Wednesday, October 29, 2008

Airlines, Recession and Going Bust

. Wednesday, October 29, 2008

So far this year, about 30 airlines have gone bust around the world, including ATA, Aloha, Skybus, Sterling, and Frontier Airlines, all relatively small airlines with mostly regional coverage. However, these small carriers declaring bankruptcy does not bode well for an aviation industry staring down a global recession, tight credit, and decreasing demand. These bankruptcies have produced ripple effects throughout the aviation sector and have left tens of thousands of travelers stranded in airports around the world. Will we continue to see more bankruptcies? Will we see consolidation in the airline industry much like we've started to see in the banking industry?

Last month, Willie Walsh, CEO of British Airways predicted that by the end of this year, 30 more airlines will declare bankruptcy as a result of the current economic climate, causing more headaches and stranding more passengers worldwide. Furthermore, analysts are predicting consolidation within the aviation industry in order to take advantage of economies of scale. 

Today, the Justice Department approved the merger between Delta Airlines and Northwest Airlines, after a six-month investigation as to the impact of the merger on consumers. This deal will create the largest airline in the world. Also today, Lufthansa, the German carrier, came to terms to purchase BMI, the British airline, and is also seeking to purchase major stakes in Austrian Airlines and Alitalia. Major carriers like British Airways, Air France-KLM, and Virgin are also positioning themselves to buyout smaller carriers and expand their networks.

However, most analysts are overlooking one important obstacle to airline consolidation, especially on a global scale. The main obstacle to airline industry consolidation globally is that it is illegal, and has been since 1938, for foreigners to own US based air carriers. The United States caps foreign ownership of domestic carriers at 25%, thus ensuring that the only consolidation in the US market can come from within. We will most likely see less consolidation than most are predicting, and the consolidation that we do see, will be a wave of "intra-market" mergers, especially within the US and the EU.

Because the sources of continued financing and merger are limited to "intra-market" transactions, especially in the US but also in Europe, our wave of consolidation may be much smaller in scope and not sufficient enough to ensure that the airline industry continues to function at its current capacity. In the short run, as a result of tighter credit, decreased consumption of aviation industry services and a global recession, we may see further bankruptcies and more headaches for travelers because airlines will not be allowed to merge across borders and take advantage of economies of scale. In the long run, none of this matters b/c we're all either dead or won't need airlines. (Hopefully someone invents Star Trek style teleportation!)


Airlines, Recession and Going Bust
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