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Airline Mergers: Will Regulators Let Them Fly?

Posted in Airline News, British Airways, QantasNo comments

They are both Irish and they both want to take over the world, or at least a good bit of its airspace. Willie Walsh, the Irish chief executive officer of British Airways announced on Tuesday that BA was plotting a merger with Qantas, the Australian flag carrier. Only 24 hours earlier, Michael O’Leary, the CEO of Ryanair launched a bid for Mr. Walsh’s alma mater, Aer Lingus.

It is Ryanair’s second tilt at the Irish flag carrier, where Mr. Walsh once sat in the CEO’s chair. The last attempt by the low-cost carrier to absorb its Irish rival was rebuffed from all sides: The Irish government, which owns a quarter of Aer Lingus, said no and so did the Aer Lingus unions, which control 14 per cent of the stock. The final blow came from Brussels, where the European Commission ruled against the combination on the grounds that it would create a monopoly on routes from Dublin to European cities.

The indefatigable Mr. O’Leary reckons he has a better chance this time. The world has changed, he says: airline bankruptcies, recession and the recent catastrophic surge in jet fuel prices have changed the landscape. More importantly, the Ryanair chief says, look at what everyone else is doing. Air France is in bed with KLM. Lufthansa has taken over Swiss International Air Lines and is flirting with Austrian Airlines, Brussels Airlines and British Midland Airways (bmi), the British carrier. EasyJet has taken over GB Airways.

The Irish government might be tempted; Mr. O’Leary is dangling a €188-million ($300-million) carrot under its nose and Brian Cowen, the Irish Prime Minister, might be tempted to take the money, fill the draining government coffers and ignore the bluster from the airline unions. After all, Aer Lingus is losing money, the airline’s bosses are squabbling with the unions about laying off 1,500 staff, and if the choice is between a bust national airline or an Aer Lingus run by an aggressive cost-cutting empire builder, the solution is obvious.
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The solution is less obvious in Brussels, where the European Commission is showing no sign that it is prepared to suspend competition rules just because a few businesses are running out of cash. The Commission has allowed governments to ride roughshod over the rules barring state aid in order to keep the banking system alive. For it to suspend merger control procedures as well would be to throw in the towel and concede that competition policy is a luxury – fair-weather politics for a world of cheap money, low oil prices and soaring profits.

Mr. Walsh is also reading the competition runes but he is hedging his bets. He has an astonishing three mergers on the go. BA’s long-running attempt to build a combined business across the Atlantic with American Airlines is still stuck with the U.S. Department of Transport, which needs to grant antitrust immunity. Meanwhile it has launched merger talks with Iberia, another code-sharing partner, and on Tuesday Mr. Walsh announced the final piece of his strategy to wrap the Union Jack around the globe.

Qantas is a glittering prize; it would give BA global reach and the opportunity to secure huge efficiency gains in the use of aircraft and crews. Qantas flies throughout East Asia and crosses the Pacific to Los Angeles. BA dominates the North Atlantic and stretches to the U.S. West Coast and into Asia. BA/Qantas would be a round-the-world airline, but it would be more than just a gimmick. BA already shares business on flights from London to Sydney and a merger would allow it to share resources and passengers around the globe.

BA used to have a slogan that it was the world’s favourite airline. Having been accused of price-rigging and having suffered debilitating labour unrest, Mr. Walsh might just settle for being the first global airline.

The question is whether the regulators will allow it. Other airlines are making aggressive moves, notably Lufthansa, which has been gobbling up market share among its neighbours both geographic and linguistic. Air France, too, favours regional dominance. With KLM it has two of the top three continental European airline hubs (Schiphol in Amsterdam and Charles de Gaulle in Paris).

BA’s strategy is to dominate routes, first the Atlantic and now the Kangaroo route to Australia, rather than passenger markets. It remains to be seen how the regulators respond but they will be mindful of the dangerous trend in air traffic. The International Air Transport Association last month reported a second month of global shrinkage in traffic; in Asia it has declined by 6 per cent, well ahead of a 2-per-cent cut in capacity by struggling carriers.

If governments want to use airlines as cash cows, punishing their carbon emissions with new taxes even as they tax passengers with duties, they need to recognize that the airlines can no longer be quaint national carriers. They must be multinationals and their competitive reach must be global.

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