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Robert Mann [HPN-NY]
AVSIG Member


Reged: 05/15/04
Posts: 11777
Loc: NY
Re: USAir to Buy Delta? [Re: Don Peters (CMH)]
      #133877 - 11/16/06 07:40 AM

Don,

<<Which Legacy Carriers are next for Consolidation? or in other words, reducing the numbers of competing US market hubbing systems.>>

There's talk about a UA/CO deal, and AA/NW. Nothing more than talk right now, but interest has been expressed.

Yes, it would reduce the number of competing market hubbing systems, and that may very well be the path to solvency and profitability in the industry. The biggest problem plaguing the industry for the last three decades has been overcapacity. These mergers will reduce capacity. Fares will likely go up too. While that may not seem to be good news for consumers, it is in the consumers' long term best interest that airlines are profitable.

--------------------
Best,

Bob


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Steve Stombaugh (IND)
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Reged: 05/01/04
Posts: 1962
Loc: Indiana
Re: USAir to Buy Delta? - One Pundit's view [Re: Tom Tyson [SUW]]
      #133878 - 11/16/06 07:45 AM

From an e-mail this morning.....

Merger to Create World’s Largest Bankrupt Airline
by Scott Ott

(2006-11-16) — If the U.S. Airways buyout of Delta receives regulatory approval, industry experts said it would make the resulting company the largest of the world’s bankrupt airlines and a strong candidate for a future government bailout.

U.S. Airways yesterday announced it would offer Delta’s creditors $8 billion in stock, cereal boxtops and S&H Green Stamps and would name the merged firm Delta Airlines, which the source called, “one of the most recognizable brand names in the non-profit airline industry.”

“The synergies are incredible,” said an unnamed spokesman for U.S. Airways, “There’s a lot of overlap in areas of incompetence, customer dissatisfaction, mismanagement and hubris. Thanks to economies of scale, together we can achieve new levels of mediocrity.”

The source assured investors that the new Delta Airlines stock would make “an excellent tax write off, and a great way to add balance to your portfolio of growth stocks.”


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Robert Mann [HPN-NY]
AVSIG Member


Reged: 05/15/04
Posts: 11777
Loc: NY
Re: USAir to Buy Delta? [Re: Tom Tyson [SUW]]
      #133879 - 11/16/06 08:15 AM

Tom,

There are some big hurdles to get past for this deal to happen. As of now, I wouldn't bet on it.

First, this is a hostile takeover. Gerald Grinstein, CEO of Delta, indicated he's not interested in this deal, and has spurned prior expressions of interest from US. Hostile takeovers are inherently difficult if there is no interest in the deal on the part of the target's senior management. Typically, there isn't, which is why a suitor would go hostile in the first place.

Second, Delta is in a Ch 11 bankruptcy. As big a hurdle as a hostile takeover is, when the target is in a Ch 11, it is several times harder. US would have to convince the Creditors Committee that such a deal is in their best interests. That is no easy task. Moreover, until Feb 15, 2007, Delta has the exclusive right to file a Plan of Reorg. That date could get extended further, putting US's offer further out there in limbo. Furthermore, if the deal can't be completed prior to the completion of the bankruptcy reorg, a lot of the synergistic cost savings won't be realized.

Finally, the deal would require antitrust approval, which is hardly assured. They both are major competitors up and down the east coast, and in the southeast, they together control a big piece of the market. Then there's also the Shuttle where they compete head to head. One of the carriers could sell off their shuttle which would make that problem go away, but the overall antitrust approval issue is a big one.

--------------------
Best,

Bob


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Stephanie Belser
Top Gun APC


Reged: 04/29/04
Posts: 5929
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Re: USAir to Buy Delta? [Re: Robert Mann [HPN-NY]]
      #133888 - 11/16/06 09:04 AM

Quote:

These mergers will reduce capacity.




Assuming, of course, that the leaseholders of the airplanes that "US Delta" would stop flying just scrap the airplanes instread of finding another lessee.

Stephanie


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Rick Durden
Top Gun


Reged: 06/07/04
Posts: 4366
Re: USAir to Buy Delta? [Re: Robert Mann [HPN-NY]]
      #133889 - 11/16/06 09:19 AM

Bob,

You reference overcapacity in the airline industry; and I have read a number of articles indicating that overcapacity is the true problem leading to the current, wonderful fiscal health of the U.S. airlines. My problem is that I have not seen an explanation as to why "overcapacity" is the problem nor how cutting the number of airlines will affect it in any fashion.

Were we to drop to two or three carriers, they would still be using their current management and market plan of cutting prices as far as possible to try and obtain market share (and brand loyalty, although that's long since gone away despite what they believe); they will have no problem having more than enough airplanes for whatever routes they chose to fly and they will continue to hire pilots at bus driver wages and have to fight off the applicants. If one carrier holds a line at prices, the others will undercut and move into the territory and, again everyone will continue to lose money.

