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Merger Mania: Is Bigger Better?
Business sometimes moves in strangely ironic cycles.
Not that long ago, when you wanted to fly somewhere, you'd pick up the landline phone serviced by the only telephone company in your region and call any number of airlines to make an easy reservation -- lining up a flight, almost always, at a time that was convenient. In the near future, if all the proposed mergers involving six major U.S. carriers go through, you'll be able to dial up a reservation on a conventional, cell, or Internet connection through any number of communications providers, but you may have a much smaller choice of air carriers to choose from in reaching your destination. And convenience of travel may not be a part of this new equation. With a frenzy familiar to watchers of big business, a sudden intense courting is now occurring among the major airline players. Last spring, there was a report that United Airlines and US Airways were looking very hard at a consolidation. Early this year, American Airlines and TWA announced a merger proposition, which has since passed government muster. And finally, there was the news that smaller Continental Airlines had begun talks about purchasing the larger Delta Air Lines. While shareholders, government agencies, and unions weigh the advisability of these proposed mergers, consumers - especially those who fly often - are left wondering what these events could mean to them. To find answers, The Leader interviewed a number of experts from Embry-Riddle's faculty. We asked them why these mergers are happening, what the partners see as advantages in the new arrangements, what some of the obstacles are that the companies face, and how the changes will affect the industry and the consumers who keep it flying.
More Slots, More Market Share "The airlines' managers believe there are economies of scale in a lot of markets, and market share drives their economic health," says Paul Bankit, the university's vice president of academics and, during the 1980s, the president of a Midwestern airline. Having more slots at an airport translates to more customers, he says. The US Airways-United deal opens up new slots in the East for United, combining those with the company's already strong positions in the Midwest and West. American will pick up some of TWA's "wonderful" overseas routes, he says.
John Wensveen, assistant professor of business administration, points out that American will gain a virtual lock on all Caribbean destinations with the acquisition of TWA, and at the same time take over the outstanding TWA debt, allowing the latter to "stay alive." "It's very important to have ubiquity," adds Alan Bender, an associate professor of aeronautical science currently on a research sabbatical at the Smithsonian Institution in Washington, D.C. "Airlines find it's important never to have to tell a passenger, 'We don't go there.' They want to say, 'We go anywhere, any time.' "The ones that go the most places are going to get the most phone calls."
Higher Fares, Challenges to Smaller Carriers Bender believes fares will go up: "They wouldn't have done it unless they thought there was some revenue premium to be gained." Wensveen agrees, to a point, that fares will increase because passengers will have fewer choices. But, he foresees new-entrant and low-cost carriers driving down airfares. "In the long term, the passenger should benefit because of multiple airline choices and increased frequency to destinations," he concludes. Bankit adds a proviso, however: "I'm not so sure prices will go up. As long as there is some competition in the market, the prices should stay the same." And the fallout, Bankit adds, should aid smaller carriers by opening up new markets in small- and medium-size cities from which the majors have pulled out. "Personally, I think it's going to affect them favorably," he says. Bender can see that scenario happening, but also doesn't rule out the predatory instincts of the large players and the way that will affect smaller, niche airlines. "The bigger they get, the more they can subsidize their wars with the weaker of the low-cost airlines," he says. And another component to consider is the draw major airlines' frequent-flyer programs have on many travelers. To many people who fly often, these reward miles have become "almost a drug," Bender points out. This loyalty to an airline in order to bank more miles will happen, he believes, despite the fact that traditionally mergers quickly eliminate duplication of routes and services. The payoff is that frequent-flyer miles will tempt many to endure the higher prices or less-direct routes the post-merger big companies may offer.
Hub Saturation?
"You'll have more activity at the headquarters, or hubs, and less at the spokes, especially of the smaller airline that is purchased," he says.
Seniority and Overtime Many of the potentially affected employees have been through the merger process before, she said, and some have been burned by the experience. This will have an effect on employee opinion, as will the natural need to protect acquired turf and seniority. "The employees at the acquired carrier will feel that the acquiring carrier is getting good employees who bring a great deal to the equation," Marett said. "The employees at the acquiring carrier see disruptions and threats to the pecking order." And the biggest question of all, she thinks, could be how to determine seniority lists among pilots, perhaps the most powerful of all the airline unions. For all these reasons, unions will be cautious in establishing a position on any of the mergers, she believes: "Unions in some of these cases represent members at both carriers in the proposed deals. It puts them in some rather difficult positions. They certainly do not want members to lose jobs, and mergers or alliances do not necessarily guarantee that this does not happen." "If I have pilots working overtime and I buy an airline where the pilots aren't flying much, the pilots won't have to fly much overtime after the merger," observes William Herlehy, who chairs the Distance Learning Department and teaches and consults in aviation labor relations. "A pilot can now say, 'Hey, I took this job with the understanding that I can fly a certain amount of overtime.' "
Finally, we asked the experts whether the mergers and the resulting changes in flights within the United States would open a door to allowing foreign-owned carriers to begin flights within the country. Bender said opening domestic routes to non-U.S. airlines would be a "shot in the arm" for competition, but thinks it is unlikely to happen soon. "The unions are exceptionally strong and would fight it tooth-and-nail," he said. In addition, said Wensveen, "The U.S. government does not want foreign carriers, because it would mean U.S.-based companies competing with foreigners. This is not good for the U.S. economy or the 'American image.' " By Tom Brinkmoeller
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