Congress Fuels Airline Merger Madness

Merger mania has struck the airlines once again. A year after US Airways failed to buy Delta Air Lines in a hostile takeover (then, pundits heralded the long-awaited industry consolidation), the buzz is back.

Not long ago, a hedge fund with stakes in both Delta and United Airlines spun a rumor about a merger, causing the stock price to soar. Now, Delta’s board has decided to examine mergers with other airlines, principally United and Northwest Airlines. Northwest’s CEO announced that merger proposals would be weighed carefully, and United has made no secret of its desire in recent months to merge with another airline. And now may be just the right time to merge, thanks to a provision in the 2007 appropriations act requiring “fair and equitable” handling of labor issues during a merger.

While merger rumors tend to send an airline’s stock price soaring–Delta’s went from $12 to $16 on news that its management was considering a merger–actually making a merger happen is more like threading a needle. From antitrust regulation and scheduling to logistics and systems integration, a merger meets countless challenges.

But the biggest challenge is merging two workforces. Airline employees are organized on the basis of seniority. Senior pilots, for example, are first in line for promotion from first officer to captain, fly the largest aircraft, choose the plum routes and are paid the most. These are all assigned on the basis of a sacrosanct “master seniority list,” with the longest-serving employees at the top and new hires at the bottom.

This is the stickiest wicket in an airline merger. The employees of the purchasing carrier see the merger date as the “date of hire” at their airline and argue that the other airlines’ employees should be tacked on to the bottom of the seniority list, as even a little interference with the list can make a difference in hundreds of thousands in career earnings. The employees of the bought-out carrier want to be integrated into the seniority list.

How weighty is this issue? Look at US Airways: More than two years since America West took it over, its two pilot groups are still haggling over the seniority lists. The former America West pilots like the plan put forward by the airline, but the US Airways crew are unwilling to ratify the new contract, which would make less experienced American West pilots more senior than their eastern counterparts.

This is hardly the first time this has happened. In 1988, when FedEx bought the Flying Tiger Line (to get access to the Tigers’ Asian routes), they merged the seniority lists, spawning over a decade of litigation. In 2001, American Airlines bought struggling TWA. More than 50% of TWA’s pilots and all its cabin crew were tacked on to the bottom of the American Airlines seniority list, causing widespread resentment. During the post-Sept. 11 aviation downturn, the former TWA flight attendants were the first to be furloughed.

TWA’s main base in 2001 was in St. Louis, where American retains a “focus city” operation. Missouri’s senators, Democrat Claire McCaskill and Republican Kit Bond, unhappy with the way TWA workers fared in the buyout, offered a little-noticed amendment to the omnibus spending bill that brings back a regulation-era worker-protection policy. The law subjects mergers and buyouts to Sections 3 and 13 of the Civil Aeronautics Board’s decision in the 1972 Allegheny-Mohawk merger. Prior to deregulation in 1978, the Civil Aeronautics Board (the primary airline regulator) required merged airlines to include some onerous “labor protection provisions” in the terms of the merger, many of which were negotiated into collective bargaining agreements after deregulation.

The McCaskill-Bond amendment requires just two of the labor protections: that “provisions shall be made for the integration of seniority lists in a fair and equitable manner” and that disputes over seniority be submitted to binding arbitration.

“Fair and equitable” is thought to mean that seniority lists would be merged, as McCaskill and Bond thought should have happened with TWA’s workers. Binding arbitration speeds up the process, forestalling the endless negotiations over new contracts currently bedeviling US Airways. Furthermore, past airline mergers–including FedEx’s acquisition of the Flying Tigers–would probably not have happened without a merged seniority list for pilots. The Tigers merger fueled FedEx’s international expansion, demonstrating the remarkable added value that a merger can offer.

With congressional guidance on integrating employee seniority lists, airlines face one less roadblock to their desired mergers. Of course, “fair and equitable” cuts both ways, and many employees who face being bumped down in seniority will be unhappy with this turn of events. Employee-management relations at most major airlines are already sour, and long-term employee resistance to mergers may erode the merger’s benefits. US Airways is a case in point: After its stock rose to $40 post-merger, and eventually $60 by the end of 2006, the airline had a bad 2007 and has seen its stock price fall to less than $12. Air-traffic delays and $100-per-barrel oil have affected all airlines, but low morale and vanishing esprit among crew do nothing to improve performance.

Thanks to the McCaskill-Bond amendment, mergers that produce value and create synergies have one less hurdle to leap.

This article was originally published on Forbes.com on January 28, 2008.

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