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Monday, May 19, 2008

Re-Regulation Possibility with Consolidation

Twice during the recent Senate Aviation Subcommittee hearing into the merger between Delta and Northwest re-regulation was mentioned; once by no less than Subcommittee Chair John D. Rockefeller IV, (D-W.V.) who said, “I don’t discount myself entirely from consideration of re-regulation of the airline industry.” The comment was followed by support from union leaders and Mark Cooper, director of research at the Consumer Federation of America, who also testified during the hearing.
The comments came on the heels of a Hawaiian legislative proposal to re-regulate the inter-island market in the wake of the Aloha failure. Related Story
Perhaps most interestingly, Former AMR Chief Robert Crandall, who never favored deregulation but went on to take full advantage of it, also supports limited regulation focusing on bankruptcy laws, definitions of fitness, reduction of ticket taxes and fees, and limitations on scheduling at congested airports. His ideas were part of his recent New York Times op-ed piece echoing SkyWest CEO Jerry Atkin who expressed doubts about the benefits of consolidation. Related Story
Crandall said consolidation will not solve airline woes. “We will be better off with higher fares and more competitors than with higher fares and fewer competitors,” he wrote. “The enormous economic importance of our once peerless aviation system is indisputable. Adding some sensible regulations and making the investments needed to give our airlines opportunities for success would be a far better way to safeguard that economic contribution than further airline consolidation.”
CFA’s Cooper indicated that consolidation would lead to less competition and higher prices in addition to worse service, but admitted they would likely come even without mergers. Senator Kay Bailey Hutchison, (R-TX) opposed the idea of new regulations saying it was not Congress’s role to impart policies on airlines, at least with respect to mergers.
Crandall, who is now involved with proposed Very Light Jet operator PogoJet, noted this year was the 30th anniversary of deregulation and that in that time airlines have deteriorated becoming the laggards in every category after, at one time, being the world’s leaders in fleet age, service quality and international reputation.
Along with many industry pundits, Crandall indicated the case for mergers is questionable. “Mergers will not lower fuel prices. They will not increase economies of scale for already sizable major airlines. They will create very large costs related to consolidation. And they will anger airline employees, who will perceive themselves to be hurt by the mergers. The absence of competition never fosters better customer service.”
In recent testimony before the House, Business Travel Coalition Chair Kevin Mitchell.Mitchell questioned the basic math for the Delta/Northwest merger. “Even if we give them the undeserved benefit of the doubt that they will achieve $1 billion in annualized synergies, many analysts believe 75 percent of that would be captured by a new, and well-deserved, pilot’s agreement – leaving just $250 million,” he said. “The projected pro forma fuel bill for the combined carriers for 2008 will be $12 billion. How is it possible that $250 million will materially help with fuel costs, especially given the $1 billion in projected upfront integration costs? What’s more, these mergers were planned when fuel prices were less than half of today's level. The idea that they are a necessary response to $125 fuel is absurd.”
Crandall suggested neither market based approaches nor a return to over-regulation of the past will yield “the aviation system our country needs.” He did, however, advocate some government intervention returning to his recurring theme that the U.S. needs a national aviation policy to “enable people to move easily from one place to another, to assure safe, courteous and on-time service for consumers, and to improve the financial performance and international competitiveness of America’s airlines.”
He pointed to what everyone else is pointing to – modernization – as the most essential step in the process as well as new runways and airport facilities and lowering taxes and fees on passengers and airlines. Citing an MIT/Daniel Webster College study, he said fees and taxes can be as much as 50 percent of the purchase price of an airline ticket and typically amount to about 15 percent. “Reducing these charges would make it easier for the carriers to recapture their costs without pricing travel beyond the reach of many customers,” he said. “Until the new system is in place, the number of flights at major airports needs to be reduced. Right now, airlines schedule more flights than the runways, terminals and air traffic control system can accommodate. Airlines cannot unilaterally reduce flights because doing so would grant other airlines a competitive advantage. In the short term, the only solution is a government mandate that limits flights to the number the system can handle. To create capacity for future demand, we need to build more aviation facilities, including high-speed rail systems that would encourage the use of airports that are farther away from the cities they serve.”
However, regional executives raised concerns over such government-imposed restrictions saying that mid-size business markets would fall victim to the over-saturation in the Florida markets. Related Story
He also called for a reform in the current definition of fitness. “The financial standards for new airlines also need to be made more stringent,” he said, noting that nearly 200 airlines have come and gone since deregulation. He charged that the goals for these carriers seem to be to exist long enough “to reap the rewards of an initial public offering,” and to hurt traditional airlines with price cutting. He also called for renegotiation of international agreements which have replaced previous pacts with consumer-friendly policies aimed solely at reducing prices. “Because the United States has long been the world’s largest aviation market, these agreements have provided more opportunities for expansion to foreign airlines than to our own, with predictable consequences.”
Crandall would prohibit maintenance outsourcing, saying maintenance done in the U.S. has more exacting regulations and higher FAA oversight. “Keeping the work here would enhance any safety improvements that result from the Transportation Department’s new plan to overhaul its oversight procedures,” he said. “Moreover, bringing aircraft maintenance work back to the United States will re-create many thousands of skilled jobs.”
Crandall decried the state of airline labor relations, saying a revision in bankruptcy laws to prevent airlines from continuing operations, “would focus management and labor on the virtues of cooperation rather than confrontation.”

BTC Opposes Mergers
Saying the Delta/Northwest merger threatens service to mid-size communities, the Business Travel Coalition testified before the U.S. House of Representatives, Transportation & Infrastructure Committee. BTC’s concerns would compound problems raised by regional airline executives during the recent Regional Airline Association convention who worried that congestion pricing would spell the end of service to many important business communities in favor of yet more over-saturation of the Florida markets. Related Story  However, many of those same regional executives favor consolidation.
There are many not-so-small communities that will be seriously harmed with market concentration. Using the Herfindahl-Hirschman Index, the standard DOJ measure for competitive concentration, Mitchell suggested such points as Nashville and Baltimore, were at risk. "DOJ merger guidelines say that a 100 HHI-point increase in highly concentrated markets, characterized as those with a score greater than 1,800, creates enhanced market power,” said BTC's Mitchell. “In Nashville, for example, there are numerous city-pair markets where the HHI skyrockets to 8,000, 9,000 and nearly 10,000. And make no mistake, these are the markets that matter.”
In contradiction to the expectations of many regional airline executives, he said, energy experts are predicting that oil prices will retreat to the $50 to $70 range in the relative near term, especially against a global economic slowdown. “Building an irreversible national aviation policy around the current price of oil makes no sense,” he concluded. “Delta and Northwest would have you focus on just 12 overlapping, non-stop markets when the real story, as far as domestic U.S. competition is concerned, is the 550 non-stop and one-stop city-pair markets where the combined carrier would have 50 percent market share, or higher. In 139 one-stop markets the market shares soar past 70 percent. These are the small and mid-size communities where capacity will surely be ripped out and fares increased.”
He suggested three scenarios that would achieve the same goals as consolidation, some of which could produce better results. These include airlines accelerating their own unilateral reductions of uneconomic capacity and continue to address cost and efficiency issues. He indicated if fuel were to retreat, the major network carriers could come out on the other side of the current U.S. economic slowdown and experience a robust airline sector recovery. He also advocated letting major carriers fail rather than “propping them up with government-sanctioned anticompetitive combinations,” he said, adding, “Antitrust law is not meant to be sympathetic to industries that cannot solve their own problems.”
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