It's merger Monday. Several deals were announced today, but the one sure to catch most Americans' eyes is the deal between Southwest and AirTran. Southwest will be paying $1.4 billion in cash and stock to acquire the smaller airline. The deal makes a lot of sense from a business standpoint, but consumers will probably be worse-off.
The biggest winner here is clearly Southwest. A Bloomberg article on the merger by Mary Schlangenstein and Mary Jane Credeur quotes an analyst who nails it:
"It's a perfect fit," said Ray Neidl, an analyst at Maxim Group LLC in New York who doesn't rate the stocks. "This fills a big hole in the southeast for Southwest, and they're getting a very good asset while also eliminating a competitor that would have overlapped with them eventually."
Although it's hard to ever be certain if a merger will work well, this one is about as close to a sure thing as you can get, assuming Southwest is paying a fair price. The two airlines appeal to a similar group of consumers, so there should be little difficulty in putting the two together. Meanwhile, the larger airline can streamline costs, but still have a broader offering. And as the analyst mentions, since the two were direct competitors, it makes the business environment that much easier for Southwest.
But what's good news for Southwest is probably bad news for consumers. This isn't the first big news of major airline mergers recently. Earlier this month, shareholders approved the merger of Continental and United, forming the world's largest airline. The Southwest-AirTran union is bad for consumers for the same reason as Continental-United. It will likely result in higher ticket prices.
As just mentioned, such mergers create less competition in the market. Consequently, fewer price wars won't put as much pressure on airlines to keep their fares down. With fewer airlines, the industry becomes more oligopolistic, which generally makes it easier for each firm to know what the others are thinking and feel less need to compete as aggressively.
There is one caveat to this logic, however. If Southwest becomes a stronger airline through this merger, then it might be able to better compete with the big guys like Continental-United, American, and Delta. If that's the case, then it could challenge them more effectively and force them to bring down fares. While that's not beyond comprehension, the group of discount lovers who find airlines like Southwest and AirTran appealing does not completely overlap with the group who flies the big airlines. So the effect of Southwest as a more worthy competitor could be muted.
Possibly the worst-case scenario would be if this merger causes the other airlines to feel like they should consolidate too. In fact, today's news could be an indicator that the Continental-Untied merger is doing just that, and helped cause Southwest to act. If the merger madness continues with JetBlue buying Spirit and Delta buying U.S. Air, for example, then the harm to consumers explained above will be even greater. That is, unless regulators begin to intervene.
This article available online at: