Airline stocks down sharply - DOJ reportedly to block AMR/LCC

[traderjake]

One airline analyst, Daniel McKenzie, of Buckingham Research, put the chances of the merger being approved at 50-50.
“We doubt Justice will prove its case if and when it comes to trial,” bond analyst Vicki Bryan, of the independent research firm Gimme Credit, said in a client note. The government makes “blanket statements that consumers will pay more and get less” but the evidence “seems weakly supported,” she wrote. “We assume the merger will close.”
Dan Goldfine, an antitrust lawyer at Snell & Wilmer in Phoenix and a former trial attorney in the Justice Department antitrust division, said the government will have a tough time proving its case.
“I think as alleged it’s a difficult case,” Goldfine said. “It’s a somewhat sketchy theory” of how the merger will be anti-competitive.
“Should it litigate to fruition, it would be a difficult and sketchy claim from an antitrust perspective for the government to prove,” said Goldfine.
The merger aims to allow two smaller carriers, No. 3 American and No. 5 US Airways, to come together to better complete with United and Delta, which are No. 1 and 2 in passenger traffic.
If the merger is scuttled, the result would be a “duopoly” between United and Delta airlines, said Helane Becker, analyst with Cowen & Co., in a note to clients.

http://www.airlinedaily.com/feeds.html#http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNEAuYrjNZFKTQhDuTlk7uZUl_KdDw&url=http://seattletimes.com/html/businesstechnology/2021652180_amrusairmergerseenxml.html

 

[WorldTraveler]

Reed,

I think you have a very good grasp of the issues.

First, though, many people are assuming that the merger is being blocked just because the DOJ said there has been enough consolidation and the ones they approved didn’t work out the way the expected. If that were the only reasons for the merger, it would be wrong and I agree that it is unfair to AA/US.

But AA/US is not the same type of merger than any of the other 3 megas that were approved. There is far more overlap and market concentration between AA and US than there was with other mergers. DL is very large on the east coast but they have a low cost carrier in their largest hub and at JFK; CLT, MIA, and DFW are all large hubs with major penetration of the east coast (yes, AA carries a lot of the same traffic flows over DFW that DL carries over ATL and US carries over CLT). Even after the slot deal which doubled DL’s slots, they didn’t break 50% of LGA but US already is higher than that level at DCA.

There are true structural differences between AA/US and other mergers.

And then there were the comments made by email that is exactly the kind of stuff the DOJ salivates at, regardless of the industry or level of consolidation of one company relative to its peers.

Second, there is a lot of truth to what you say. The long term future of AA and US is a lot less cloudy as standalones. US particularly doesn’t have the size or market presence in large markets to compete effectively for corporate contracts like DL and UA have. But remember that US gave up a lot of presence in some of those same markets that it now says it needs to have by adding AA’s presence. And, as much as some don’t want to hear it, AA’s presence in NYC continues to shrink relative to DL and UA and there really isn’t any evidence that AA/US combined can do much more than AA does on its own. The same is true for Asia, Latin America, and the Midwest where the merger doesn’t really move the needle (good or bad) in one direction or the other. The benefits of the merger are focused on the eastern and southwest US and continental Europe. Thus, you have to really ask if doing the merger in the name of being able to compete against DL and UA is a valid or reasonable goal and I’m not sure it is and the DOJ doesn’t believe it.

Also, the focus of the DOJ is on the domestic market so there really are 3 players – DL, WN, and UA – even if AA and US aren’t in the mix at all. I don’t believe WN will be a true source of discipline for domestic fares long term if competition is reduced to 3 or 4 major players which is also why they are shifting their focus to Latin America where they can get a bigger bang relative to the legacies. The international markets are still controlled by 3 carrier groupings and when you have ATI/JVs, there isn’t the discipline from foreign carriers that there would otherwise be. Absent AA and US and with JVs at DL and UA, a large portion of US int’l capacity is controlled by a very few number of carriers.

I have long said that AA has a lot of underperforming capacity and that US’ network wno’t work at the labor rates that Parker has agreed to pay in order to get labor on board.

