U.S. Rejects Airline Reservation System Merger
The Justice Department on Thursday rejected the planned merger of the computer reservations systems of American Airlines and Delta Air Lines, saying it would result in “higher fares and poorer service for airline passengers.”
In response, the carriers said they agreed to terminate the merger, which would have created a global giant that would have handled about half of the nation’s airline reservations.
Atty. Gen. Dick Thornburgh’s decision will deprive each carrier of as much as $375 million that they planned to generate by selling shares in the merged system. American said it now will try to sell parts of its Sabre system, the nation’s largest with 38% of the market, to other airlines in the U.S. and abroad. Delta spokesman Jim Lundy said the carrier is “studying its options.” The carrier is expected to seek another, smaller merger partner for its Datas II system, which has a 5% market share.
Under the original agreement proposed in February, Delta, because its system is so much smaller, was to have paid American $650 million to form the partnership. The two carriers each would have held 25% of the new company and sold the rest to foreign or domestic airlines or other entities. Initially, the carriers planned to sell 1% shares for $20 million, but that amount was reduced to $15 million. American said Thursday that it was in “serious negotiations” with several carriers that it would not identify.
Opposed by Skinner
The computer reservation industry comprises five major systems in the United States. Apollo, the second largest with about 30% of the market, is half owned by United Airlines. United sold the other half of Apollo last year for $500 million to USAir and a group of European airlines.
Smaller systems include PARS, owned jointly by Trans World Airlines and Northwest Airlines; and SystemOne, owned by Texas Air Corp., the parent of Continental Airlines and strikebound Eastern Airlines. There are six other systems in Asia, Canada and Europe.
U.S. domestic airlines that do not have their own systems and with which Delta could possibly form one are Pan American World Airways, America West, Alaska Airlines and Southwest Airlines.
Besides making reservations for major carriers, the systems handle bookings for smaller airlines, car rental companies and hotel chains, charging $1.50 to $2 for each reservation. They are an essential ingredient for success in a deregulated airline industry.
The merger of the American and Delta systems met opposition last month from Transportation Secretary Samuel K. Skinner, who cited an adverse effect on competition in computer reservation systems and in the airline industry.
But American on Thursday decried such charges. Robert L. Crandall, chairman of AMR Corp., American’s parent, said in a statement that “for several years, we have heard a great deal about single-airline ownership (of computer reservation systems) and the perceived marketing advantages enjoyed by the owning carriers. While we believe the concerns are specious, the proposed partnership would have satisfied them.”
It was the first time the Justice Department ruled on an airline-related merger since it took over that responsibility from Transportation on Jan. 1.
‘Sample Case’
“I am disappointed,” said Louis Marckesano, airline analyst with the Philadelphia-based brokerage Janney Montgomery Scott. “I think that the two airlines bent over backward to try to meet the criteria to show that the merger would not be anticompetitive. In my opinion Justice was out to set a precedent. They are probably looking for a good sample case.”
Paul Karos, airline analyst with First Boston Corp., added: “It looks like a loud and clear message that the Administration is going to be tough on airline merger-related events.”
The Justice Department said Thursday that it planned to sue to prevent the merger. This, however, will not be necessary because the airlines terminated their agreement.
