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View From A Pilot: Why Airline Mergers Don't Fly  
User currently offlineKarlB737 From United States of America, joined Mar 2004, 3286 posts, RR: 10
Posted (7 years 11 months 4 weeks 13 hours ago) and read 3600 times:

An unnamed airline pilot provides us with a detailed account as to why he believes that the merger thing may not be all its cracked up to be. He provides this info in four key areas:

1. Capacity Reduction Is A Bugaboo
2. Any Capacity Reductions Will Only Be Temporary
3. Inventory Management
4. Mergers Fail


Courtesy: The Wall Street Journal

"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."


Here is his detailed report which I think you will find interesting especially since it is coming from an airline employee.


5 replies: All unread, jump to last
User currently offlineTango-Bravo From United States of America, joined Jun 2001, 3813 posts, RR: 26
Reply 1, posted (7 years 11 months 4 weeks 12 hours ago) and read 3397 times:

Since deregulation took effect, the U.S. legacy airlines have created a vast amount of artificial demand with their unsustainable habit of below-cost pricing for the many while depending on the few who they can gouge in hopes of turning a small profit -- in the best of times. So while, on the one hand, record load factors and overbooked flights may lead one to ask "what overcapacity?" the reality with the current reductions is elimination of the artificial demand (dependent upon below-cost pricing) that the legacies themselves have been foolishly and short-sightedly creating for more than a decade. In recent weeks, some legacies have (finally!) even been honest enough to admit (albeit with a different spin) that they are, in reality, making market corrections to an unsustainable pricing model and the great lengths (and costs) to which they have gone in chasing "bad money"/artificial demand (read non-profit business) with all manner of promotional gimmickry.

The most unfortunate fact is that it took a crisis such as the one airlines currently face to sober them up from their wanton pursuit of market share and load factors at the expense of profit. While a key tenet Southwest's stability and consistent profitability in good times and bad is preparing for the bad times during the good times, the legacies consistently squander the very same opportunity.

As for the track record of airline mergers in the U.S., there has not been one success story in the post-deregulation era. Delta-Western may have come close but, in the end, it was a greed-driven acquisition that proved to be "the beginning of sorrows" for what had once been the very best, most profitable U.S. airline, to say nothing of the best airline to work for.

Pre-deregulation mergers worked well inasmuch as the driving force was the preservation of the services of airlines who were on the verge of certain failure, without disruption of service. In the process, the healthy airlines that "came to the rescue" benefited immediately and longterm in very tangible ways. The difference between the highly successful outcomes of Delta-Northeast (1972) and United-Capital (1961) was night-and-day compared with the post-deregulation merger debacles.

Unfortunately, due to the nature of what the deregulated U.S. airline industry has become, the only realistic solution to the need for consolidation/rationalization is liquidation of at least two of the legacies, a much-needed correction that was preempted by flawed banckruptcy laws and application thereof by the courts. Next time (which can't happen too soon IMHO) it will hopefully will be different.

User currently offlineRobsawatsky From Canada, joined Dec 2003, 597 posts, RR: 0
Reply 2, posted (7 years 11 months 4 weeks 6 hours ago) and read 3201 times:

Quoting KarlB737 (Thread starter):
2. Any Capacity Reductions Will Only Be Temporary

Of course it is temporary. As soon as the market conditions and competitive environment make a profitable outcome an even slight possibility, the existing parties and new entrants will expand capacity. The only alternative is regulation.

What mergers do is reduce the competitive aspect for a time, allowing for price adjustments to be made with fewer competitors willing to push back on price. It also takes out capacity that is filled simply because it is there, even at unrealistic prices, as strategic route structures can't readily be dropped without negatively impacting the rest of the business.

User currently offlineSsides From United States of America, joined Feb 2001, 4059 posts, RR: 19
Reply 3, posted (7 years 11 months 4 weeks 6 hours ago) and read 3131 times:

Quoting Tango-Bravo (Reply 1):
Unfortunately, due to the nature of what the deregulated U.S. airline industry has become, the only realistic solution to the need for consolidation/rationalization is liquidation of at least two of the legacies, a much-needed correction that was preempted by flawed banckruptcy laws and application thereof by the courts. Next time (which can't happen too soon IMHO) it will hopefully will be different.

Agreed. I do not believe that a reduction in capacity is a panacea that will solve all problems, but it is a major factor in the current situation. The fact that airlines can declare bankruptcy, shed costs like crazy and then re-enter the market to compete against airlines that did the right thing (e.g., protecting workers' pensions by not filing bankruptcy) does not allow the market to function as it should.

From the pilots' perspective, of course they're not going to want reduced capacity. Less capacity means less flying for the pilots, which means less money. He says that the problem isn't "overcapacity," but the management of existing capacity. In a competitive environment like the US domestic industry, though, how is capacity supposed to be managed when there are so many planes flying? If an airline reduces the amount of seats in its super-low-fare bucket, another airline will simply step in and undercut them on price -- and we've all seen how fickle the US consumer is on pricing. It's not like the airlines can just get in a smoke-filled room and agree on how many seats will be flown in a particular market.

"Lose" is not spelled with two o's!!!!
User currently offlineOlympic472 From United States of America, joined Jun 2008, 518 posts, RR: 0
Reply 4, posted (7 years 11 months 4 weeks 5 hours ago) and read 3058 times:

All the finger pointing to management, unions, employees, customers, regulators, etc etc are not going to help any airline survive. The facts are that airline tickets are price elastic. With little differentiation of their products, airline tickets are also a commodity. Major airlines face downward pressure on pricing from budget airlines. Over time some of these upstarts will face increasing cost from items such as C & D checks, and rising staff seniority. Until then it is not a level playing field. It is a battle ground out there.

However airlines do not have many "weapons" (solutions) left. Airlines cannot afford predatory pricing, so what is left is consolidation, alliances, reduction of capacity. The marketplace now reflects all of the above. Regardless of the airline's condition, all the major airlines need to cut out the "fat" now and rebuild the business from the core. This is a necessity.

In rebuilding, their focus should be on these five measures / criteria which I feel makes a good airline. In no particular order, they are:
- customer service
- network
- product
- safety
- meets or exceed industry standards

Civil Aviation has a "Need for Speed"!
User currently offlineChristao17 From Thailand, joined Apr 2005, 980 posts, RR: 8
Reply 5, posted (7 years 11 months 4 weeks 1 hour ago) and read 2905 times:

It would be very interesting to see what would happen if foreign ownership percentages were allowed to increase. Also what would happen if foreign carriers were allowed to carry traffic within the US. Perhaps then the industry would right itself and the situation would improve for the traveling public.

Keeping the "civil" in civil aviation...
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