As you’ve probably heard by now, Southwest Airlines has made a $1.4 billion cash-and-stock offer to buy AirTran. (The rumors that Southwest would buy SunCountry didn’t pan out.) I’ll leave the financial analysis to others. The market went nutso today though, with Southwest going up 8.7% and AirTran going up a whopping 61.3%.
So what does this mean to you, whether you fly Southwest, AirTran, or neither?
- More open seating, more coach, fewer first class seats, and tougher upgrades elsewhere?
Southwest seating rules will prevail, which means a victory for the open-seating model. AirTran will lose assigned seats and its first class. Those first-class seats were rather inexpensive, compared to other airlines’ products, which will disappoint some premium travelers out there. And the network effects of that loss of first-class seats? Demand for first-class fares on other carriers might go up as a result, making your upgrades harder to clear. Hey, it’s a theory.
- Bag fees take a well-deserved beating.
Southwest has vowed to remove checked baggage fees on AirTran, post-merger. Spreading the gospel of no- or low-fee travel is a good thing. (And given Southwest’s recent advertising of its baggage policy, I think they’re committed to it.) This won’t kill the concept of bag fees, but it might make them less socially acceptable.
- This is about Atlanta and Washington.
When organic growth slows, or the barriers to entry in a new market are great, buying a local rival becomes more attractive, and that’s what happened here. AirTran has been successfully carving out a piece of the Atlanta market from Delta for the past few years. For Southwest fliers, you’ll (finally) be able to fly to Atlanta without having to change to a different airline. This deal also brings Southwest to Washington-Reagan National. If you fly into either of those cities, you’ll see a bit of fanfare over this deal, and likely some fare sales to kick things off. You may see counteroffers, like double-mileage promotions from Delta in ATL, US Airways at DCA, etc. But over the longer term…
- Fares? A wash, for now.
Yes, there’s a “Southwest effect” on fares, but it’s particularly pronounced when Southwest enters a new market, bringing low-fare competition to the legacy airlines. In this instance, AirTran has already warmed up the market. So for now, we shouldn’t expect any macro-level discounting. If anything, we might see fares go up in the long term if Southwest retires some of the AirTran capacity. But that’s not going to happen overnight.
- This takes Southwest international, but it’s not a big deal.
Yes, it’s international, but it’s not like this takes Southwest to Tokyo and Sydney. If Southwest keeps the AirTran routes, you’ll be able to fly Southwest to Cancun, Montego Bay, and Punta Cana. For those who have avoided Southwest because their travel plans (and frequent flier redemption goals) take them to other hemispheres, you’ll still be out of luck, for now.
Any other thoughts on Southwest and AirTran? Any predictions on how this will affect your travels, on a post-merger Southwest or anywhere else? Hit the comments!
Southwest has agreed to lease 18 take-off/landing slot pairs at Newark Airport from United and Continental. The deal is a function of the CO-UA merger, which, if it were approved without conditions, would solidify Continental’s grip on Newark.
Bringing Southwest into Newark is a big deal. Southwest
hasn’t flown to a New York airport yet (correction: they have had flights from LGA to Chicago and Baltimore since June 2009… sorry about that!) — and no, their flights to Islip, NY are not New York City. It’s a major move into a huge market, and it’s to Newark, which is arguably the easiest and most convenient airport to access from Manhattan, despite being in New Jersey.
Especially if it goes above and beyond these initial slots, Southwest’s presence will mean lower fares at all the NYC airports, so New Yorkers can look forward to the greater competition.
No word yet on the specific routes Southwest will fly out of Newark, once it starts up.
Update: Just hours after the announcement related to Newark slots, United and Continental received clearance from the US Dept of Justice, paving the way for the finalization of their merger. Stockholder approval is still required, but the two airlines are expected to be merged into one company by October 1, 2010. Ta-daaaa.
