Airline merger possibilities: less than the sum of the parts?
That the excellent question that Jeff Bailey explores in this New York Times story:
In the Math of Mergers, Airlines Fail
. . . [C]ountless corporate mergers — in manufacturing, media and financial services, among other fields — have made the leap of faith that the sum would be worth more than the parts. But studies generally show that more than half of such combinations fail to create value.
What special magic, then, might occur to make two big airlines worth so much more together?
Essentially two theories are at work, each a chestnut of the merger-and-acquisition game, and neither of them a sure thing.
The first is simply to cut costs of the combined companies and hope to hang on to all the customers and revenue. . . .
The second theory used to justify airline mergers is that combining would increase revenue because a bigger route system would help take market share from competitors. That makes sense, until other carriers also combine.
Bailey’s points are worth keeping in mind as we await the outcome of Delta’s talks with Northwest and UAL. Maybe a Delta merger would work out, but Bailey’s right to point out the risks. The talk about synergies always has a certain appeal (remember the hype around Time Warner’s tie-up with AOL?) but the reality usually pales by comparison (as the Time Warner/AOL deal also shows).
Category: Deals, Transportation2 Comments so far
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Thanks for drawing this to our attention. Here’s my comment to the NYT writer:
“Jeff - a good analysis but you’re focusing (it’s a key point)on the likely failures of cost savings without looking at the deeper problem. Which is that the hub-n-spoke route structure badly constrains the limits of choice of the majors. BtW there’s an earlier NYT story from ‘04 on how airlines were planning on surviving by leaning up thru cost reductions. That’s worked but not addressed the fundamentals but is still worth reading.”
dblwyo: I definitely agree that there are deeper issues underlying the industry here. I think Bailey knows that, but it didn’t really come out strongly in this story.
My fear is that a merger of two of the big airlines will be the sort of elaborate window-dressing that investors will reward . . . even though it fails to address underlying issues.
SOMEBODY is going to come up with a better business model that addresses these underlying issues. When they make it work, they’re going to reap a gigantic financial harvest.