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Oberstar's "merger madness" vs a "challenged industry" in United-Continental merger

17-May-2010

"We will take the time that is necessary for us to look at it, to make sure we are comfortable in the decisions that we are making. We will not unnecessarily delay things but we will certainly take the time that we need to come up with a reasoned decision. I can assure you that political considerations will not be a part of that process" - Attorney-General Eric Holder’s comments on his Department of Justice’s (DoJ) review of the United-Continental merger, 14-May-2010.

Several interpretations have been attached to the Attorney-General's comments. One version suggests that it would not be held up, while another indicates it would not be accelerated. One suggests the two carriers will be able to close their deal by year-end as planned; the other suggests just the opposite. In the meantime, Delta has pointed to the fact that approval of its (relatively straightforward) swap slot with US Airways took three months longer than its merger with Northwest.

The reality is that the DoJ antitrust review will be vigorous and, according to Mr Holder, will not take longer than necessary. However, he did tell Congress that congressional hearings and politics would not influence its investigation.

"I'm confident that we will give this a good, thorough, vigorous look and make a decision on the basis of that examination," Mr Holder told the House of Representatives Judiciary Committee.

The agreement should clear antitrust hurdles, given the end-to-end nature of the merger with only 13 overlapping routes compared with 12 in the Delta-Northwest deal. But that is based on common sense rather than politics, although Continental CEO Jeff Smizek declared at the outset, this agreement was "built to close".

Congressional legislators from Texas (concerned about the move of the surviving carrier’s headquarters to Chicago rather than at Continental’s Houston HQ) and Ohio (concerned over downsizing of the Cleveland hub) joined House Transportation and Infrastructure Chairman James Oberstar in expressing concern over the merger, each calling for additional reviews. See related report: Oberstar War begins – Continental-United merger under attack

Rep Oberstar says "End this merger madness"

Meanwhile, Rep Oberstar has ramped up his opposition to further airline consolidation. In an opinion piece published in USA Today on 14-May-2010, he warned so-called mega-carriers would "Balkanise the domestic market, as they concentrate efforts on fortress hubs and on the routes they dominate". He added, "less competition would mean fewer flight options, poorer service and higher fares", stating consolidation was the "very antithesis of the structure I voted for when Congress deregulated the [airline] industry in 1978".

He stated the DoJ has already expressed its concerns over a reduction in competition between United and Continental and urged it to "demonstrate that same degree of caution now and put an end to this merger madness".

How the dark forces of the three global alliances and "challenged" domestic industry conspire

Rep Oberstar warned the situation would be worsened by the "trend toward vesting international service largely in the hands of three global alliances. Protected by immunity from antitrust laws, these alliances have every incentive to refrain from competing on service and fares."

He then, rather oddly, went on to imply that the merger is anyway unlikely to succeed in stabilising competition: "And in the end, given the long history of ultimately unsuccessful airline mergers, no one knows whether this merger will succeed in bringing stability to a challenged industry."

US airlines are undoubtedly deep in a challenged industry.

Perhaps the piece of this puzzle that is missing is how Rep Oberstar's support for the status quo would change that obviously unsatisfactory position.

Will the DoJ wilt under political pressure?

Here again, the logic of the matter is forced to take a back seat to rhetoric and politics.

More substantively, the vital issue will be just how much the DoJ's procedures and decision making will be influenced by external pressures and by the perhaps more circumspect approach generally under the Obama administration. There should in theory be no difference - after all, free market competition is largely apolitical; a merger has the same impact or not, regardless of the political colour of the government of the day.

So it is one thing to assure the audience that political considerations will play no part; it is another to dissect precisely what are political matters from those that are merely commercial. There is certainly one significant difference between this merger and Delta-Northwest's: now there is one major player less in the game than there was before they combined. Otherwise it will be hard to differentiate significantly between the two applications.

Meanwhile, though, the host of increasingly powerful new entrant/low fare airlines are showing much greater interest in subsuming the international roles that were traditionally the preserve of full service airlines - as well as gobbling up any domestic vacancies caused by legacy withdrawals. That too is a relatively new and important change in the landscape.

But the current storm of words perhaps only goes to emphasise the fact that the DoJ's determinations are more an art than a science in this respect. Or at least Rep Oberstar appears to believe that to be the case.


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