I did my best to listen to as much of each hearing as I could today. I certainly found the Senate hearing much more interesting than the House hearing. The only players to testify in each hearing were Delta CEO Richard Anderson and Northwest CEO Doug Steenland. For the most part, similar testimony was offered in each the House and Senate hearings.
I did think both CEOs were much better and much sharper in the Senate give and take. But I sure did feel the pain for Anderson as he tried in many ways to describe how networks work and how networks can create new product as the nodes are leveraged post-deal. Both were particularly good in the afternoon discussing the fuel issue and Steenland finally reminded everyone of the fact that the weak dollar versus virtually any world currency is just another issue weakening the competitive posture of US airlines today.
But the other two panelists in the Senate session?………And for me the most interesting testimony was from Kevin Mitchell of the Business Travel Coalition.
I just cannot help myself and will spend a little time picking out some of my highlights from the testimony of each Kevin Mitchell of the Business Travel Coalition and Dr. Darren Bush of the University of Houston Law Center -- and I am just not sure what he was saying. No, I will spend virtually all of my time with Mr. Mitchell’s testimony as he has been around this industry a long time, and well…….should know better on many points.
In his first full paragraph of his overview, Mitchell rightfully discusses the importance for the Department of Justice to evaluate competition from both a city pair and network perspectives. Then the 5 minutes of scare tactics begin. Mitchell #1: “Moreover, Congress needs to understand the total consumer costs resulting from massive service disruptions and the degradation of the reliability of the system. The direct, indirect and opportunity costs for mid-size communities that lose efficient connectivity to important business centers around the country and globe need to be quantified”.
The reliability of the system? Don’t you think that the government has a significant stake and has failed the consumer, and small and mid-size communities, by failing to upgrade the very air traffic control system within which the carriers operate? It seems to me that even without these high fuel costs that the industry may not be in such “dire straits” if it did not need to add time to the schedule each quarter because of the system’s inefficiency. “money for nothin’”.
If the economics are not there, just because an airport has a runway, a terminal and security does not mean that the airport market is entitled to air service. Maybe another question could be: how have global forces impacted that community and possibly moved much of the economic base away because they were simply not competitive? A fair question to ask before laying it all at the feet of the industry. More simply, if those customers are willing to pay the cost for the service, then they will continue to receive the service.
Mitchell #2: “The managements of Delta and Northwest drove their companies into painful bankruptcies”. Based on what we know about Gerry Grinstein, my guess is bankruptcy was the last arena he preferred to visit. As for Northwest, they along with their labor, worked arduously to avoid a trip to a court-assisted restructuring and stood with labor on the pension issue along that troubled road. Management did not drive anyone in. Market forces did. And each carrier had very different competitive reasons for filing.
Mitchell #3: “With respect to Delta / Northwest, how can one accept that there are billions of dollars in revenue synergy when there are no plans to restructure either network? Unless Delta can convince expert outsiders of something on the order of $5 billion dollars in readily achievable synergies, there is no possibility that this merger could benefit consumers or the public interest”. No plans to restructure either network? Why did they want a complete pilot deal done first? So they could immediately begin to move aircraft around the network to best match aircraft to market sizes I thought. $5 billion in achievable synergies? Well you must have been much more a fan of the US Airways hostile as it did involve capacity cuts that would have been much greater than anything considered here even with the announcements made on each of the carrier’s earnings calls.
Mitchell #4: “The Delta / Northwest proposal emphasizes all of the features of past mergers that have consistently failed and doesn’t exploit any of the synergies of the rare mergers that did produce positive returns, e.g., TWA / Ozark and Northwest / Republic”. You did forget Delta-Western. What I find most interesting about your statement is that each of these mergers, except Delta-Western removed a competing carrier sharing the same hub. Talk about anti-competitive!? My flip comment on the mergers in the mid 80's was if they approve these, then anything goes.