So United and Continental got an unconditional green light from the European Union to merge their operations. This was hardly a surprise — the antitrust review by the U.S. government is far more relevant, given the greater domestic competition between the currently-separate carriers.
It’s not clear if it’s coincidence or providence, but United is “celebrating” by offering a free alcoholic beverage to each passenger in Economy Plus from August 6 to 16.
But don’t let the free drinks distract you. The real issue is the merger going forward, and what that means for customers. And while there are no concrete changes being announced, there are telegraphed changes through the shifts in the management lineup.
While the Continental CEO will be at the helm of the combined firm, the frequent flier program will be managed by a United executive. United execs also take the COO and CIO position. (I just hope that the CIO adopts more of continental.com than united.com…)
So, in all likelihood, the mileage program will look more like MileagePlus than OnePass. Gary Leff has speculated some on the direction that the program will take under the merged airline, and I agree fully with his assessments. Most importantly, during a transition period immediately following merger, the two programs will likely feature the best of both worlds.
Check out Gary’s comments for a glimpse into what will likely happen on the mileage front.
All the attention has been on the Continental-United merger, but that’s not the only M&A action in the travel space. To wit:
- Hertz made an offer to buy Dollar/Thrifty for $41/share. Avis subsequently signaled interest in making a higher bid. Bottom line: The car rental market is about to shrink.
- Google is reportedly in talks to buy ITA Software, which provides much of the functionality for sites like Orbitz, Kayak, TripAdvisor Flights, and others. You can’t just google a ticket today, but you may do so soon.
The battle for Dollar/Thrifty between Hertz and Avis is largely about consolidation and elimination of the competition (much like the “Continited” merger). At the same time, buying Dollar/Thrifty would give Hertz or Avis a larger presence in the comparatively “downmarket” leisure travel segment.
The speculated deal for ITA Software is perhaps more interesting. What will Google do if it gains the technology and software engineering human resources to run better fare searches? Will they offer a search-of-searches, pushing traffic to airlines and online travel agencies, but putting Kayak and their metasearch ilk out of business? Will Google challenge Expedia, Orbitz, Travelocity, et al. themselves and build a Google travel agency? Will Google continue to sell the powerful ITA engine (which ITA lets anyone test drive on their beta site — login as guest) or will they let contracts expire and keep the technology for itself? Plenty of theories, but no answers.
So in the past week, the competitive landscapes for flying, driving, and booking travel have all potentially changed, with minimal visible benefits to the consumer. After all, less competition breeds higher prices.
All we’re missing is a hotel deal and a cruise line merger, and we’ll be all set. (The week is young.)
Assuming that federal regulators don’t put a stop to this, the newly combined airline (“Continited”?) will drop the Continental name and operate under the United banner. However, Continental’s CEO Jeff Smisek, will take the reins, with United CEO Glenn Tilton stepping back to the salutary title of “non-executive chairman” for two years. In other words, it’s Continental’s executive team, with United’s name, in United’s headquarters building. Assuming that current market shares simply transfer over to the combined entity, the merged United would have 21% of domestic ASM (available seat miles, i.e., market share) and 7% of global ASM, making it the biggest American player.
(Will this put an end to the on-again-off-again wooing of US Airways by United, in a seasonal display reminiscent of a National Geographic wildlife special? I sure hope so. It was growing tiresome.)
As I have argued several times over the years, these airline mergers are anti-consumer. True, there is no overlap between the United and Continental operating hubs, but a merger will give “Continited” a great deal of pricing power. Instead of re-inventing the wheel, here’s something I wrote in January 2007, that still holds true today:
Sure, you might get a few more potential destinations or routings for your flights, but the total number of flights is bound to be cut, and prices in turn are bound to rise. With less competition, it’ll be easier than ever to raise fares and make them stick.
