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Airline mergers – flying into turbulent times?

by our aviation correspondent, Roy Hinds MSc MRAeS

Last Monday saw the announcement that United and Continental Airlines intend to merge to create the world’s largest airline or – shall I put it another way? – on current financial performance, the world’s leading loss-making airline.

I’ve yet to fully understand how two largely dysfunctional legacy carriers with a raft of problems can truly benefit from the merger. As a fellow aviation professional, my first thoughts are with the employees of the respective airlines. Currently the two companies employ about 86,000 people.

United Airlines CEO Glenn Tilton called the deal “great for our customers, our employees and our communities”. He indicated minimal cutbacks in front-line employees, but given the oversupply problem that has plagued the global air transport market for nearly a decade post-9/11, one cannot realistically see how there will not be significant job casualties over and above any retirements and voluntary redundancies.

Merger talks between United and another US carrier, US Airways, came to an end on 23 April. Again the reasons for the merger were stated as it being in the best interests of customers, shareholders and communities. The story is the same, this time the outcome is different. Mergers are back on the agenda as carriers try to hold out until the return of better economic times.

Before you think I am focused only on the USA, I have some very serious reservations about the true benefit of British Airways and Iberia merging. British Airways has some serious financial problems, a potentially crippling pension deficit, and a serious reputation problem with a large section of the travelling public across the world. Whoever in marketing dreamt up the slogan “The world’s favourite airline” clearly failed to consult the world at large or at least those who had actually travelled with the airline.

Now, moving away from the specifics of this particular merger, where else would you find two giant loss-making businesses, with a raft of issues – ranging from long-term pension provision issues, to a massive oversupply of product (in an airline’s case, empty seats), and a market that is taking a battering as a result of events beyond the control of the players (9/11, global recession, ash clouds) – seeking to merge? In my mind, for two dysfunctional businesses with no sound basis to move forward on merging into one business with a myriad of problems is not the way forward.

The problems that persist in the American aviation business, in my opinion, go beyond the issues that mergers try and seek to solve by economies of scale and the accompanying reduction in parallel business functions.

In Europe over a decade ago, it became illegal for states or governments to prop up failing airline businesses. The two airlines that seem immune to this position are Olympic and Italia, which are widely regarded in financial circles as basket-case airlines and are probably in truth beyond redemption.

The American aviation sector is very much protected and most of the major carriers have spent periods in Chapter 11. For those not familiar with Chapter 11, it is a financial instrument under the United States Bankruptcy Code that allows a company to continue trading during a period of insolvency, thus affording a corporation protection from its key creditors, whilst it tries to fix its financial affairs. I almost cynically think that the boards get together in tough times and decide, “Shall we operate normally or shall we call for Chapter 11 again?” This, combined with a complete unwillingness to have any significant foreign ownership, means that the American carriers operate away from the normal financial realities that the rest of the world’s airlines live with.

The larger American carriers are “too big to fail”. This simply means that should the shareholders and other stakeholders agree to the formation of the new “United” (the proposal calls for the use of the Continental logos and the United name), the new airline will simply have the option of trading using the Chapter 11 rules when things get tough again, which no doubt they will.

I find it ironic however that one of the best performers historically on the New York Stock Exchange is another airline – Southwest. This is a good performer financially not only in its own sector, but across all sectors.

The Southwest business model has been reapplied in Europe to form some of the leading and now largest carriers in Europe, notably easyJet and Ryanair.

At the end of the day I remain convinced that, far from providing any real improvements for customers, employees and the wider non-aviation communities, the only winners from these mergers will be a small number of shareholders and, as always in these things, the banks and other financial advisers who are “in on the deal”.

PG Author: Roy Hinds

After completing his Masters in Air Transport Management at City University he became a project manager at an expanding regional airport and became involved in projects as diverse as relocating and re-certifying an ILS system, to organising an air show with an attendance in excess of 20,000.

He is also an avid aviation photographer and has had his work published in a number of aviation journals including Pilot magazine. His ultimate flying ambition would be to restore a Mosquito to flying condition (“Why have one Merlin, when you can have two in a lightweight airframe?”).

He now focuses his time and efforts on the evolution of AV8Services and CrewDatabase.com.

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