US Airways and United in Merger Talks

By Megan McArdle

The airline industry is not a particularly attractive market.  You're selling a perishable commodity--once the doors close, any unfilled seats are worthless--to an audience that stubbornly resists treating your product as much other than a commodity.  Attempts by the airlines to resist this, with their byzantine pricing rules and frequent flier programs, have by and large not succeeded particularly well; business travelers tend to have multiple frequent flier accounts unless they live near a single airline's home airport, and economy fliers don't care.  Meanwhile, software is steadily eroding their ability to thwart bargain-hunting consumers through pricing power.

In an industry like this, overcapacity is particularly ruinous, and unfortunately for airlines, planes fly for a long, long time.  It takes eons for attrition to reduce the number of planes in the air, especially since the old majors have multiple powerful unions that make cuts tricky.  That's why you get serial bankruptcies--and CEOs who spend inordinate amounts of time lamenting overcapacity.  It seems to be the airline CEO equivalent of talking about the weather.

But while, as Oscar Wilde noted, "everyone talks about the weather, but nobody does anything about it", United and US Airways have been for some time desultorily considering action, in the form of a merger.  Now it appears that the merger chit-chat has heated up into preliminary "talks".

This makes business sense--it would give the two majors more pricing power, and let them streamline their staff.  But that, of course, is itself a major obstacle.  Regulators don't like it when airlines get pricing power, and unions don't like it when they cut staff.  As the Wall Street Journal notes, "The airlines have flirted with mergers a few times in recent years. They aborted a deal in 2001 after unions protested and antitrust enforcers threatened to file a lawsuit to block a deal."

It's not clear why this time is supposed to be different--it's not like the Obama Justice Department is likely to be more merger-friendly than the same department under Bush.  And even if they succeeded, they'd spend years negotiating with regulators and angry unions over things like slots, and seniority.

On the other hand, what else are they supposed to do?  It's all very well to say that they need to manage their business better, but the business they're in isn't a particularly good one, and they're hampered at every turn from making the kinds of changes that would give them a sustainable business model.  It seems that as a nation, we prefer serial bankruptcies and cheap, uncomfortable seats.

This article available online at:

http://www.theatlantic.com/business/archive/2010/04/us-airways-and-united-in-merger-talks/38641/