The caveat to the “mergers mean higher prices” argument is that cuts in capacity (and increases in prices) eventually are met with new market entrants. Relatively constant demand is met with entrepreneurs wielding fresh supply. (The rise of JetBlue can, at least in part, be seen in the context of the disappearance of TWA and PanAm, through merger and bankruptcy, respectively.) The benefits to the merger participants are short-lived, and it’s debatable whether they actually pay off. Think back to past mergers: Is American really eating everyone else’s lunch since they bought TWA?…
In fact, the merged airlines’ competitors may benefit more. As fares rise, the companies that aren’t part of the merger arguably benefit more than the merger participants, because they get to raise their prices, without having paid the price of the merger…
So if consumers lose, and merging airlines don’t really win for very long, then who is the real winner in all this?
The answer: the CEOs, and the Wall Street investment banks advising them.
As the folks at Morningstar’s Footnoted.org blog noted earlier last week, the real motivator for a deal here isn’t “synergy” but “payday”:
We’re sure there are plenty of operational reasons United’s management might be looking for a deal. But we also couldn’t help noticing that the company has made it substantially more attractive for the top officers themselves to seal a deal — in the case of Chairman and Chief Executive Glenn Tilton, more than three times as attractive as in prior years.
According to the proxy that UAL Corp., parent of United Airlines, filed at 5:25 p.m. on Tuesday, Tilton’s payout if there’s a change of control rose to $9 million last year — up nearly fourfold from the $2.4 million listed in last year’s proxy. If he loses his job within two years after a deal, his payout would be $14.3 million, up 78% from $8 million last year.
Loses his job within two years? Why yes, that’s exactly what’s planned. What a coincidence!
It’s not just United’s current CEO who’s getting the big payday, either:
Other executives have seen similar jumps. Executive Vice President John Tague, also president of United Airlines, would see his payout in a change-of-control rise to $3.7 million, from $1.1 million. Total cost for the top five officers under a change in control scenario, even if none of them are fired: $17.6 million.
Footnoted’s post on the subject is worth reading in its entirety.
FYI: I am unable to get search results from the SEC’s EDGAR database right now, so I can’t see if there’s a merger bonus in the cards for Continental’s Smisek or not. (Try searching for yourself, using Continental’s stock symbol “CAL.”)
In coming days, you can expect the usual parade of executives touting the benefits and synergies of the merger. Don’t believe them. This merger is about them, not you.
Related posts from yesteryear:
- What will airline mergers mean to consumers?
- (Flashback to 2006) What’s in the cards for a United-Continental merger?
- (Flashback to 2008) Merger do-si-do: Continental spurns United, but other partners are ready to dance
Upgraded: Airline mergers, speculated and real
Like the swallows returning to Capistrano, it’s the time of the year when speculation arises again that US Airways and United will merge. How many times have we heard this before? Six? Nudge me when it actually happens.
In the non-hypothetical realm, British Airways and Iberia have actually merged.
Upgraded: Speculation of pay toilets on Ryanair
Another recurring story: Ryanair pursuing pay toilets again. Yawn. I feel like Ryanair’s PR department has a timer, to see how long it’s been since they’ve been in the news. It’s been a few months! Quick! Roll out the pay toilet idea again!
Downgraded: Kayak hotel search
Kayak has made it harder for fans of a particular hotel loyalty program to search for their brands of choice. As Ric Garrido points out, it’s no longer possible to, say, search for Starwood hotels.
Downgraded: PDA in Dubai
Just another warning for tourists heading to Dubai: Don’t kiss in public. Add that to your other Dubai related warnings, like not bringing melatonin along on your trip to fight jet lag if you want to stay out of jail.
Downgraded: Voluntary bumps
Most travelers want to get from point A to point B at the scheduled time. Others want to get bumped, to collect the voluntary denied boarding (VDB) vouchers. And according to the NYT’s profile of a frequent bumpee, the airlines have gotten better at predicting who will show up for a flight. Add to that the fact that planes are really full these days, and people are decreasingly likely to volunteer for a bump. Involuntary denied boarding, interestingly, is going up.