It is very possible that AA and US could merge if US was smaller and AA had eliminated a lot of its duplicate capacity but the DOJ can’t predict that AA/US would do that. It hasn’t helped that AA/US have touted being the world’s largest when in reality they likely won’t be if they manage the combined company as it needs to be to generate revenues and profits proportionate to what DL (the best performer in the industry) is doing. DL has cut capacity since the merger but is also the most profitable network carrier. The DOJ undoubtedly looks at what DL has done (far more than UA or WN who are not as far along in their mergers relative to DL) and says that isn’t a price that is worth paying – but if both AA and US were of the size they would be after consolidation, I don’t the DOJ would have nearly as much problem. But it is obviously a horse and cart problem. AA/US can’t shrink w/o a merger because they will be too small… they can’t say they will cut capacity in the merger because everyone will object…. So the reality is that both might have to shrink a lot more (and likely lose more money) in order to get to a size that the DOJ says makes them not too large.

Also, labor won’t begin to see any gains until the benefits of a merger – and not just cutting underperforming/uneconomical capacity takes place. There are limits to cost advantages… revenue strength is becoming far more significant of a predictor of success. US people aren’t going to work for lower wages and want better pay now. AA people don’t want to face the prospect of not being in the same league as DL, UA, and WN employees WRT pay and benefits.

Not a pretty picture no matter how you look at it and there are no easy answers. It is precisely for that reason that AA and US have no choice but to fight but it also doesn’t make the end game any better looking or clear.

Given that AA and US both repeatedly said they could survive as standalone companies, the DOJ is not going to consider the future health of AA or US as a factor in blocking the merger. And, in reality, AA and US execs would both lose a whole lot of credibility if they go to trial saying the future of their companies is at risk because the merger has been blocked after saying the opposite not that long ago, even if a chorus of analysts all would support AA and US’ contention that they can’t make it on their own.

 

[Reed Richards]

Thanks WT. And I am still digesting your post, so to speak! Since 911 I have wished to work for a successful carrier and have job security. Now my Company is "successful" and that very fact may eventually cost me my job. Welcome to my career! RR

 

[traderjake]

"But to heck with the opinions of industry CEOs, board members, creditors, shareholders and workers – if there's one thing the Obama administration wants the American public to believe it's that the government knows best. Consumers must trust that the administration understands the complicated and confusing airline industry better than the people who run it every day – even if that trust comes at the expense of free enterprise."


http://www.usnews.co...s-and-consumers

 

[Phoenix]

Reed,

I think you have a very good grasp of the issues.

First, though, many people are assuming that the merger is being blocked just because the DOJ said there has been enough consolidation and the ones they approved didn’t work out the way the expected. If that were the only reasons for the merger, it would be wrong and I agree that it is unfair to AA/US.

But AA/US is not the same type of merger than any of the other 3 megas that were approved. There is far more overlap and market concentration between AA and US than there was with other mergers. DL is very large on the east coast but they have a low cost carrier in their largest hub and at JFK; CLT, MIA, and DFW are all large hubs with major penetration of the east coast (yes, AA carries a lot of the same traffic flows over DFW that DL carries over ATL and US carries over CLT). Even after the slot deal which doubled DL’s slots, they didn’t break 50% of LGA but US already is higher than that level at DCA.

There are true structural differences between AA/US and other mergers.

And then there were the comments made by email that is exactly the kind of stuff the DOJ salivates at, regardless of the industry or level of consolidation of one company relative to its peers.

Second, there is a lot of truth to what you say. The long term future of AA and US is a lot less cloudy as standalones. US particularly doesn’t have the size or market presence in large markets to compete effectively for corporate contracts like DL and UA have. But remember that US gave up a lot of presence in some of those same markets that it now says it needs to have by adding AA’s presence. And, as much as some don’t want to hear it, AA’s presence in NYC continues to shrink relative to DL and UA and there really isn’t any evidence that AA/US combined can do much more than AA does on its own. The same is true for Asia, Latin America, and the Midwest where the merger doesn’t really move the needle (good or bad) in one direction or the other. The benefits of the merger are focused on the eastern and southwest US and continental Europe. Thus, you have to really ask if doing the merger in the name of being able to compete against DL and UA is a valid or reasonable goal and I’m not sure it is and the DOJ doesn’t believe it.

