Economic Outlook: Mergers are us

By ANTHONY HALL, United Press International  |  Feb. 15, 2013 at 9:02 AM
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The merger that would create the world's largest airline was announced with handshakes, broad smiles and mutual admiration.

Forging the new airline, American, which will be created out of US Airways and the bankrupt American Airlines is likely to win regulatory approval if only because prior airline mergers have been able to overcome complaints from regulators and the precedent is firmly set.

The precedent has been set repeatedly, in fact. The Justice Department allowed Delta and Northwest Airlines to merge in 2008 and United to join forces with Continental in 2010. Southwest was given a green light to buy AirTran in 2011 with regulators' blessing.

"The merged firm will be able to offer new service routes that neither serves today," the Justice Department said in an April 26, 2011, release.

Executives at US Airways and AA said there were only 12 routes out of 900 between the two that were redundant, an extraordinary lack of overlapping that will save jobs.

The companies also said they would keep all existing hubs, another fortuitous decision for a struggling economy.

It is ominous, nevertheless, to have the industry dominated by so few mega-airlines -- just three of them, that will be able to collude on prices tacitly if nothing else. It doesn't take email messages and secret phone calls for Delta to figure out fare changes at United. There are dozens of fare-comparison websites for travelers that do the work for them.

Tellingly, the happy couple with their Valentine's Day announcement mentioned hubs, but didn't mention employees. The quickest savings for any business is layoffs and AA and US Airways said the merger would save $1 billion in annual operating costs. That has to come from somewhere.

Over the past five years, airlines have created a gold mine out of thin air, literally, creating fees for everything from checking a second bag to the privilege of boarding early. Pretzels, pillows and other perks that formerly came with the price of a ticket have turned into lucrative cash cows. However one looks at that development, it is pretty clear that the fees, among airlines, was contagious. First one, then everybody. Dominoes. So it goes.

What's good about airline mergers besides an excuse to open expensive champagne? Analysts say airlines that have more purchasing power will buy new planes, presumably planes that are safer, more cost efficient and cleaner to operate. Airlines will likely invest more in airport lounges and expand on benefits for frequent fliers.

This doesn't eliminate the negatives and shiny, new airport lounges shouldn't sway anti-trust regulators. Studies, however, indicate that fares rise after mergers and fares rise sharpest among routes where competition is significantly trimmed.

This may seem benign at the moment. Air fares are down compared to 1995, The New York Times reported. But they have been rising since 2008 and a merger won't slow that down.

Behind the scenes, analysts say mergers are on the upswing because top-tier executives are confident enough in the economy to think of expanding, rather than retrenching. It is a sure sign of a healthy financial system, as well, if banks are willing to finance deals or get involved in such a risky undertaking.

These deals don't always pan out. Shareholders may simply say no to a $24 billion deal to take computer company Dell private and a huge Berkshire Hathaway and 3G Capital purchase of H.J. Heinz Co. is under investigation on possible insider trading collusion.

In international markets Friday, the Nikkei 225 index in Japan dropped 1.18 percent while the Hang Seng index in Hong Kong added 0.13 percent. The Sensex in India dropped 0.15 percent while the S&P/ASX index in Australia slipped 0.06 percent.

In midday trading in Europe, the FTSE 100 index in Britain was up 0.1 percent, while the DAX 30 in Germany shed 0.15 percent. The CAC 40 in France added 0.07 percent, while the Stoxx Europe 600 gained 0.04 percent.

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