The sky overhead is about to become a little less friendly.
In keeping with the script that so often follows economic downturns, United and Continental Airlines are trying to get hitched. They’ve been courting one another for two years. But the recently receding recession has, until now, kept them from them reaching the altar.
The combination of the two air carriers would nudge Delta Airlines, now merged with Northwest, out of the top slot on the basis of annual passenger volume. Management at both companies say the merger will save the two airlines a combined $1.2 billion in operating costs, and create a synergy that will boost their bottom line.
On paper, this merger may look like a good idea. Shareholders in each airline will likely welcome it. I think this merger is dumb, the harbinger of a dangerous trend.
It’s bad enough that the airlines charge nine bucks for a stale ham sandwich and a bag of chips; or that they are contemplating charging cash for carry-on. Bigger may be a boon for shareholders, but it is not so great for consumers or the economy.
From an economic point of view, it really doesn’t matter whether we are talking about airlines or banks; bigger isn’t necessarily better.
At the end of 2007, four mega-banks — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo — held 32 percent of all deposits in FDIC-insured institutions. By June 30, 2009, the four banks had 39 percent of all deposits.
Why ‘Lines Lack the Crucial Incentive
The total aggregated value of these deposits by mid-2009 was about $3.8 trillion. In stark contrast, at that same moment, the Federal Deposit Insurance Fund showed a balance of only $10.4 billion. Despite the fact that deposits at each of these four banks were FDIC-insured the FDIC did not have the funds to cover their losses or to actually protect their depositors.
There is broad consensus that during the course of this economic crisis, the FDIC, under the guidance of Chair Sheila Bair, has been one of the federal government’s most effective regulatory instruments. Yet at no time did the FDIC ever have the financial capability to liquidate these banks to protect depositors. This is why the taxpayers were forced to foot the bill for the big bank bailout.
Big banks like big airlines also have little incentive to behave well. Because they control so much market share, they can treat their customers with disdain and shrug off regulators like an elephant does a fly.
Regardless of regulatory reforms, these super companies create a systemic risk because they are “too big to fail.” No matter what happens, they know that the federal government has no alternative other than to step in to keep them from folding. This means they can operate with impunity or a genuine regard for consequence.
The Bailout Was Circuitous
Following the Sept. 11 terror attacks, the House and Senate passed a $15 billion airline industry bailout. Although the fortunes of the airlines had long been on the decline, the industry used the excuse of the New York and Pentagon assaults to leverage its case for federal assistance. To prevent the industry-projected collapse of the entire sector, Congress and the White House capitulated.
In retrospect, it’s apparent that the airline bailout did little else besides providing companies like Delta with the wherewithal to nearly double its size by absorbing a rival carrier like Northwest. By allowing this to occur, the airline sector of the economy may have become economically more efficient, but at the same time the concentration of business in fewer hands has made the industry as a whole more vulnerable.
The idea that monopolistic practices pose an imminent threat to continued economic vitality is neither a new nor necessarily a liberal-based notion. Historically, enforcement actions under the Sherman and Clayton federal anti-trust provisions have been most aggressively employed by some of this country’s most celebrated conservatives.
Teddy Roosevelt used the anti-trust laws to sue 45 companies. President William Taft’s administration invoked these provisions 75 times. These cases included the celebrated case against Standard Oil to loosen that company’s crippling stranglehold on the kerosene industry.
Consolidation in the wake of an economic downturn of the sort we have just weathered is not surprising. Historically, the big fish have always gobbled up their weaker and smaller cousins. While this may seem to be the normal course of the economic food chain, natural is not necessarily better for the health of system.
The vitality of our economy is as much about the efficient use of capital as it is about the preservation of competition. In the long run, we need both.
The merger of two airlines may seem small potatoes. But looking at the big picture, their combination will weaken, not strengthen our long-term economic prospects.
For this reason, I oppose it.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
