Albert Einstein once defined insanity as “doing the same thing over and over again and expecting different results.”
Einstein may have been a genius, but he never worked in the airline business.
Of the dozens of airline mergers since deregulation, only a couple have been considered successful. Airline executives, of course, know this. So why do they keep discussing mergers as if they expect different results?
Not much choice
Perhaps because they have few other options. A gaggle of mid-decade bankruptcies substantially lowered costs for most of the major carriers. Unions have already made concession upon concession. Even executives have taken pay cuts.
Executives have even tried, at various times, paring back routes. They’ve learned the hard way, though, that airlines can’t shrink their way to profitability. When they reduce flights, revenue falls faster than costs, meaning they actually become less profitable.
So if they can’t get smaller, and they’re already about as profitable as they’re going to get at their current size, what choice do they have other than getting bigger?
Mergers have a terrible track record, but their failure is based on integration. If you could structure them better, the thinking goes, then they just might work.
‘Market cap envy’
Right now, industry executives are looking at Delta Air Lines’ acquisition of Northwest in late 2008. Largely considered a success because it had union support, the market has cheered the deal.
The carrier’s market value is more than $9.7 billion, surpassing United, Continental and US Airways combined.
“I do believe we have a little market cap envy going on between the rest of the industry and Delta,” said William Swelbar, with the International Center for Air Transportation at the Massachusetts Institute of Technology.
“The market has embraced Delta-Northwest. I think we have some CEOs looking at this and saying, ‘This is about my ability to raise capital.’ ”
It’s also about responsibility to shareholders. Airlines have done so little for investors in recent years that executives have to consider premiums that might come with a buyout offer.
Two problems that persist
The airline industry is confounded by two persistent problems: a fragmented market and too many empty seats.
No single airline in the world controls more than 5 percent of the market, Swelbar said, and the more fragmented a market is , the poorer the profits. The abundance of seats has kept fares low, but it’s also left carriers vulnerable to surges in fuel prices.
It’s no coincidence that United and Continental have come back to the table as fuel prices are once again creeping upward. Once oil gets above about $90 a barrel, a deal becomes more difficult, Swelbar said.
Much of the merger talk, then, is aimed at consolidating that capacity without incurring additional costs.
Mergers, though, don’t necessarily reduce capacity. To win antitrust approval, the carriers need little overlap on routes. Besides, in 2009, U.S. airline capacity fell the most that it has since World War II, according to MIT data, yet airlines are still losing money.
With US Airways’ pullout from the talks, Continental has to decide whether it’s better to go ahead with a merger and get bigger or do nothing and hope that if United merges with another carrier, it will reduce capacity across the industry.
“Presumably, standing on the sidelines you would benefit from a consolidating industry,” Swelbar said.
The frustration factor
Ultimately, the persistent merger talks have less to do with insanity than sheer frustration.
Executives at Continental, for example, have been working on the industry’s structural problems since the early 1990s. How can things still be so broken?
“It has to be better than this. It really does,” Swelbar said. “We’ve done all this work, and everything is so fragile.”
It’s enough to make even Einstein repeat himself.