Arguably, an AMR Corp/American Airlines take-over of Trans World Airlines is of little consequence in the massive US domestic air transport market. In the world airline revenue league (1999 figures), American is number two, and although TWA is number 25 it generates 82% less turnover than American, consistently makes large losses, and brings with it astronomical debts and liabilities.
Analysts Stern Stewart Research, looking at the US domestic air transport market, also observes: "Size is not the competitive advantage in this market that one might assume, perhaps because the industry remains fragmented and over-supplied." But Stern Stewart was talking about returns to investors, not consumers.
The American/TWA argument for the take-over is that TWA would fail without it. The questions are, first, are there viable alternatives to the American/TWA plan? And second, if the take-over were to go ahead, would it be better than the alternative(s)?
And there are alternatives. With Chapter 11 bankruptcy protection and a new management infusion, TWA might just re-emerge in a form which could enable it to find its place in the US market. Continental has done it and survived, with the 1999 figures showing it ranking 6th in the USA and 12th in the world for revenue, and tenth in the world for group operating profits. The only trouble is, TWA has been there before more than once and failed to make it work.
The second alternative would be that TWA is allowed to go to the wall. If it did, many big creditors would get hurt, shareholders would lose their stock, and many more employees lose their livelihood than would happen with a take-over. But there would be a rush for the pickings at TWA's St Louis hub, and American would not be the only one at the party.
These are the scenarios which the US Justice Department has to consider in deciding whether to let the American/TWA deal go ahead. It also has to look at the bigger picture, which includes the fact that American is in line to pick up 20% of US Airways to appease the US regulatory authorities as they consider the pending United Airlines take-over of that carrier.
The Justice Department's job is to determine the effect on the consumer - in the long run. There is no question that farepayers will suffer in the short term if either or both the take-overs were given the go-ahead, but if they were not cleared and either of the two targets were to fail, American and United would increase their market dominance and the consumer would suffer anyway.
The only scenario which would serve the consumer would be a take-over ban followed by a revival of the smaller carriers, but there would have to be a realistic prospect of TWA regeneration and US Airways' long term survival for the Justice Department to take that decision.
If TWA and US Airways are swallowed up by the two biggest sharks in the world's biggest pond, it would undoubtedly set in train a wider restructuring. Due to its size it is assumed that a third giant will emerge with Delta at its core. Northwest and Continental are large, but not in the same league. So if the Justice Department clears either, or both, take-overs, it has to consider the direction the whole US domestic air transport market is taking. Maybe it is time for the US authorities to consider allowing meaningful foreign investment in its domestic carriers to encourage competition. On the other hand it may already be too late to save second tier operators like Alaska Air and America West from being consumed by the voracious remaining big players, Delta, Continental and Northwest.
Ever since the early 1980s, when US domestic deregulation began to bite, market watchers have speculated about just how long it would take before a Big Three swallowed up the significant remaining competition, leaving only niche carriers serving regions. Southwest Airlines is the only exception and even that is a niche player in the no-frills market.
It would take quite a leap of faith to believe that a marketplace consisting of three giant carriers and one specialist no-frills organisation would provide for the consumer as well as the present relatively diversified market does.
Source: Flight International
