Airline Mergers, Marriages of Inconvenience?

America's experience of airline unions has not been entirely from the passengers' viewpoint.
It all started when People Express, an aggressive, low-fare American airline, bought out a faltering Frontier Airlines to bolster, its presence in the western US. People, in turn, was taken over by Texas Air. Northwest Airlines picked off Republic; Texas Air, already the owner of Continental and New York Air, moved in on Eastern; Piedmont linked up with USAir and Pacific Southwest Airlines; TWA bought out Ozark and Delta acquired Western. When the dust had settled - and within the space of four years - the American airline industry had been completely transformed by the merger wave.

In December 1987, the wave spilled over into Europe. British Airways, already Europe's largest carrier, won a bidding war with SAS and acquired Britain's main second force airline, British Caledonian. (SAS had previously been in unsuccessful merger talks with Sabena). Then Alitalia's Chairman Umberto Nordio let drop that he was also talking to several European airlines about possible linkups. To some observers, it seemed that Europe was about to go the same route as the US.

There are plenty of good reasons why airlines are forming partnerships these days. Foremost among these are the competitive forces unleashed by deregulation in the US and the liberalization of Europe's air transport market. In a competitive environment, the keys to success are critical mass and hub strength. If an airline can control a hub, with dozens of feeder flights flowing into a central location, it can fill its larger aircraft with enough passengers to increase yields on flights to other hub cities. This creates economies of scale and scope and helps the airline flight off raids by other carriers seeking footholds at the same hub, particulary since the acquisition of slots - takeoff and landing rights - can be one of the byproducts of a merger. When Northwest took over Republic, for example, it took control of the Minneapolis hub it had been sharing with Republic and also acquired Republic's strong hubs in Memphis and Detroit.

There are other compelling reasons for airline linkages: acquisition of the aircraft fleets of the merged carrier - usually at a discount and, in some instances, the takeover of a computer reservation system (CRS), a vital marketing tool and money spinner now used by more than 90 percent of US travel agents to book their flights. When Texas Air's Franj Lorenzo acquired Eastern, he made the half-humorous remark that he was really after Eastern's CRS, but unfortunately had to buy the airline as well.