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US Airways Group, Inc. (UAIRQ) Message Board

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  • lottopol.geo lottopol.geo Sep 19, 2004 10:01 PM Flag


    NEW YORK, September 18 (Investor�s Economic Resources)
    Mergers and Acquisitions Coming to the Airline Industry?

    US Airways has rejoined UAL in bankruptcy. Delta is threatening to file for bankruptcy within a month unless it reaches agreement with its pilots union. Thus, a possibility exists that a record percentage of the airline industry could be in bankruptcy shortly. Furthermore, the number two and number three largest firms in the industry could be bankrupt at the same time.

    The possibility of such a large portion of the industry in bankruptcy at the same time is not just a matter for the record books, but has important ramifications involving antitrust law. The "failing firm" and "existing assets" defenses and exemptions in antitrust law let otherwise anti-competitive deals proceed if the firms and industries attempting to merge are extremely dire straits.

    Under those theories of antitrust law, the bankruptcy of Delta could open up a window during which mergers that would never be permitted otherwise could be allowed. The Justice Department blocked UAL�s attempt to buy US Airways on antitrust grounds. Today, such a merger would likely be permitted. If Delta were to enter bankruptcy, even larger mergers would probably be feasible based on �failing firm" and "existing assets" defenses.

    Aside from any antitrust law considerations, there is no way that any of the non-bankrupt major legacy airlines could merge with each other because of their huge unfunded pension liabilities. Thus, any merger of major legacy airlines will have to be like American�s acquisition of TWA�s assets. After TWA�s pension plans were terminated along with all post-retirement employee obligations, American bought TWA�s assets.

    American assumed certain of TWA�s debts and TWA employees were added to the bottom of the American Airlines seniority lists. As 9-11 occurred shortly after the merger, American furloughed most former TWA employees. Today there are no former TWA pilots or flight attendants still working at American Airlines.

    If an antitrust law exemption based on the "failing firm" and "existing assets" doctrines were to develop, mergers thought inconceivable a few years ago might occur. American might be able to acquire the assets of Delta or even UAL on terms similar to those used in the TWA acquisition. The cash required would be relatively small, but it would involve the assumption of significant amounts of debt. Northwest and Continental might also try to take advantage of such an antitrust law exemption �window� to attempt to acquire the assets of UAL, Delta or US Airways on similar terms.

    While the words �Penn Central� may come to mind when any such mega-mergers of legacy airlines are considered, there is no doubt that consolidation is sorely needed in the industry. One wrinkle may be that the non-bankrupt legacy carriers use the prospect of such acquisitions to obtain wage concessions from their unions. Many American Airlines pilots and flight attendants still have jobs today because the TWA employees went to the bottom of the seniority lists. Probably all of the employees at any major legacy airline now on furlough could all be recalled if their airline were to acquire the assets of a bankrupt legacy carrier and the bankrupt carrier�s employees were �stapled� to the bottom of the combined entity�s seniority lists.

    The acquiring legacy airline might even be able to obtain wage concessions from its unions as a quid-pro-quo for giving its employees job security (at the expense of the bankrupt airline�s employees) significant enough to allow them to compete with the low cost carriers. That, combined with the capacity reductions and creation of local monopolies that such consolidation would entail, might actually allow a legacy carrier to actually earn a profit.