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Merger madness

I began to dislike and distrust the big airlines on February 1, 1987, a date that still lives in business-travel infamy. Like thousands of others, I was stranded by Continental Airlines on the day that it attempted a “big bang” merger with its Peoplexpress, New York Air, and Frontier Airlines subsidiaries.
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I began to dislike and distrust the big airlines on February 1, 1987, a date that still lives in business-travel infamy. Like thousands of others, I was stranded by Continental Airlines on the day that it attempted a “big bang” merger with its Peoplexpress, New York Air, and Frontier Airlines subsidiaries.

On President’s Day weekend 1987, at Newark Airport, Continental’s terminal was overwhelmed with angry, abandoned travelers, mishandled luggage, and dazed and confused employees. I literally ran into Continental’s top flack, doggedly picking his way through the huddled masses, handing out his business card, serially apologizing, and asking travelers to write him with their particular tales of woe.

Some months later, I found myself at Continental’s Houston headquarters, staring across a desk at Lou Jordan, the executive in charge of the merger.

“We were losing $1 million a day running the airlines as separate operations, and Frank [Lorenzo, then C.E.O. of Continental] gave me 30 days to make a merger happen,” he explained.

Did he stop to consider the potential effect on passengers?

“Like I said,” Jordan snapped, “I had 30 days to do a merger. I didn’t have a lot of choices.”

I learned the lesson of airline mergers then: They are never good for travelers. Airline bosses do what is expedient for them. Customers, airports, employees, and the communities they serve are just inconvenient distractions along the way.

Consider the industry’s most recent foray into mergers. In September 2005, America West and the old US Airways combined forces. More than two years later, the “new” US Airways is an operational nightmare. Its computer and Web site woes have forced passengers to rebook flights, wait in long lines for boarding passes, or cancel trips altogether. Cutbacks in the frequent-flyer program and bad in-flight service have driven away many of the airline’s most profitable and elite frequent customers. The airline has recorded several quarterly profits but, for most months in 2007, it also reached record lows for on-time performance and record highs for lost baggage.

Keep all this in mind as you consider the merger mania gripping the airline industry. Delta Air Lines and Northwest Airlines, each just months out of Chapter 11, are talking about a deal. Delta is also discussing a merger with United Airlines, whose bosses have been shopping the carrier ever since it limped out of bankruptcy in February 2006. American Airlines and Continental, the other remaining “legacy carriers” that can trace their corporate DNA to the regulated airline era before 1979, seem less eager to play, but they’ll probably be drawn into the fray as a defensive tactic.

The merger frenzy of 2008 is driven by a nearly perfect storm of negativity. None of the carriers predicted—or hedged for—$100-a-barrel oil, and fuel is the largest item on an airline balance sheet. Stock prices are tanking. Over the past 52 weeks, shares of the legacy carriers have fallen between 30 and 80 percent. The old-line airlines have been pulling out of domestic markets, battered by lower-fare competitors, such as Southwest, JetBlue, and AirTran. One of their most profitable redoubts—trans-Atlantic routes—opens to new competition in the spring. They are awash in debt and depressed employees, can’t borrow to finance replacements of their aging fleets, and are facing a slowdown in demand as the economy slows. Mergers seem to be one way out.

But mergers won’t help the airlines. At least, they never have before.

The conventional wisdom on the efficacy of airline combinations was dutifully reported in a Reuters dispatch last week: The legacy companies view mergers “as a way to stabilize the industry by allowing carriers to cut costs, reduce capacity, and raise fares.”

Stability? Hardly. In the 30 years since deregulation, the surviving legacy carriers have endured dozens of mergers. Almost all were disasters, with the acquiring carrier eventually being driven off most of the routes it acquired. The mergers led to debilitating strikes, management putsches, greenmail, and failed employee buyouts. Iconic brands such as Pan Am, Eastern, TWA, and Braniff disappeared without a trace. All the surviving legacy carriers except American Airlines have been in bankruptcy, some more than once.

Capacity reduction? The legacy carriers have shrunk their capacity, but the market has grown without them. As a group, the legacy carriers have shed a point of market share each year since deregulation. That’s opened the way for mavericks like Southwest Airlines, which was unknown outside Texas in 1979. Now it flies more passengers than any other U.S. airline and has turned a profit every year since 1973.

Raise fares? Nope. While prices for business travelers skyrocket after every merger, overall fares since 1979 have fallen consistently, in both real and inflation-adjusted dollars. Transcontinental fares routinely drop to $99 each way during slack periods; two years ago, they fell to $69 one way. Skybus sells some $10 one-way fares on all its flights. Or consider this: In 1966, a 14-day advance purchase roundtrip from New York to London cost $399. The same ticket costs $368 today.

Bottom line: This year’s airline mergers will probably inflict as much pain on the carriers as they will inflict on us. After all, it took a decade, a bankruptcy, and several C.E.O.’s for Continental to rebuild its reputation after the botched 1987 merger. That’s cold comfort, I admit, but the only kind of comfort we’re likely to see this year.

The fine print …
A followup to my column about passport and visa expediters: An expediter called has opened a 24-7 help desk in Terminal 4 at New York’s John F. Kennedy Airport, the nation’s busiest international gateway. As predicted in my 2008 Travel Agenda column, British Airways last week announced its subsidiary airline to fly nonstop between the U.S. and continental Europe. The most notable feature of B.A.’s OpenSkies is the “premium economy” class, between business class and traditional coach. It will offer 52 inches of legroom at each seat, about 15 inches more than any other carrier’s upgraded coach class.