Also, the focus of the DOJ is on the domestic market so there really are 3 players – DL, WN, and UA – even if AA and US aren’t in the mix at all. I don’t believe WN will be a true source of discipline for domestic fares long term if competition is reduced to 3 or 4 major players which is also why they are shifting their focus to Latin America where they can get a bigger bang relative to the legacies. The international markets are still controlled by 3 carrier groupings and when you have ATI/JVs, there isn’t the discipline from foreign carriers that there would otherwise be. Absent AA and US and with JVs at DL and UA, a large portion of US int’l capacity is controlled by a very few number of carriers.

I have long said that AA has a lot of underperforming capacity and that US’ network wno’t work at the labor rates that Parker has agreed to pay in order to get labor on board.

It is very possible that AA and US could merge if US was smaller and AA had eliminated a lot of its duplicate capacity but the DOJ can’t predict that AA/US would do that. It hasn’t helped that AA/US have touted being the world’s largest when in reality they likely won’t be if they manage the combined company as it needs to be to generate revenues and profits proportionate to what DL (the best performer in the industry) is doing. DL has cut capacity since the merger but is also the most profitable network carrier. The DOJ undoubtedly looks at what DL has done (far more than UA or WN who are not as far along in their mergers relative to DL) and says that isn’t a price that is worth paying – but if both AA and US were of the size they would be after consolidation, I don’t the DOJ would have nearly as much problem. But it is obviously a horse and cart problem. AA/US can’t shrink w/o a merger because they will be too small… they can’t say they will cut capacity in the merger because everyone will object…. So the reality is that both might have to shrink a lot more (and likely lose more money) in order to get to a size that the DOJ says makes them not too large.

Also, labor won’t begin to see any gains until the benefits of a merger – and not just cutting underperforming/uneconomical capacity takes place. There are limits to cost advantages… revenue strength is becoming far more significant of a predictor of success. US people aren’t going to work for lower wages and want better pay now. AA people don’t want to face the prospect of not being in the same league as DL, UA, and WN employees WRT pay and benefits.

Not a pretty picture no matter how you look at it and there are no easy answers. It is precisely for that reason that AA and US have no choice but to fight but it also doesn’t make the end game any better looking or clear.

Given that AA and US both repeatedly said they could survive as standalone companies, the DOJ is not going to consider the future health of AA or US as a factor in blocking the merger. And, in reality, AA and US execs would both lose a whole lot of credibility if they go to trial saying the future of their companies is at risk because the merger has been blocked after saying the opposite not that long ago, even if a chorus of analysts all would support AA and US’ contention that they can’t make it on their own.

"It's never a simple answer." is merely the point of departure proposed by those in favor of peddling their ability to major in the minutiae. There is untold money to be made in exhaustive analysis, mountainous reports, and unassailable opinions... Yet at the end of it all the answer is very simply no more complicated than "yes", or "no".

All the trappings that dress up the "yes" or "no" are simply that, trappings.

 

[Piedmont1984]

I wonder if the merger went ahead with more divestiture than originally planned or anticipated, even to the degree that the new company still could not compete on an equal footing with DAL and UAL, but then a smaller carrier could be acquired later, such as Hawaiian, for Asia access. Same end result, only with a piecemeal approach.

 

[traderjake]

All the trappings that dress up the "yes" or "no" are simply that, trappings.

Thanks for reposting the entire WT diatribe, I'd hate missing the opportunity to read it all a second time.

 

[Phoenix]

"But to heck with the opinions of industry CEOs, board members, creditors, shareholders and workers – if there's one thing the Obama administration wants the American public to believe it's that the government knows best. Consumers must trust that the administration understands the complicated and confusing airline industry better than the people who run it every day – even if that trust comes at the expense of free enterprise."


http://www.usnews.co...s-and-consumers

"Some opinions are more equal than other opinions."

