As long as the barriers to entry remain low (frankly, you don't need that much money to lease a couple of 737s and start flying some short hops), there is actually nothing wrong with the above scenario.
Assuming free entry, guess what happens when NW/DL try to cartelize certain routes? Hellooo new Southwest route! Or United route. Or whatever carrier.
This has happened over and over again on so-called cash cow routes of the majors over the years. Look at what happened after CO exited their Denver hub. United became basically the only player in town for a while. Then, SW and Frontier eventually moved in and now United makes basically no profits from Denver.
In the end, each route will, over time, be priced according to (roughly) how much revenue potential it can yield.
How does this affect the NW/DL merger? With rising costs of fuel, etc., fares have to rise and routes have to be canceled, with or without a merger. Capacity is not a factor of how many players are in the market (generally), but of the overall supply/demand curves of the aggregated firms. However, by cutting back past a certain threshold and having poor positioning of hubs etc., the business model of a network/hub can be threatened. By combining, you can still maintain that model by picking only the best hubs and routes and downsizing the poor ones.
What a global drop in capacity may mean is that fares (over time, adjustment takes a little while) will stay in line with what the market for each route can support given the costs of flying. However, as capacity declines, the space for total firms overall shrinks. If you believe that there is a certain size at which a carrier (and especially a network carrier) needs to be to survive, then a merger or eventual death of one of the competitors has to happen.
So, fares go up somewhat in line with costs but there is little real opportunity for cartelization in the medium/long term. However, with capacity decreases, space for the number of firms decreases and someone's got to exit, either via death or merger. NW is apparently thinking that their shareholders would benefit more from a merger now than potential death throes later.
If you believe that there is a certain size at which a carrier (and especially a network carrier) needs to be to survive, then a merger or eventual death of one of the competitors has to happen.
So, fares go up somewhat in line with costs but there is little real opportunity for cartelization in the medium/long term. However, with capacity decreases, space for the number of firms decreases and someone's got to exit, either via death or merger. NW is apparently thinking that their shareholders would benefit more from a merger now than potential death throes later.
Given this "merger" is basically a DL acquisition of NW and given today's news about DL's larger financial losses, it seems like the bigger financial loser today -- that is DL -- may be even less well suited to take charge than even NW's management which has done marginally better than DL in this bad quarter for both of them.
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This game is not as much fun as it used to be: 2008/2009 Frequent Flyer Program Fleecing Award goes to Delta Airlines
However, by cutting back past a certain threshold and having poor positionin NW is apparently thinking that their shareholders would benefit more from a merger now than potential death throes later.
Actually, NW's CEO was thinking of being able to cash in on his golden parachute of $10 million before it turned into a pumpkin in June, and his board was thinking of fixing it so the entities they represented could churn the stock they had acquired as former bankruptcy creditors. They sold NW down the river for purely personal considerations.
And anyway, death throes would have come to DL long before they would have to NW.
DL and/or NW are not going to face "sudden, forced liquidation" whether this merger collapses before it closes or whether it closes. Scare tactics are no reason to believe this merger will do much to improve the outcomes for current frequent flyer programs' account holders.
. . . and the need to use scare tactics shows that there is no real underlying substance to their arguments.
Actually, NW's CEO was thinking of being able to cash in on his golden parachute of $10 million before it turned into a pumpkin in June, and his board was thinking of fixing it so the entities they represented could churn the stock they had acquired as former bankruptcy creditors. They sold NW down the river for purely personal considerations.
And anyway, death throes would have come to DL long before they would have to NW.
These are all open questions about the specific economics of this particular merger. But there can't be any doubt about the logic of: 1) with increased costs, all other things being equal, there has to be a reduced number of firms in the market, whether that happens by death or merger and 2) fares, in the medium to long term, will reflect the aggregate supply and demand curves of their particular market, because individual routes have very low barriers to entry and the overall number of players is not restricted (except maybe to NYC).
NW has great international routes (esp. to Asia, but also a great KLM link) but poor O&D hubs. DL has less desireable international routes but very strong O&D hubs. That right there at least makes the merger potentially interesting to look at.
