Mergers And Consolidation Topic of Interest at ICAO Meeting

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By Debby McElroy
Last week, the International Civil Aviation Organization convened an air transportation symposium, “Strategies and Tools for Sustainable Air Transport” in Montréal.  Speakers at the second session of the symposium, “Industry Trends, Mergers, Alliances and Consolidation” were Ian Wadsworth, chief commercial officer, Houston Airports System, Jan Brueckner, professor of economics, University of California; Don Wykoff, president, International Federation of Air Lines Pilots’ Associations; and Sharon Pinkerton, senior vice president, legislative and regulatory affairs, Airlines For America.

Brueckner was a proponent for consolidation, emphasizing that mergers are designed to increase profits; airline profits are critical for “the economic part” of sustainability for the aviation industry. He also argued that mergers and alliances are good for consumers and cited research on fares following the Delta Air Lines/Northwest Airlines merger, which showed increases of only about 5 percent.  He concluded his remarks by noting that the beneficial effects of mergers exceed the downsides of consolidation.

ALPA’s Wykoff noted that the airline industry had moved from struggling for survival to finding a system that is economically sustainable and allows effective competition. Capacity discipline is a key part of that strategy but he stated there is still more capacity that what is needed for the predicted increase in travel. In what seemed to me a U.S-centric presentation, Wykoff expressed concern about threats to economic stability from the large orders from Middle East airlines, which could lead to “capacity dumping,” the policies of “federal credit agencies,” and state airline subsidies.

A4A’s Pinkerton stressed that governments “should let (airline) consolidation happen,” especially since other components of the aviation supply chain (GDSs, engine manufacturers, caterers) have been permitted to merge, with the result being increased economic stability. She conceded that while some airports have been negatively affected by consolidation, “generally airports have benefited”, noting that all airports enjoy investment grade credit ratings.  Only one airline has such a rating.

Houston’s Wadsworth emphasized that the airline and airport communities have different goals, which can mean a different perspective on mergers.  Airlines, as private businesses, want to expand their network breath, increase their market power and eliminate redundancies.  Airports seek to grow air service, create competition to lower airfares and grow the market, diversify the airline customer base and support long term investment in infrastructure. He noted that it should be no surprise that Los Angeles Airport has the highest credit rating in part because it has no single dominant airline.

For Houston, which operates George Bush Intercontinental Airport and William P. Hobby Airport (as well as Ellington Airport), the United/Continental merger resulted in Bush Intercontinental changing from one of three hubs to one of eight hubs. While that adds challenges in terms of growing air service in general, the impact is most felt in the international area, especially for adding service to Asia which has been a focus of the Houston Airports System.

Wadsworth stressed that airline concentration is a threat to individual airports, especially those that recognize their long term future depends on growing international air service.  In this environment, airports need to be creative in meeting the economic and air service needs of their communities and aggressive in seeking new airline service.  Therefore, it should be no surprise that the Houston Airports System so strongly supports the proposed international service from Hobby by the merged Southwest Airlines/AirTran Airways. This competition will mean lower fares and economic growth for the Houston area.

The decision is now up to the 17-member Houston City Council.