Diverging on Merging

U.S. airlines have been reeling from a combination punch: their costly, shiny new jumbo jets arrived just as a recession cut back the predicted increase in air travel. Last year the U.S. trunk carriers ran up a total loss of $179 million; TWA alone went some $60 million into the red. As always when in trouble, the airlines resorted to a wide-ranging exploration of merger possibilities-the classic, though not always successful industry device for rescuing the flounderers. Some carriers have already reached merger agreements. Currently pending before the Civil Aeronautics Board are three proposed consolidations that could strongly affect the industry's structure: Mohawk with Allegheny, Northeast with Delta and, by far the largest and most important, American with Western. The American-Western merger would join the second-and eighth-biggest domestic carriers.

Last week, on the last day allowed by the CAB for filing briefs in the American-Western case-the largest proposal for a merger since United took over Capital in 1961-the Federal Government managed to confuse matters by attempting to clarify them. The Department of Transportation published guidelines defining what types of mergers would be permitted. A merger should not eliminate "effective" competition or give the consolidated airline an "excessive" share of important markets, said the DOT. It should produce "significant benefits," including better service to the public, and it should not be likely to touch off "defensive" merger proposals by other airlines that might feel threatened.

Common Routes. The department filed briefs with the CAB supporting all three of the proposed acquisitions. On the other hand, the Justice Department, which is entitled to weigh in on the antitrust aspects of pending mergers, argued against American-Western.

DOT found that the American-Western consolidation met its criteria, particularly in that it would not limit competition significantly. But Justice contended that the "anticompetitive effects" of the planned merger "would outweigh any public benefits that might result." One possible consequence, it said, would be reduced competition on routes between Phoenix and San Diego, and between San Diego and Los Angeles. In addition the opposing brief noted that American, with Western, would have an excessively large share (22.7%) of the total national trunk airline market, yet would not gain "any significant cost reductions," as had been argued by American President George A. Spater. American and Western insist that their common routes in the Southwest are not a major overlap and that their combined size would not likely be greater than that of United, now the largest domestic carrier.

Muscular Giant. The American-Western merger was negotiated last fall by Spater and Kirk Kerkorian, the Western board chairman, more on the grounds of convenience than necessity or public interest. Spater contended, however, that the merger would generate $50 million in new annual profits-$22 million in increased revenues and $28 million in cost savings. Yet some CAB economists predict a $20 million burden of cost increases on the merged carrier.

American and Western have already laid out nearly $1,000,000 in legal fees and lobbying for the merger. Naturally, their competitors are dead set against the merger and have engaged in some vigorous lobbying themselves. "If the merger goes through," warns Continental Air Lines President Robert Six, "the muscle of this giant would ruin the smaller carriers, and they will desperately seek a merger partner and get out before they are overrun and overcome."

Six's claim, while self-serving, is not without historical basis. The 22 trunk carriers certified in 1938 have shrunk to eleven today, and the four largest airlines-United, American, TWA and Eastern-have 70% of the domestic business. What the CAB must now decide is whether this trend, which could well result in the end of what competition remains among the major domestic carriers, is desirable-or, if it is not, whether it could be reversed. What neither the Federal Government nor the airlines themselves have yet produced is a viable overall plan for making sense of a business that remains as jumbled a historical hodgepodge as the nation's sagging railroad system. "Somebody ought to rationalize the route structures," American's Spater admits-but no one has begun to.

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