Whether Steenland and co. benefit to the tune of tens of millions of dollars is a chump change issue compared to whether or not the core economics make sense. If DL + NW make sense, then a few million to Steenland, deserved or not, is basically immaterial. If the economics don't make sense, then the shareholders will be dumping stock and everyone will know it. At the end of the day, it's just an airline corporation, and an American one at that. If NW goes but there was still room for another firm, something else will take its place. If there isn't room, then the deal makes sense.
These are all open questions about the specific economics of this particular merger. But there can't be any doubt about the logic of: 1) with increased costs, all other things being equal, there has to be a reduced number of firms in the market, whether that happens by death or merger and 2) fares, in the medium to long term, will reflect the aggregate supply and demand curves of their particular market, because individual routes have very low barriers to entry and the overall number of players is not restricted (except maybe to NYC).
I don't know if you noticed the following or not, but I did -- your given "1" above is inapplicable because the inclusion of ceteris paribus is inapplicable in the relevant system.
With respect to the "because" portion of your given "2", I have already commented about it earlier and don't find it reflective of current conditions.
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This game is not as much fun as it used to be: 2008/2009 Frequent Flyer Program Fleecing Award goes to Delta Airlines
Given this "merger" is basically a DL acquisition of NW and given today's news about DL's larger financial losses, it seems like the bigger financial loser today -- that is DL -- may be even less well suited to take charge than even NW's management which has done marginally better than DL in this bad quarter for both of them.
Of course, iin absolute dollar terms, DL lost more than NW - but then again, DL is a bigger airline than NW. In fact, for this particular quarter (Q1 08), unusually, Delta actually did better on an Operating Margin and Net Margin (excluding the goodwill writedown at both carriers) basis than NW. NW traditionally has had better margins than most in the industry:
Programs: UA 2MM, DL 500k, SW CP, GP 1M, HH Gold, Miracle Fruit-su Club
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Quote:
Originally Posted by GUWonder
Given this "merger" is basically a DL acquisition of NW and given today's news about DL's larger financial losses, it seems like the bigger financial loser today -- that is DL -- may be even less well suited to take charge than even NW's management which has done marginally better than DL in this bad quarter for both of them.
FWIW: Remember, the folks at Delta didn't just wake up to this news today, as we did. They and Northwest have seen the numbers even as they've been issuing their releases over recent weeks. This is the context for them - their perspective.
I don't know if you noticed the following or not, but I did -- your given "1" above is inapplicable because the inclusion of ceteris paribus is inapplicable in the relevant system.
With respect to the "because" portion of your given "2", I have already commented about it earlier and don't find it reflective of current conditions.
Ok, so what's wrong with my ceteris paribus clause? I don't see any other factors that, when combined with increased costs (effectively shifting the supply curve leftward) will somehow magically lead to the same number of firms staying in the market. If there is a peak efficiency of size, then the firms will remain the same size but number of firms will decrease. Of course, when the market is a finite number of players the exact maths are a little more turbulent, but given the dramatic increase in costs I don't think that there is any doubt that this logic will come into play.
And as to your second question, can you point out a domestic route to me that has a significant amount of passengers that has ever suffered a loss of service and, over the medium to long term, remained cartelized? I gave an example of how Denver, over a 5 year period, after suffering the loss of service of Continental, restored a great deal of competition. If there's money to be made on a route by a competitor, than any attempt at monopolistic pricing over the medium-long term will fail. It's basic economics, and the market for domestic flying has unlimited potential players on unlimited potential routes, making it very healthy with respect to consumer price.
Lots and lots of airlines have attempted to prevent Southwest from entering their market and they have almost always failed.
And why does it take a merger or purchase to reduce capacity?
It doesn't. Though with the merger NW and DL can coordinate additional reductions in ways that would face price fixing investigations as separate entities.
It doesn't. Though with the merger NW and DL can coordinate additional reductions in ways that would face price fixing investigations as separate entities.
... so, of course, part of the anti-competitive scheme behind this takeover is to legalize their price fixing. Great thing for consumers, that!