I am not disagreeing with the premise of overcapacity, I just have not heard it explained - commentators mouthe the word and move on, rather than discuss why it is a part of or the root of the problem.

I can't help but think of my econ history class in college and compare this to the railroad competition of the 1880s and '90s as the oligopolies went at each other hammer and tongs and cut their own throats on routes where there was competition and raised rates to "what the market would bear" where there was no competition (I just rode the United commuter to Riverton, WY and wow, they do know how to price their tickets when no one else wants to fly the route).

The purely compeitive market model has airlines doing precisely what they are doing until one buys out the rest and establishes stable, monopolistic pricing that pays the actual costs plus whatever profit the managers desire. Even though our anti-trust laws were pretty well gutted during the Reagan administration (or at least no longer enforced), I still doubt that we'll get down to just one airline (or even 2); so the market will not be allowed to take its course. We'll have an oligopoly as we have now, only with a few fewer companies, and they will either carve up geographical sectors and put on a little pretend competition along the edges or continue trying to be everywhere and cut prices in the vain hope of obtaining a greater market share.

I need a discussion as to why overcapacity is the problem or whether it is merely a symptom of an industry where overcapacity is so very easy to arrange and there is no real penalty for it (but a very definite penalty for not having it in that you get your legs cut from under you on your own turf unless you have the excess capacity to go onto your neighbor's home court and undercut him there, thus maintaining an uneasy, money losing status quo for everyone). Braniff did not have overcapacity and stuck to its historic routes, American came in and undercut them on every single route that was making money for Braniff (and did some interesting ticket dumping on the clearinghouse and other fascinating little ethically-challeneged actions) and Braniff didn't have the capacity to take it to American's money making routes. American used its money makeing routes to subsidize the ones where it competed with Braniff to force Braniff out. Then of course, American had its tactics used against it by everyone else and the games began.

I don't have a horse in this race, other than as an old econ major who once did a major research paper on what would be expected if the airline industry were deregulated. I'm just watching what I predicted in terms of the overall economic health of the airlines as well as the dimunition in numbers of airlines and wondering whether we will follow the railroad pattern of 120 years ago as the downside of a relatively pure free market wreaked its havoc, or whether there will be some recognition that a natural monopoly (or oligopoly) requires some degree of oversight to prevent what occurs without an external pressure relief valve. (In contrast to the 19th century railroads, at least the FAA is requiring some minimal maintenance and safety equipment, so we are not repeating the slaughter that occurred on the railroads during the worst of the fights for economic dominance. Accordingly, there is some check already in place and we do not have a purely free market. I'm just wondering whether the public will eventually demand more. Side bet - not until the number of competitors drops to where they raise prices and actually make money <g>.)

Interesting subject and one that pits those who believe that there is not a downside to pure compeition (and don't know the history of how bad it can be) versus those who want a purely regulated industy (and don't know the history of how bad it can be).

Me? I'm just standing and watching (and taking advantage of incredibly cheap airline tickets from time to time while complaining about the hell of a center seat on a 757).

Hmm, and this long post all started with a question about overcapacity <g>.

I'd really appreciate your comments.

Warmest regards,
Rick


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sreyoB yrraL
AVSIG Member


Reged: 05/16/04
Posts: 9442
Re: USAir to Buy Delta? [Re: Rick Durden]
      #133900 - 11/16/06 10:05 AM

Quote:

My problem is that I have not seen an explanation as to why "overcapacity" is the problem nor how cutting the number of airlines will affect it in any fashion.




I have written at length on the topic right here in AvSig.

Just reducing the number of airlines does not necessarily affect capacity. Merging two airlines does tend to reduce it, however, as the duplication in routes is rationalized.

The problem, in either case, is what happens to the excess airplanes? The owners of those airplanes are highly motivated to keep them flying so they will cut deals with other airlines, possibly new startup airlines, to keep them flying. In such cases total capacity isn't reduced, it's just reshuffled from some routes to others. JetBlue was the beneficiary of such a situation when Airbus found itself with a large number of A320s that were no longer wanted. JetBlue was able to negotiate extremely favorable lease rates for their first batch of airplanes.

Airlines aren't setting fares to maintain market share--at least not over the long term. They are setting fares to fill the seats that they have available on a route. Often times the fares that are necessary to fill the seats results in an average fare that is less than cost. The problem is, how do they get rid of those seats?

Parking airplanes is very expensive. In most cases it's cheaper to operate the airplane, even at a loss, because the operating airplane will lose less money than it would if it were to be parked. This makes it very difficult for airlines to reduce capacity over the short term. (It is similarly difficult to increase capacity over the short term) Over the long term capacity can be reduced and has been reduced. We've seen that for most of this year with the majority of Major airlines once again posting profits instead of losses.


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Rick Durden
Top Gun


Reged: 06/07/04
Posts: 4366
Re: USAir to Buy Delta? [Re: sreyoB yrraL]
      #133903 - 11/16/06 10:47 AM

Larry,

Thanks for the insight.

