Merger fever strikes again, rationality nowhere in sight
By now it's all over the news: US Airways and United are "deep" in merger talks.
The NY Times broke the story here in their DealBook blog on wednesday.
Amazingly enough, the market loved it.
United's stock (UAUA) jumped by nearly 10% after the announcement, and continues to hover close to that high.
US Airways stock (LCC) took an even bigger jump -- rising as much as 15% before settling down.
Perhaps the market has a short memory? Yes, the Delta/Northwest merger seems to still be value accretive, but generally these sorts of mergers fail to add value (and even DAL's performance vs. it's peers leaves some reason to be suspect).
My perspective is that this merger is a relatively bad idea. Beating the consolidation drum excites the market, but it doesn't really add anything. I respect Gerry Arpey (CEO of American) for admitting he doesn't believe consolidation is the panacea, as he said at the OneWorld conference in LA (read about it here)
After scouring the web for opinions, I'll share my favorite and the closest to my own. Eric Torbenson from the Dallas Morning News has what I think is a very relevant discussion of the merger and while not scientific, certainly gets at the core issues. Check it out here: LCC + UAUA = um, Y?
One added point: Eric's discussion, like most, focuses on market power shifts relating to a reduction in capacity from consolidation. But the official airline reports all talk about cost savings. Which is the real lever? Well, it's clearly not costs in reality, and the market isn't responding to that. It's about market power -- which is a nice way of saying reduced competition.
Cutting overhead costs at an airline I fear is a total red herring. But of course if their proposal was all based on market power, that would displease the public and the DOJ. What a strange market environment airlines have created!
Of course all this might be a moot point, as labor is throwing down with management, saying they won't let a merger occur. They realize it's in their worst interest, at least relatively short-term and with these airlines in particular, they hold A LOT of the cards. It'll be interesting to see if management can win them over. I'm doubtful, because any deal that would win them over would also handcuff the combined airline with prohibitively high costs.
We'll follow this closely and see what happens. If I had to put money down today, I'd say no deal. Even when management finally agrees (which is hard in and of itself), getting labor on board is likely prohibitive (and THEN the DOT and DOJ also). But at this point I'd hazard that's a blessing for UA and US -- It'll save them from an awkward marriage.
Posted by Evan
