Mention airline mergers, and Tom Lee, a road warrior business executive, flashes back to 1991 and the sensation of helplessly watching his bag bob down a conveyor belt into the bowels of New York’s John F. Kennedy International Airport.
“Congratulations, you’re the last one,” the Pan American World Airways agent told Lee, who had just checked in for his flight.
As Lee’s bag disappeared from view, the agent and other workers walked off the job to protest Pan Am’s sale of its Kennedy hub and other assets to Delta Air Lines and the massive lay-offs that were to follow. Lee was stranded as operations ground to a halt. It would be a week before he saw his luggage again.
Pan Am’s liquidation came at the height of the last great consolidation in the airline industry, a year when Eastern and Midway Airlines also disappeared. With carriers again gearing up for more industry-changing mergers, Lee and other seasoned travelers are apprehensive.
“Things can get fairly nasty when these things happen, because people know there could be consequences to jobs, pay,” said Lee, a Los Angeles-based airline industry supply executive who logs about 250,000 miles a year.
For those who weathered the consolidation that followed the industry’s 1978 deregulation, mergers meant fare hikes, often in tandem with service cuts, as flights and hubs were trimmed from route networks and aging planes were parked. They also faced surly service from employees stressed about losing their jobs or seniority, a reduction in rank that usually involves pay cuts.
The irony for today’s travelers is that the industry seems to be suffering from a merger hangover before any of the massive combinations being contemplated actually take place.
Prices are soaring, capacity cuts are rampant, frequent-flier rewards are elusive, and morale at some airlines has never been lower. They’re all aftereffects of a massive restructuring that is reshaping the airline industry, with or without consolidation.
Add to the mix deals that could leave just three surviving carriers among the nation’s five largest airlines, and passengers have to wonder: Could it get any worse?
Chicago executive recruiter Bill Baker, a partner at Baker Montgomery, certainly thinks so.
“If you’ve flown for 30 years, what you know is that it’s always gotten worse. It’s never gotten better, other than smoking going away,” he said.
Frequent-flier programs likely will remain intact no matter what happens in the industry, as will airlines’ efforts to pamper prolific travelers, predicted Ralph Brown, an Illinois-based corporate travel consultant.
But the value of the miles that travelers hold in their accounts is depreciating rapidly, as marketers flood consumers with mileage offers and airplane seats become increasingly difficult to claim for free. Airlines would be even less inclined to offer freebies to travelers if competition among mileage programs were lessened by mergers.
“Merger or no merger, the outlook for frequent-flier programs is very dreary,” said Joe Brancatelli, travel writer and editor of JoeSentMe.com. “Even without mergers, every mile you leave in your account will be worth less a year from now.”
Deal or no deal, carriers will continue to pare flying in the U.S., one way to keep planes full in a sagging economy, analysts say. In fact, airlines dropped a staggering 1.4 billion available seat miles in January, about 2 percent of total capacity, noted Roger King, airline analyst with CreditSights Inc.
Fares keep rising
Those moves, along with high oil prices, are driving fares higher, a trend that is also likely to continue regardless of other events. U.S. carriers have successfully pushed through three major price hikes this year, said Tom Parsons, chief executive of BestFares.com.
Truth is, nobody knows how an industry shake-up would shake out for consumers. Some see mergers, flaws and all, as better than the alternate scenario that is likely if the industry heads into a downturn: selling airline operations piecemeal, possibly as a prelude to another round of bankruptcies.
Europe’s megamerger of Air France and KLM, creating the largest airline in the world by revenue, has gone surprisingly smoothly since the French and Dutch carriers combined in 2004.
“It does seem to have come together very well,” said John Strickland, director of JLS Consulting LTD, a U.K.-based aviation consultancy. “But they’ve taken the low-hanging fruit: closing sales offices, combining lounges, frequent-flier mileage plans,” he added, noting that the carrier hasn’t tackled fully merging French- and Netherlands-based workforces or their unions.
Too big to prosper?
But Jim Brock, economics professor at Miami University, predicts U.S. mergers won’t go smoothly for customers and that service will suffer. Brock thinks megadeals are likelier to be crippled by overgrown bureaucracies.
Any organism that gets too big “becomes inefficient and ineffective. And it seems to me that the biggest carriers refuse to recognize that reality and continue to push for more size as a solution [to economic pressures],” said Brock, author of “The Bigness Complex: Industry, Labor and Government in the American Economy.”
What’s clear is that U.S. carriers are in uncharted territory as they try to cope with $100-per-barrel oil and a sputtering economy that threatens to squelch the demand for travel.
Many airline executives have come to believe that they can’t sustain the status quo and that without deep structural change, the industry is headed for more bankruptcies.
If they are able to reconcile differences among their pilot groups, a merger of Delta Air Lines and Northwest Airlines would create the biggest airline in the world. That combination likely would be eclipsed by a deal many think would follow, a merger between United and Continental Airlines.
Also unprecedented: the efforts executives are taking to gain labor’s support before final deal terms are struck, increasing the risk that the transactions might not happen at all.
Delta and Northwest pilots have been promised steep pay raises and equity worth hundreds of millions of dollars in the combined carrier, said a person familiar with the discussions. Meanwhile, United Airlines executives have signaled to pilot union leaders that their members also would be amply compensated in any merger involving the Chicago-based carrier, sources said.
Executives are well-aware of the trail of passenger misery left by earlier mergers. America West Airlines’ buyout of the US Airways in 2005 remains a mess. The combined carrier scored the worst among major airlines in on-time performance, mishandled bags and customer complaints during 2007, federal data show.
But even the promise of higher pay doesn’t guarantee labor peace, as the protracted Delta-Northwest pilot talks have shown. That’s one reason some travel pros remain stoic and unexcited about the industry’s prospects.
“Even if you worry about it, there’s not much you can do about it,” said Mike Weingart, president of a Carson Wagonlit travel agency in Houston. “If it happens, it happens.”
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jjohnsson@tribune.com
