Horizon, Host: Ted Simons

July 16, 2013


Host: Ted Simons

U.S. Airways/American Airlines merger


  • U.S. Airways shareholders gave their stamp of approval to a merger between their airline and American Airlines. That pushes the merger closer to finalization. Robert Mittelstaedt, former dean of the Arizona State University W.P. Carey School of Business and an airline expert, will talk about what the latest move means to the upcoming merger.
Guests:
  • Robert Mittelstaedt - Former Dean, Arizona State University W.P. Carey School of Business
Category: Business/Economy   |   Keywords: airline, flight, update, merge,

View Transcript
Ted Simons: Good evening, and welcome to "Arizona Horizon." I'm Ted Simons. Shareholders of the Tempe-based U.S. Airways approved a merger last week with American Airlines. Here to tell us what's next in the merger process aviation expert Robert Mittelstaedt, dean emeritus of ASU's W.P. Carey School of Business. Good to see you again. Was this at all a surprise, this overwhelming approval?

Robert Mittelstaedt: No, it looks like it's going as scripted now. We're well past the point where there's any serious impediments to this happening. We still have the details to be worked out, largely because of department of justice reviews, and there's some various lawsuits people are filing, but for the most part it looks like a scripted activity.

Ted Simons: What is the Department of Justice be looking at?

Robert Mittelstadedt: Whether this will be a competitive in terms of having excessive concentration in some Market or another, and you see some what I would call a nuisance lawsuit for instance from some individuals in San Francisco, for instances, that are suing because they think they're going to dominate the market there, which is kind of a joke since United is sort of already dominates the market there. But the deposit of justice is looking at it from an antitrust standpoint.

Ted Simons: I had read it seemed like this merger would mean a whole lot of flights at D.C. national. Is -- Reagan national.

Robert Mittelstaedt: The allegation is that U.S. Airways would have 67% of -- The new American Airlines would have 67% of the departures, what the company has said is that would be only 50% of the passengers there. I presume that is because many of the U.S. air feeder routes into there now are short-haul commuter kinds of routes that don't carry so people. In all of these mergers, when you were talking about the previous big ones with United-Continental, with Delta-Northwest, every one of those places has a hub somewhere that they seem to dominate. And they have similar market shares. So United and Chicago, Delta in Atlanta, the old Northwest Minneapolis, so it's not uncommon to see some hubs like that, but it will be interesting to play out especially since all the politicians care how they get to and from the office.

Ted Simons: Would you be surprised if justices cut back a few flights here and there?

Robert Mittelstaedt: There's almost always some give and take in these things, where they have to dispensary vest some routes or give up slots at an airport somewhere. But when you look at these two companies, they don't overlap all that much in terms of complete overlap. But there may somebody places they'll have to adjust.

Ted Simons: What about creditors, American Airlines creditors. Talk about that.

Robert Mittelstaedt: This is a very unusual bankruptcy. First of all, American was not bankrupt in the sense that they were running out of cash or anything else. When they went bankrupt, they had something like five or $6 billion in cash on the balance sheet, or equivalent. The reason they declared bankruptcy was because they had obligations around pension funds and health care costs that extended far into the future which meant that their liabilities exceeded their assets. So -- And they declared bankruptcy to try to get their balance sheet cleaned up. It wasn't that they were going under in that sense. So the net result because of the fact that company, it had problems, but it was in reasonably good shape compared to what happens in many bankruptcies, and U.S. Air comes into this in good shape. The deal going to leave the creditors essentially recovering 100% of their debt, it looks like. And in fact they'll recover well enough that the original shareholders of American Airlines will actually get a small amount of money back for the stock that they hold.

Ted Simons: So the balance sheet will balance and then some?

Robert Mittelstaedt: It will balance and then some.

Ted Simons: So the creditors should haven't too much trouble.

Robert Mittelstaedt: No. The creditors are likely quite happy. They're still working on the details, but the creditors become significant owners of the new get their debt paid off and become owners in some cases of the new airline.

Ted Simons: With that in mind, a judge overseeing the bankruptcy proceedings, any sticking points there?

Robert Mittelstaedt: It appears it's going to move pretty smoothly because you've had advanced agreement from the unions as we heard about in the news last spring, especially, and before that as rumors, and you've got -- It looks like you've got agreement from the creditors and the American -- The U.S. Airways shareholders voted 99% last Friday to accept this. And this constituted a new board, so all these things have to be approved by the courts, but the company is saying they hope this will be done this quarter, by the end of September.

Ted Simons: Technically until the court says yes the merger can't officially happen.

Robert Mittelstaedt: Correct. The court and -- Has to sign off, the department of justice has to sign off.

Ted Simons: How will this merger change the airline industry?

Robert Mittelstaedt: It's something that Doug Parker has argued for a long time, had to happen, because the industry consolidated in other areas, and I would agree with that, U.S. Airways was doing a great job as a smaller airline, but the long-term future was that you had to be one of the big boys or you're not going to get to play. So the industry has changed to the point we have three major carriers. It changes in terms of some people might say it changes in terms of choice, you may not have six or seven choices, but most places you'll still have three, four choice and you've got other smaller ones still. So it changes in the sense that there is a consolidation. I would hope it gives us more financially viable carriers that will be there when we want them to be, it may give us locally better route structures and might be good for Phoenix in that regard. And there's arguments obviously people worry about will they have more price controls. But I don't think control over price, I'm not sure that's the case.

Ted Simons: With the Delta merger with Northwest and United and Continental, critics were saying the same things less competition means higher prices and it will change the entire landscape of the airline industry. What did we see after those mergers?

Robert Mittelstaedt: What you've seen is airline prices are still a good deal. Why? Because there's still competition between the airlines. So Southwest and U.S. Air or American still compete. And you also have sort of what I would say somewhat analogous to gnats, the gnats that are the small specialty routes, like from Mesa Gateway. It's easier to get in the airline business than people imagine. It's difficult to be big. But you can buy a used airplane and start a route between two obscure cities that does haven't service now relatively easy. So -- And some of those people fly into routes where they compete. So you see different prices on different routes, but in most cases there's still significant competition.

Ted Simons: Could this be a situation where the big boys have to get even bigger? We saw what happened to U.S. Airways after these mergers, they said we got to get bigger or we can't compete. How does big have to get?

Robert Mittelstaedt: I think big in today's world means you have to be multinational big. So Southwest is a great example of a company that has been traditionally been almost totally domestic. They do have some flights now in Latin America and Caribbean, but for the most part they've gotten as big as they can get domestically. The other guys want to have feeder routes to other cities, and we are global travelers now in ways that we weren't in the past. So big means you've got to be big on a global scale. Even -- And they compete against -- Outside the U.S., we limit competition at the borders. We let in other airlines up to our borders, we let them fly into our cities, but we don't let them fly in the U.S. once they get here. Some of that goes on the other way in other places. So yes, they have to be bigger I think.

Ted Simons: Combining work force, combining fleets, computer system, frequent flyer programs. That will all be a big picnic, won't it?

Robert Mittelsaedt: It could be. Anything from smooth to a disaster. We'll see what happens.

Ted Simons: Alright. Good to see you again.

Robert Mittelstaedt: Good to see you, Ted.

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