Written by William Kurtz
The folks at USAirways and at American Airlines thought their proposed merger would be an easy case. After all, there had been four recent mergers which had sailed right through with hardly a ripple. However, this time proved to be different.
Merger #1. USAirways merged with America West Airlines in 2005, to form USAirways Group (NYSE: LCC). The two now do business under a single FAA Operating Certificate and under a single trade name (“USAirways”), although their operations are still not fully integrated. It was a USAirways flight that Captain Chesley Sullenberger was forced to ditch into the Hudson River when his airplane’s engines were disabled by a flock of Canada geese. His skill, and that of his crew and of waterborne rescue crews that fortunately were nearby, saved the lives of everyone aboard. The Governor of New York called it “The Miracle on the Hudson.”
Merger #2. Delta Air Lines (NYSE: DAL) and Northwest Airlines merged in 2008. It has been a successful merger. There’s a “back story:” Richard Anderson had worked at Northwest for 14 years, and had risen to the office of Chief Executive Officer. He was instrumental in the initiation and facilitation of the merger, and now serves as Chief Executive Officer of Delta, which is the surviving airline. One can reasonably speculate that his intimate knowledge (“institutional memory”) of Northwest’s history and operations has been and continues to be of significant benefit to the merged company. It was a “good fit” from the start. There was little overlapping of shared routes, and the Federal authorities found that the merger would not adversely affect competition.
Merger #3. United Air Lines (NYSE: UAL) and Continental Airlines merged in 2010. The route patterns of the two companies largely complemented each other, but with some overlaps; and the merger was allowed to proceed on the basis that competition would not be significantly reduced. The merger resulted in the formation of the largest airline in the world, in terms of the number of passengers carried. The merger itself has not been as easy to implement as that between Delta and Northwest. After the merger, there were only four “legacy” air carriers left standing: USAirways, Delta, United, and American. Southwest (NYSE: LUV), not counted as a “legacy” carrier, was nevertheless a dark shadow in the corner of the room. It had started as a “low price” carrier, operating only within Texas, but had grown into a large “point-to-point” (as distinguished from “hub-and-spoke”) nationwide airline which carried more passengers within the United States than anyone else. It had grown by focusing on smaller cities which nevertheless offered significant underserved populations, and by tapping into peripheral locations which could be utilized as “reliever” airports for large metropolitan areas – such as Providence and Manchester (serving suburban and exurban populations of Boston), Islip (serving dense suburban populations of New York), and smaller cities within Metropolitan Los Angeles. It had taken a big jump by starting service at the new Denver International Airport. However, Southwest had no presence at all in Atlanta, the busiest airport in the world.
Merger #4. Southwest acquired AirTran in 2011. AirTran was based in Atlanta. It had started out as “ValuJet,” but had suffered a disastrous crash following an in-flight fire, and had re-invented itself as “AirTran,” a “low price” airline. It had grown by reaching out from Atlanta to cities in the East and Midwest. Its main competition, of course, was Delta, which was (and is) based in Atlanta, and may fairly be said to enjoy a dominating presence there. AirTran was a tempting target for Southwest, which had never before made such a large acquisition: There was little route overlap, so the established routes of the two companies would largely complement each other; it would give Southwest instant access to Atlanta without the costs of starting from scratch; and at one stroke it would establish Southwest as a major competitor of Delta – right on Delta’s own home ground. The merger was approved.
Proposed Merger #5: USAirways and American Airlines (OTCMKTS: AAMRQ). American had struggled with high relative costs for years, but had always insisted that it would not resort to the bankruptcy court and that it would continue to “go it alone.” However, the mergers of Delta and Northwest and of United and Continental had presented American with stiffer competition than ever. It was losing the race. Its potential candidates for a merger, if it wanted or needed one, had almost all disappeared – and so had those of US Airways, by the way. Reality finally set in at American, and it filed. USAirways, ever hungry, broached the possibility of a merger, and now found a receptive ear. Discussions ensued, and a merger agreement was announced. It was odd, in that a smaller company would effectively be acquiring a larger one. USAirways’ management (former America West management!) would run the new company, to be called “American Airlines,” which would be operated from American’s offices in Fort Worth. Phoenix-based USAirways people began to look for houses in Fort Worth.
They Thought it Would be a Snap
The folks at USAirways and at American thought this would be an easy case. After all, there had been four recent mergers which had sailed right through with hardly a ripple. However, this time proved to be different. Perhaps some of the objection from Government could be attributed to “Approver’s Remorse.” There is more to it, though; this time, there is significant route overlap; and on some routes there would be no competition remaining. Then there is the question of oversized control of the number of landing and takeoff “slots” and of airport boarding gates at certain airports. One more major carrier would disappear. Yes, there is the recent history of four approved mergers; but the fact situation attending each one was different from the others, and this one is different from any of those.
What’s the likely outcome? My guess is that a merger will ultimately be approved, but that there will be substantial “give-ups” required with respect to routes, landing and takeoff slots, and gate control. I think that the result will be nothing like the result that USAir and American had intended. I think that USAirways will “swallow hard,” but in the end will take the medicine, because it badly wants the prize which is American Airlines. I also think that this will be an opportunity for Southwest, in particular, to pick up valuable tidbits that may be required to be spun out as conditions of a merger.
Whatever happens, it will be fascinating to watch it evolve.
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