Amid all the hype, hot air and hysteria produced by the circus that has formed around the Boeing-McDonnell Douglas 'big top', the airlines have remained relatively quiet. But a mini-survey of leading carriers suggests concern about the competitive effects of the mega-deal.
Following his controversial outburst against the proposed linkup during the European Commission's investigation, European competition commissioner Karel van Miert may be heartened to hear that over 60 per cent of respondents to a straw poll, conducted by Airline Business in late May, expressed reservations about the proposed merger's effect on competition. But an even split on the issue of the exclusive deals, which Boeing has inked with American Airlines and Delta Air Lines, suggests that van Miert faces a split down the middle over what is one of his favourite whipping horses.
In its official statement of objections to the two companies in late May, the Commission raised the single manufacturer deals as one of its three main concerns about the merger, alongside the restrictive effects on competition and the issue of indirect subsidies financing commercial programmes via US government-funded defence work.
But behind the results of the survey lies an apparent contradiction, which illustrates the complexity of the task facing regulators on both sides of the Atlantic. The prospect of one manufacturer disappearing from the market appears to worry most airlines, but at the same time many of the same carriers are happy to entertain the notion of signing an aircraft deal which locks out the competition.
The straw poll asked 20 leading carriers:
1 Would your airline consider signing an exclusive manufacturer contract similar to the ones signed by American Airlines and Delta Air Lines with Boeing?
2 Do you think it would benefit competition among aircraft suppliers if Boeing merged with McDonnell Douglas?
Most of the 13 airlines that replied requested anonymity.The 10 carriers that replied to question 1 (three abstained) were divided equally between the 'yes' and 'no' camps.
Question 2 produced a much clearer split: eight carriers answered 'no' and two carriers - the only US airlines to participate (American and Delta were excluded) - said 'yes', with three abstentions again. One of those US carriers was Continental Airlines, whose chairman Gordon Bethune told Airline Business: 'It doesn't cause a problem. We have assumed for a long time there are only going to be two companies in this business.' Indeed, Bethune has all but committed his airline to a sole-source supplier deal with Boeing (see interview, p34).
One of the four European naysayers qualified its answer to question 2 by saying that the merger would have 'no big effect'. One of the three Asian respondents commented that a merger will 'definitely lead to less competition in certain aircraft categories.'
These results support some of the Commission's posturing. But while no-one disputes that the merger will eventually be cleared, the debate is still raging over how much say Brussels should have over a merger of US firms, against the backdrop of threats of a transatlantic trade war.
Airclaims data shows that the two US manufacturers account for 70 per cent of widebodied aircraft in operation in the 15 European Union member states, and a massive 83 per cent of narrowbodies (see charts). Brussels officials argue that this could give the merged company an advantage when these aircraft come up for replacement, and certainly give it a dominant position in the spares market.
But the share of future business, as illustrated by firm orders, is the measure that regulators are expected to give more credence to and here Airbus' position is considerably stronger.
Trevor Soames, a lawyer at Norton Rose in Brussels, says the figures show that the merger will 'certainly create or enhance the dominant position of Boeing.' He points out that the Commission has reason to be concerned, especially because the barriers to entry for new competitors 'are extremely high.' He dismisses the US objections to Commission interest as 'a patently non-sensical argument.'
However, he adds that McDonnell Douglas' relatively weak share of firm orders could give the merger a 'failing firm defence.' But John Balfour, a London-based lawyer for Frere Cholmeley Bischoff, is not convinced the failing firm doctrine is 'particularly relevant' and believes Boeing should focus on persuading the Commission that the dominant position created or strengthened by the merger will not restrict competition.
Airbus refuses to comment on the merger but it comes as no surprise when one official privately confirms his opposition: 'It is taking a competitor out of the market place.'
There is no doubt that van Miert's preemptive criticism of the deal caught the US off-guard. Jim Korens, managing director of Washington-based consultants GMKG and a former majority counsel for the Senate aviation sub-committee, says: 'The initial reaction over here was that the Commission was seen as an annoyance . . . and was doing no more than trying to extract some competitive concessions. I think those who subscribed to the annoyance theory are a bit surprised and are now trying to digest and rethink their position.'
Boeing was quick to react by playing its trump card: the driving force behind the merger is the US Department of Defense's desire to retain strong competition for military programmes. Jim Frank, Boeing's vice president EU regulatory affairs, is blunt: 'Since the merger affects the national security interests of the US it would be inappropriate for the [Commission] to take unilateral action to block the merger.' The US aerospace giant is particularly unhappy that van Miert decided to air his concerns in public. Soames believes Boeing has a point: '[Van Miert] has said some pretty imprudent things. He's meant to be an impartial regulator.'
In response, Boeing's chairman Phil Condit has gone public to counter the three main points raised by Brussels' statement of objection. He points out that McDonnell Douglas' market share for new sales in the EU fell to 4 per cent in 1996 and claims this means the answer to whether the merger will restrict competition is a 'resounding no'. He says Boeing is adhering to the 1992 trade bilateral on 'spill-over' from defence to commercial aircraft programmes and dismisses the link between the merger and the two exclusive contracts out of hand.
But Airbus' SVP commercial John Leahy disagrees and claims that Boeing used its 'linkage with McDonnell Douglas' to win over Delta. The Atlanta-based carrier still has up to 44 MD-90s on order and asked both Boeing and Airbus to buy back future commitments on the aircraft. 'For Boeing it would have been a case of opening up the filing cabinet and tearing up a piece of paper; for us it would have meant a massive capital commitment,' says Leahy.
But others doubt Brussels' reasoning in raising the latter two concerns. Balfour questions whether the Commission can intervene in the exclusive deals as they are between US companies. 'If a European airline were involved it would be less controversial.' Korens is dismissive of the Commission concerns over the 'spill-over' between military and commercial programmes, alluding to the military side of the Airbus partners' business.
The Commission is expected to make its final ruling at the end of July. By that time the US Federal Trade Commission should have cleared the merger. Indeed, the US and European regulators couldn't be further apart. The only antitrust concerns that the FTC is thought to hold are on the military side. 'I would not be surprised if there is a negotiated divestiture of certain [military] assets,' says Mark Hough, a lawyer at Seattle-based firm Reed McClure and an ex-staff attorney at the FTC. Support for the merger from Congress and the White House will ensure approval.
The gulf between the US and European regulators' views and the strong political support for the merger in the US have led to speculation of a trade war breaking out if Brussels attempts to block the deal and impose fines of up to 10 per cent of the merged entities' global turnover. No-one appears to think that the Commission can obtain any sizeable concessions on the commercial side of the business. 'I can't see much opportunity for flexibility on Boeing and McDonnell Douglas' part,' says Korens.
And as neither US manufacturer has any tangible presence in Europe, the only way for Brussels' to recoup any fines would be through punitive tariffs on aircraft sold into the EU, which will certainly prompt the US to retaliate.
Korens remains optimistic that a trade war can be averted as the current US administration 'has shown a willingness to go to the brink, but ultimately at the eleventh hour has been prepared to sit down and work things out.'
Korens believes the issue will have to worked out at 'a fairly high political level.' Commissioner van Miert may not like the idea of having his authority undermined by his political masters, but unless he persuades them that a trade war is the only way to protect European interests he appears to have little choice.
Source: Airline Business
