a stab at it – but set an alarm just in case.

Airline merger history has more partner-changing than a marathon square dance. In the last thirty years American picked up TWA, Eastern, and Air California. Pan Am and Continental were taken up by United. Delta consumed Northwest and Western after Northwest had acquired Republic, and Southwest Airlines snatched up Air Tran. United and US Airways courted, but the Justice Department (DOJ) objected because it would have resulted in increased fares, reduced competition, and fewer route choices. When US and Delta flirted Delta pilots and senior management, and some creditors, threw buckets of cold water on that affair.

Mergers are mainly motivated by alluring cost reductions and increased revenues (follow the money), but the DOJ must study how a merger would affect competition to determine the risk of antitrust.

Consider the merger that created the largest airline in history – American and US Airways, proposed as a stock swap while American was in bankruptcy court. Follow the money.

Analysts said it would cause a significant decrease in competitors serving the same cities if the merger was approved. Would potential benefit to consumers outweigh potential harm? Would one of the partners go belly up, losing its assets if they didn’t merge? The DOJ poured over financial information, ticket sales, operations, labor force, and schedules and interviewed experts for insight into how the airline industry and U.S. economy may be affected.

They also considered the "Southwest Effect". Southwest has served for years as a check on mergers because even with less competition, there’s always Southwest, and legacy airlines know that SWA has every intent of "Luving" all those passengers, so their presence can help keep ticket prices down.

But raising ticket prices or eliminating competition doesn’t drive businesses to merge; rather, its greater efficiency (purchasing, technology, and facilities) with more flexibility (a greater variety of aircraft to serve changing or seasonal capacity needs). Challenges come in integrating technology and in workforce blending - how to handle seniority, a major problem in a union-heavy industry.

And approval from DOJ and DOT are not the only prerequisites; they need economic authority from the Office of the Secretary, safety authority from the FAA, and approval of shareholders. And that’s where the rubber meets the runway. The real driver for airline mergers is the financial gain to shareholders – and let’s be honest, it’s only the big fat cheeses who gain.

When American and US Airways announced their engagement they put all their equity in a pile and counted it. $11 billion. They proposed shareholders of American Airlines would own 72 percent of the new company, and US Airways shareholders would have 28 percent: American had 879 airplanes and US had 336, a 72-28 split. With the new company, they could offer more seamless travel to more destinations, and that would trigger more ticket sales for a bigger piece of the pie.

Always follow the money. Aside from employees’ loss of pensions and $17M severance for the American CEO, what’s not to love? Care to dance?

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