DL Might Spark Merger Mania

[FWAAA]

The DOT cares little about route overlap for the simple reason you illustrate - network carrier's routes by and large are to and from their hubs and their hubs are not at the same airports, so the routes don't overlap.

However, the DOT is very interested in market overlap. If a combination of two carriers results in a significantly larger share in markets (regardless of the routes used to serve that market), the DOT considers that anti-competitive. They frown at anything anti-competitive.

Jim

While you're completely correct about the distinction between route and market overlap, I'm not as pessimistic about antitrust approval of a proposed UA/DL (or any other combination of two of the big six). Since 2000, B6, WN and others have shown a remarkable ability to enter markets and drive down fares, especially where those true LCCs see the legacies earning high yields.

Granted, this won't help the Podunk-Backwater markets, but many of those are already one-horse (or single engine) towns. A lot has changed since 2000 when rumours of antitrust denial swirled about the UA-US merger, and I suspect similar mergers now would be approved. Perhaps approved with some market/asset divestitures, but approved nonetheless.

Of course, you're probably right (as usual). Cheers.

 

[BoeingBoy]

[Sorry for any confusion, FWAAA - this was in reply to Bear. You posted while I was typing this up. Jim]

The question with any big merger isn't whether it'll be approved or not, but what conditions will be required for approval. The more market overlap the greater the "price" of approval - what has to be given up. The potential merger partners then have to decide if the benefits of the merger are worth paying the "price" necessary for approval.

Just looking at some sample overlapping markets from the 1Q Air Fare Report, UA/DL have about 75% of the Salt Lake City - Washington market. That could lead to a requirement to unload some SLC gates or DCA slots to get approval. UA/DL would have about 68% of the Atlanta - Portland OR market - give up gates in ATL maybe? 75% of Boston - Salt Lake City, 74% of San Fran - Atlanta, 52% of Los Angeles - Norfolk, 52% of Boston - Portland OR. And that's just a sampling from a report that only gives 2 carriers per market for the larger markets (by passengers). When you look at all the markets that DL and UA both serve, the number where the merger would produce market domination could grow into the
hundreds.

Any merger among the big 6 would have problem markets where the merger would produce a single carrier dominating that market. What divestitures the DOT required for approval would make or break the merger.

Jim

 

[BoeingBoy]

FWAAA,

You're right as far as you go. The problem I see is in markets where one/both ends are in cities with entry constraints (slots, available gates) or not large enough to be attractive to the lcc's (ROA, TRI, AVL and the like in my neck of the woods). The first would probably require divestitures, the second is a somewhat tougher nut to crack if the merged company (whichever pairing it might be) had a high enough market share).

I don't doubt that any merger among the big 6 could be approved. As I said, it would come down to whether the merger was worth the price of approval.

Jim

 

[brokenwrench]

[Sorry for any confusion, FWAAA - this was in reply to Bear. You posted while I was typing this up. Jim]

The question with any big merger isn't whether it'll be approved or not, but what conditions will be required for approval. The more market overlap the greater the "price" of approval - what has to be given up. The potential merger partners then have to decide if the benefits of the merger are worth paying the "price" necessary for approval.

Just looking at some sample overlapping markets from the 1Q Air Fare Report, UA/DL have about 75% of the Salt Lake City - Washington market. That could lead to a requirement to unload some SLC gates or DCA slots to get approval. UA/DL would have about 68% of the Atlanta - Portland OR market - give up gates in ATL maybe? 75% of Boston - Salt Lake City, 74% of San Fran - Atlanta, 52% of Los Angeles - Norfolk, 52% of Boston - Portland OR. And that's just a sampling from a report that only gives 2 carriers per market for the larger markets (by passengers). When you look at all the markets that DL and UA both serve, the number where the merger would produce market domination could grow into the
hundreds.

Any merger among the big 6 would have problem markets where the merger would produce a single carrier dominating that market. What divestitures the DOT required for approval would make or break the merger.

Jim

Jim,
One little fact no one is touching on. The DOJ has NEVER denied an airline merger that was "lobbied" for by both airlines' top brass. I.E. TWA/Ozark, that gave TWA what an 88% market share of STL?

Please no one come back with the UA/US merger that was shot down. UA pulled its active support for that merger and let it be known they did not want it to go thru after all.

 

[BoeingBoy]

Jim,
One little fact no one is touching on. The DOJ has NEVER denied an airline merger that was "lobbied" for by both airlines' top brass. I.E. TWA/Ozark, that gave TWA what an 88% market share of STL?

Keep in mind that when the DOT uses the term "market" in respect to mergers, it doesn't mean a single city or airport unless it's capacity controlled, but rather a city pair. Just look at the US/UA merger you mentioned - US had 80+ percent of the CLT "market" and would have added UA's share, yet CLT was never a point of contention with the DOT/DOJ. Conversely, US/UA had a much smaller share of the DCA "market" yet would have had to spin off assets to get approval. Conversely, looking at city pairs, compare CLT-ORD and DCA-LGA - the first was no problem despite the merged carrier having a large market share because neither airport had limits on access, but the limited access at DCA and LGA caused problems despite the smaller combined market share.

Also, as I said, it's not whether the merger will be approved or not but what price has to be paid for approval (if any). Either the carriers decide the price is worth paying (and the merger gets approved) or they don't (and they call it off). I don't recall a merger where the carriers involved effectively said to the DOT/DOJ "Shove your requirements - we're not doing that and we're going ahead with the merger" and the DOT/DOJ meekly said "OK".

Jim

 

[brokenwrench]

Sounds as if you and I are in agreement then.

The game has already started and when the pieces begin to move the DOT/DOJ will not stop any two airlines from merging. They will likely get their say in what parts get "spun off." That is about it. Congress will have its theatre, er I mean hearings but if money, er I mean corporations what it, it will happen.

BTW, JMO. DL/UA will not happen. I THINK that the airlines out there that are going to be the buyers, are more than happy to sit back and let the airlines that want to do "deals" weaken themselves some more. Thus making them cheaper to buy and if needed easier to carve up.

Happy Thanksgiving all.