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View From A Pilot

Why airline mergers don’t fly

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Jun 04, 2008

Throughout the current debate about the future of the airline industry there has been one constant refrain: the airlines must cut capacity. Some analysts say the industry needs to cut so much capacity, in fact, that the only way to do it by combining two or more airlines in a merger. United is playing along: it is getting rid of 100 mainline aircraft, including all of its 737s.

At least one airline pilot takes issue with this idea. The pilot, who works for an airline seeking a merger (and isn’t authorized to speak on behalf of the company, of course), wrote to Deal Journal to tell us that people have it all wrong. The airline industry doesn’t need to cut capacity, he argues. The problem that allows dollars to fly out the windows of its 747s isn’t too much capacity, it is the industry’s management of it.

Below, as part of Deal Journal’s unofficial Reader Empowerment Week, here are some of this pilot’s thoughts on why reducing capacity will only drive up prices and why airline mergers don’t work.

Capacity reduction is a bugaboo: “When industry pundits assert that there is too much capacity in the airline market and that consolidation is the appropriate response, I wonder how often you have flown on empty airplanes lately?…It isn’t that uncommon for me to travel [on a space available basis]…and to be told by the customer-service agent working the flight that I will not be able to board the aircraft as a passenger because the flight is oversold, has 25 revenue passenger standbys plus another 80 employee standbys. I frequently use my flight deck authority to ride to work…using a single available jump seat located in the cockpit as my only alternative to getting to and from work.”

Any capacity reductions will only be temporary: “Any reduction by legacy airlines will simply be filled by enthusiastic new entrepreneurs and new airlines who will buy airplanes on the cheap and backfill the markets pulled down. The airline business has always been a romanticized, ego-attractive venture for new entrants. Everyone wants to try their hand at this business, which has not made a cumulative profit since the Wright Brothers first invented the airplane. This is why we have had people like Howard Hughes, Richard Branson, Warren Buffet, Carl Icahn, Marvin Davis and the like venture into and out of the airline business. It is a business very attractive to big egos.”

Inventory management: “My belief is that there should always be one empty seat on every flight.…Seats sold beyond your inventory cost you three ways; first you charged too little for the inventory; and second, you now have to pay your customers to use alternative transportation with free tickets, upgrades, overnight hotels, etc. The third way this increases your costs is that it disenfranchises your customer and destroys his or her brand loyalty and it reduces your product to a commodity. When I regularly see flights oversold by 30+ customers I wonder what the reaction would be in other businesses selling seats! Would you tolerate a long planned evening at the theater to see a favorite show only to be told when you arrived that your seat was also sold to three other people and that you may not attend the show?”

Mergers fail: Mergers in the airline business have failed to produce the advertised result in every previous merger. I can’t imagine that you can point to one merger in the past that has produced a stronger, more viable enterprise. Having the government give their “wink of okay” simply will not fix our current operating environment or business models.

I have seen a lot of merger carnage in this industry over the past 25 years. The early mergers of Western into Delta, PSA into US Air, Air California into AMR, Reno Air into AMR, Piedmont into US Airways, New York Air into Continental, People’s Express into Continental, National into Pan AM, Ozark into TWA and TWA into AMR did little to improve the surviving airlines prospects and little incremental benefit was ever shown after the merger. Bigger is not better in the high fuel price environment we are in now.

You see Heidi, all of these airlines (and many others) departed the marketplace and the consolidation did nothing for the metrics of our business. Consolidation is just an excuse for the exercising of exit contracts which pay huge amounts of money to the CEO and his patrons for “change of control.” The market will always accept new entrants like Virgin America, Air Tran, Republic, several versions of Frontier Airlines, Frontier Horizon, New York Air, SkyBus, etc, to name only a few of the dozens of airlines that enter the market repeatedly and with the mantra that they “can do it for less!”

Why airline mergers don’t fly

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