That is so yesteryear. The new administration cannot be bothered with notions that it is hindered by possessing mere opinions. It has evolved beyond such limitations.

 

[Phoenix]

Thanks for reposting the entire WT diatribe, I hate missing the opportunity to read it all a second time.

You are welcome. Thanks for magnifying my point.

 

[WorldTraveler]

"It's never a simple answer." is merely the point of departure proposed by those in favor of peddling their ability to major in the minutiae. There is untold money to be made in exhaustive analysis, mountainous reports, and unassailable opinions... Yet at the end of it all the answer is very simply no more complicated than "yes", or "no".

All the trappings that dress up the "yes" or "no" are simply that, trappings.

And the DOJ could very well say to AA/US "NO" and tell them to go away. But they can't because there are good reasons why they will say no (if they do.)

Likewise there are people who want to be able to discuss the real issues... perhaps you aren't one of them.

Reed,
The sad reality is that there are a lot of good peoples' lives just like yours that are mixed up in this whole situation.. and the same is true of AA. There are many people who made career decisions without knowing where things would be now...who could know the state of the industry or individual companies 20 years or more in advance?

As you know, life isn't fair and our lives are affected, often adversely, by people who do their jobs poorly or even by circumstances that are beyond anyone's control. Doesn't make it any easier... which is why you can only go to bed knowing you have done your best and have spent every effort possible to make a living despite obstacle after obstacle.

All the best and thanks again for the reminder that all of these strategic maneuvers do have real people's lives wrapped up in them.

 

[traderjake]

And the DOJ could very well say to AA/US "NO" and tell them to go away.

And AA/US can tell the DOJ make your case in court.

 

[zethya]

WHAT IF US OFFERED TO CLOSE THE CLT HUB in order to satisfy the DOJ - and the DOJ jumped on it and accepted it as the only give up required? Obviously, the objections it has noted should vanish quickly with the removal of US's only Fortress Hub. Nope, PHL and PHX are Not Fortress Hubs. Could a profitable network be structured to compete favorably with UA and DL, without CLT and could it be done without (significantly) damaging the existing revenue streams of both carriers? Internationally, obviously JFK/PHL/MIA could easily compensate for the relatively low level of CLT O&D. But could the combined airline compensate for a significant, or total reduction in domestic connecting flow through (by far) the cheapest major airport in the U.S. ? With the assumption that closing the CLT Hub does not mean a total elimination of flights through there (whatever that could mean), can PHL, ORD and DFW obsorb a sufficient amount of the NE/South - East/West flows to offset the loss and still have a viable. competitive AA network? My theory is Yes, such a network could be established as long as one of its principal objectives and results produce signficant increases in the international scope of the new AA, particularly in Asia and Africa. One thing for certain, it would take the greatest network planners in the world to pull it off and still convince the financial community of it's viability. ALL OF THIS IS OF COURSE 100% HYPOTHETICAL, we know Parker would never give up CLT. :blush: :blush:

 

[nycbusdriver]

but then a smaller carrier could be acquired later, such as Hawaiian, for Asia access.

Hawaiian? For Asia access?

Huh????

Why not Guam, then?

 

[Piedmont1984]

Hawaiian? For Asia access?

Huh????

Why not Guam, then?

It's not hard to check out their route map for current/ future service to Asia and 'down under'.
Much better presence in that part of the world than we have. They can be purchased with this year's profit. Nothing to scoff at if the merger dies with AA.

 

[nycbusdriver]

It's not hard to check out their route map for current/ future service to Asia and 'down under'.
Much better presence in that part of the world than we have. They can be purchased with this year's profit. Nothing to scoff at if the merger dies with AA.

Feed?

O&D?

Will lots of folks really want to stop in Hawaii enroute to a Far East hub where they can again change planes before getting to their destination?

Or, should we go for another hub at a leisure destination?

Hawaiian might be a good merger prospect, but not for Asia access from the mainland.