Warmest regards,
Rick


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Richard Duxbury (Dux)
Top Gun


Reged: 05/15/04
Posts: 5468
Loc: Minneapolis/Tucson
Re: USAir to Buy Delta? [Re: Robert Mann [HPN-NY]]
      #133914 - 11/16/06 12:04 PM

Hi Robert

I agree with your comments about this buyout being anything but a sure thing.

As you note, there are a lot of official hurdles as well as the fact it's hostile now.

Still, it does seem that some additional mergers could happen in the US commercial airline industry. Somehow we must return to a situation that there is some (small?) profit in the industry for the legacy group.

Not always a smooth ride with this industry -much like my somewhat bumpy career with Northwest.

regards,

Dux


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Robert Mann [HPN-NY]
AVSIG Member


Reged: 05/15/04
Posts: 11777
Loc: NY
Re: USAir to Buy Delta? [Re: Rick Durden]
      #133923 - 11/16/06 01:54 PM

Rick,

Let me take a stab at this without going into a long dissertation.

At its roots, the problem is too few dollars chasing too many seats. Such a state of affairs is going to drive down prices, often to unprofitable levels. The biggest problem with overcapacity is that once you have it, it's hard to get rid of it. Not impossible though. But once you have that overcapacity in place, you're willing to sell seats at ridiculously low levels because even if you sell a RT ticket for $50, that's $50 more revenue than you would have gotten if you didn't sell the seat. The root cause of this Hobson's choice is that the seat is available in the first place.

Quote:

Were we to drop to two or three carriers, they would still be using their current management and market plan of cutting prices as far as possible to try and obtain market share




Maybe, but probably not. I suspect that they would cut prices in competitive markets to try to obtain profitable market share. Any idiot can buy market share.

Quote:

they will have no problem having more than enough airplanes for whatever routes they chose to fly. If one carrier holds a line at prices, the others will undercut and move into the territory and, again everyone will continue to lose money.




Once again, that exists because they've already created an overcapacity situation.

It's no different than if you, as a practicing attorney, leased 20,000 ft of space, hired 20 associates, and saw that 70% of them were sitting around and doing nothing. So now, you decide to cut your billing rate from $300/hr to $30/hr, because $30/hr of revenue is better than nothing. Word gets around and you get more business (i.e., market share). You put pressure on your competition. But Rick, how long can that last for? How long can you pay your people $75/hr and bill them out at $30/hr? Well, the answer is: not too long. So, you file Ch 11. You wipe out all your debts and your creditors wind up holding the bag.

BUT . . ., if you decided to get a fresh start from your Ch 11 Reorg, what's the chance of your landlord leasing you property again? What's the chance of the computer company who leased you 50 PCs that they repossessed leasing you more brand new computers? Etc, etc ,etc. Not too good. This is where things start looking different between The Durden Law Firm and the airline industry.

In the airline industry, for reasons I have not entirely figured out, there seems to be an endless stream of stockholders and bondholders who are always willing to invest and capitalize distressed and start-up airlines. I believe this irrational willingness is somehow related to a certain fascination and romance with flying and aviation. So long as this willingness exists, so long as the stockholders and creditors are willing to get burned and burned again, there will be overcapacity in the industry. Maybe this is what you were alluding to when you said, "where overcapacity is so very easy to arrange and there is no real penalty for it." But I am an optismist - eventually that capital will dry up and capacity will return to normal.

Quote:

and they will continue to hire pilots at bus driver wages and have to fight off the applicants.




That's more of my theory of an "irrational willingness is somehow related to a certain fascination and romance with flying and aviation."

As far as the Braniff/AA situation you described, I don't see that as anything more than the big guy beating up the little guy. Happens every day in America, and that's the price we pay to live in a free market economy. WalMart and Home Depot put a lot of little stores out of business. Not because WallMart and Home Depot are evil, but simply because they're bigger, they have economies of scale, they have lower costs, they have more cash to cover the lean periods, and finally, being bigger is often an advantage in a fight.

Where do I see things going? Eventually, I see capacity coming down through mergers, bankruptcy liquidations (not Ch 11's), and what I referred to above re the bondholders and stockholders getting tired of holding the bag. I wouldn't be surprised to see an oligopoly in the industry in another 10-15 years where there are one or two or three carriers flying a particular route, but they all want to stay in business, so, without needing to speak to one another, they will not lower prices to levels that will put them out of business. I don't think that scenario is a bad one. Antitrust laws are in place to keep the field from getting too narrow.

Quote:

Even though our anti-trust laws were pretty well gutted during the Reagan administration




Oh no no no, you're not going to get me to go after that bait and wind up in a bar room brawl with you. Anyway, you're bigger than me.

--------------------
Best,

Bob


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Ron Natalie
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Reged: 10/24/06
Posts: 90
Loc: CJR
Re: USAir to Buy Delta? [Re: Robert Mann [HPN-NY]]
      #134051 - 11/17/06 11:43 AM

You have to realize the company US Airways Group is the old America West Airlines. They bought up the US Airways hulk and took the name as their own.

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