Mitchell #5: “Megamergers create a risk of an operational meltdown that could cripple the nation’s aviation system". Fuel prices and the lack of merger-related synergies would create huge pressures to cut corners on implementation spending, creating pressures that would exacerbate conflicts with (and among) employee groups”. You are right, economic forces, competitive forces, antiquated air traffic control systems and uncontrollable crude and refining costs have no effect at all – so blame it on M&A activity [please read with tongue in cheek].
And further each carrier today, operating as a stand alone, will avoid the fates of Aloha, ATA, Skybus and Frontier? For someone that has made fares a career, do not forget that it is an accepted principle that volatile prices are most unsettling on commodity industries – and the US airline industry has become a commodity industry. Any one of your members should do a net present value calculation on travel expenditures and compare it to other input costs that they have paid.
Mitchell #6: “Merged mega airlines will leverage their route structures to dictate terms and conditions (pay more for less) to corporate buyers, even for those airline pairings without significant route overlap”. Mr. Mitchell, consumers are going to pay more. And if they don’t, labor is part of your constituency and they would not get anymore either. On the more for less issue. Short-term maybe. But this industry knows it has been lacking in making both aircraft and non-aircraft capital expenditures in the business and the most recent earnings announcements suggest they will get further cut back. For virtually every carrier, another trip to bankruptcy is not an option – and Southwest, jetBlue and AirTran are not the option for the constituency you represent.
Mitchell #7: “Coordinated Effects. Going from 6 to 5 airlines would make fare increases easier to stick, especially if Northwest were absorbed into another large carrier because this carrier has often played the role of the “spoiler.” And of course, the problem with fare increases is even more enormous if the industry goes from 6 to 3 super major carriers. United Airlines recently brought back the infamous Saturday Night Stay requirement that will virtually fence-off lower-priced fares for business travelers increasing ticket prices by hundreds of dollars”. Market forces are the catalyst. All sectors of the industry are affected by the current environment. No more free lunch. But again I impress on you to do that net present value analysis I suggested earlier.
Mitchell #8: “Congress should be concerned with the market power of super-mega airlines and their incentive and means to frustrate new airline entry at hub airports”. With the low cost carriers approaching 30% of US domestic market share, your scare tactic that suggests low barriers to entry are simply not true. The US market should not fear individual carrier failures or consolidation. Indeed, this market has demonstrated time and time again that where competition is vulnerable, a new entrant will exploit that vulnerability. Where there are market opportunities, there will be a carrier to leverage that opportunity. Where there is insufficient capacity, capacity will be sure to find the insufficiency.
Mitchell #9: “Congress should also view with great concern the increased joint purchasing power of the global alliances (buying groups) with respect to their ability to exercise monopsony power and drive supplier prices below competitive levels”. To suggest the current laws and regulations even permit this type of action by US airlines is yet another scare tactic. Yes the world will evolve. And alliances are nothing but a band-aid to access the world.
Mitchell #10: “The primarily objective and dirty little secret of these megamergers is the permanent end to meaningful competition between the U.S. and Continental Europe—two airline competitor groupings would control 90-95% of a profitable, growing market of over 30 million people, where there would be zero possibility of new competition”. This is among the more laughable suggestions. Whereas the European-based carriers are healthy today, have you noted the downgrades on British Airways; the story surrounding the continent’s sixth largest carrier, Alitalia; continued moves toward further consolidation that make the Europeans stronger? Further have you noted that Europe’s next competitor originates in the Middle East? To suggest that the game’s conclusion is now decided is another unfortunate scare tactic.
Mitchell #11: “All of the potential external funding for Northwest / Delta and United / Continental would come from the European airlines that would be the leaders of this two-airline duopoly, Air France and Lufthansa”. Interesting comment. Most interesting, as they are not participating in the deal that has been presented. I am not saying that Air France will not, but interesting. And Lufthansa invested $300 million in jetBlue but you did not mention that.
Mitchell #12: No comments on your conclusion.
Thank goodness, Cliff Winston of the Brooking Institution testified today so that market forces could get entered into the record. Not sure what the unions were trying to accomplish as you cannot have a seat at the table until you set the table. My guess is you will have a seat once you have made it clear that that a collective bargaining agent outweighs other options.
Much more to say. Much more to come.