Why Airline Mergers Don't Work: Scale Is Not a Blessing
Why Airline Mergers Don't Work: Scale Is Not a Blessing -- Seeking Alpha
On March 24, 2008 my first post on Why Airline Mergers Don’t Work opened with the following paragraph:
Ever wonder why over the last 30 years Southwest Airlines management (NYSE: LUV) spent only $0.03 on mergers and acquisitions for every $1.00 of shareholder value they created? By comparison Delta management (NYSE: DAL) spent $2.35 for every $1.00 of value they created. And Northwest (NYSE: NWA) spent $1.61 on M&A for every $1.00 of value they created. In Louisiana we have a name for this kind of strategy: Jumping over a dollar to get to a nickel.
In a nutshell, I found that airline mergers don’t work because the bigger an airline gets, the greater its exposure to low price carriers like Southwest. This exposure forces management to meet lower fares in more markets, which puts inescapable downward pressure on ticket prices, revenues and earnings. In air travel, scale is not a blessing, it’s a curse. Of course the two biggest M&A losers cited above went ahead with their merger and now have become what Delta advertising proudly proclaims is the world’s largest airline.
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