(Very) Apparent Contra-diction

“US Airways' aggressive attempt to acquire Delta Air Lines, which fizzled earlier this year when DL's creditors refused to endorse the takeover, might have sparked a consolidation frenzy that could have reshaped the world's largest air transport market.

“If the merger actually had gone through, it's unlikely the US's other four legacy carriers-United Airlines, American Airlines, Northwest Airlines and Continental Airlines-could have afforded to stand pat.

“A scenario in which the Big Six became the Bigger Three did not appear too far-fetched, particularly since few are really growing on their own…

“Is consolidation inevitable, as US and UA fervently contend, or is the current structure sustainable given the rigorous cost-cutting airlines have endured and the return to profitability many of them enjoyed last year? And would antitrust officials, who shot down a UA-US merger proposed in 2000, allow consolidation to move forward?

“At the heart of this thorny debate is an apparent contradiction. Airline executives generally concede that there are too many major international carriers in the country and that the market as currently structured is not ideal. Yet many also believe that their particular airline is well-positioned in its current form, especially after spending the last several years shedding billions of dollars in annual costs. Further, even if they may think a merger would be a good idea in theory, they also may believe that the obstacles to achieving one in reality are too great to overcome and ultimately would damage the potential value of the merged entity.

“Blank Sheet: ‘There's no question that if you had a blank piece of paper, you probably wouldn't come up with six hub-and-spoke carriers. I think that has probably been the underlying thesis for consolidation,’ Continental Airlines Chairman and CEO Larry Kellner told analysts and investors recently at the JP Morgan Aviation and Transportation Conference. But, he quickly noted, ‘We don't see huge benefits in consolidation for us.’”

(“Is US Consolidation Inevitable?” Aaron Karp. Air Transport World: June 2007. Vol.44, Iss. 6; pg. 49)

QUESTION: How long can companies fly into the face of fundamental economics while trying to fool themselves with contra-diction?

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