The Travel Adviser: The downside of mergers in the travel industry

Larger airlines swallowing up smaller ones does not augur well for both workers and travelers.

UK plane 298.88 (photo credit: AP)
UK plane 298.88
(photo credit: AP)
At the end of the 19th Century, William Waldorf opened a 13-story hotel in the heart of New York and humbly named it the Waldorf Hotel. Four years later his cousin, Jacob Astor, erected a 17-story hotel on the adjacent site, naming it the Astoria Hotel. The two cousins agreed to a corridor connecting their properties and with the added benefits of having private bathrooms and electricity, the hotels flourished. It took only 38 years but finally in 1931, having vacated their original space for the Empire State building, the merged hotels became the Waldorf-Astoria Hotel. At the time, this gleaming skyscraper on Park Avenue was the tallest hotel in the world. It was one of the few successful mergers in the tourism industry. Fast forward to this century. Air France purchases KLM and is now pursuing Alitalia, the national carrier of Italy. Lufthansa swallows up Swiss Air and is weighing bids for more country-owned airlines in Europe. Delta, just over a year out of bankruptcy and ripe with cash, is eyeing Northwest Airlines. Continental Airlines, with record profits, reacts by initiating talks with United Airlines. Is it something in the air? Mergers and acquisitions in the travel industry are the buzzwords today. Senior management of many airlines views this trend as a stop-gap to rising fuel costs and global economic slowdown. Let's take a pause and explore if this pattern will be beneficial to the traveling public. The last 30 years have seen airlines embrace what is called the spoke-and-hub system, similar to the wheel of a bicycle. Simply put, airlines designate a city as a main hub and use a multitude of flights to feed it. In Europe for example, Schiphol Airport in Amsterdam is used as KLM's main hub. From its base in Amsterdam, KLM feeds in hundreds of flights from all over the world, quickly deplanes passengers and herds them on to connecting flights. Experienced travelers have long marveled at the abundance of items that can be found in the Duty Free Stores throughout the airport as they walk the cavernous terminal to their departure gate for their connecting flights. Hosting both a wedding chapel and a mortuary, Schiphol brings fresh meaning to the expression, "from womb to tomb." Just last decade, TWA - founded by the not-yet reclusive billionaire, Howard Hughes - designated St. Louis as one of its main hubs. But saddled with a bloated pension plan and almost criminal mismanagement, TWA would later leap into the arms of a welcome suitor, American Airlines. It didn't take long for the management of the awkwardly-joined competitors to realize that St. Louis left much to be desired. American Airlines quickly dismantled the St. Louis hub and overnight ceased flying TWA to Israel. It callously informed its Israeli-based employees to seek greener pastures. TWA employees in Israel are still battling American Airlines, in court, for compensation. El Al and Tower Air were left as the only airlines flying non-stop to the United States. One of the core economic theorems states that size matters. Economies of scale can result in savings passed on to the consumer. Big companies can negotiate larger discounts on merchandise that they order. Wal-Mart is often cited. Due to its massive size, it forces outside suppliers to drop their prices - savings that are passed on to the buying public. This has rarely been the case in the aviation industry. While marketing, sales and accounting departments are pruned of competing personnel, entire hubs are dismantled. Hubs are not just the cities where the airlines previously flew. Coupled with the loss of direct airline employments, when hub cities are dismantled, the ripple effect on the supporting service industries is also negative. Service industries such as airport stores and sanitation companies are also forced to downsize operations. As the income of the airports diminishes, the airports themselves are forced to increase fees to those airlines that remain flying. Bottom line, costs rise. Flying becomes more cumbersome, lines become longer and the consumer is left to wonder: Where was the great benefit touted by the acquiring airline? Unless some new, young entrepreneurial airline steps in to fill the void, these forgotten hubs wither away. As Air France/KLM tries to finalize its purchase of Alitalia, it will be fascinating to see if Air France can overcome the objection of Alitalia's unions, which make our own Histadrut labor federation look like pussycats. I'd be very surprised if Italian airports don't have wildcat strikes as Italian workers try to maximize their compensation. In the US, expect major Congressional oversight if Delta does forge an alliance with Northwest Airlines. With the entire House of Representatives up for election this November, politicians will find it quite easy to raise valid concerns about this potential merger. Playing to the populace on planned personnel cutbacks will resonate deeply. Airline mergers have always resulted in fewer choices for the consumer, higher prices for the traveler and an unwelcome addition to the unemployment rosters. Coupled with dwindling options to utilize frequent flier miles, they mean fewer flights and a greater occupancy of the planes themselves. Unless you personally own stocks in the airline being acquired, there is little upside to a merger. Mark Feldman is the CEO of Ziontours, Jerusalem. For questions and comments email him at [email protected]