US Airways Merger Discussion

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ASU Economist Dennis Hoffman discusses the effects of a possible merger between US Airways and American Airlines.

TED SIMONS: Tempe-based U.S. Airways continues to express an interest in merging with bankrupt American Airlines. Here to tell us what a merger could mean for the local economy is Dennis Hoffman of ASU's W.P. Carey School of Business. Always good to have you here, Dennis, thanks for being here.

Dennis Hoffman: Good to be here.

TED SIMONS: Is this -- we hear this so much: this merger possible, merger maybe, how likely is this?

DENNIS HOFFMAN: Well, any particular deal, this one, any deal, could fall through for any number of reasons, especially through bankruptcy issues, negotiations with unions, etc. But if you look at the industry, some form of consolidation is clearly inevitable given the cost structures of the industry, the pressures they're under; if you just look at the pricing pressures that they're under, they've got to reach some efficiencies of consolidation in my opinion.

TED SIMONS: So with that in mind, why would both sides, these two particular sides, want a merger?

DENNIS HOFFMAN: Well, if you look at the history of America West over the years, I think there was a lot of talk around--remember when it was founded, there was a lot of talk that it was founded to grow a regional airline with an eye toward being taken over, and then the original owners would reap the benefits of selling it to a bigger airline. So I think consolidation in some form or selling, acquiring was always in the mind and the trajectory of the founders of America West, and now U.S. Air it.

TED SIMONS: Yeah, it seems to be surviving pretty well. Would U.S. Airways move headquarters to Dallas? Would they leave Tempe?

DENNIS HOFFMAN: That is the speculation. Let me tell you what that's founded on: well first of all, American is just far bigger than U.S. Airways. It has a significant presence in Dallas in terms of flight simulator, pilot training, service facilities; just a massive operation. And if one were going to exploit some efficiencies, it would seem to me that you'd want to cluster around that area, and then the speculation would be that the several hundred -- I've heard everything from 100 to, you know, 200, 300 employees in the Tempe facility would move, the management team would move to Dallas. That is the speculation. Remember, speculation is the -- is everything. In terms of the consequences for Tempe, 300 workers, even if it's 300, is a very, very small number that the entire state, 2.4 million employees march alone, net positive gains, 19,000, which was a great march by the way. But you know, it's just a swirl here in terms of economic activity. So that's a handful. I think it would be more of a greater concern if they consolidated some service operations or some other operations that are currently taking place in Phoenix and move some of those jobs to Dallas. Again, this is all speculation, and you're just looking at the business and saying, well, it only makes sense if they can consolidate and gain efficiencies, so then where will those efficiencies going to come from?

TED SIMONS: As far as the economic impact for Tempe, in particular, and for the valley in general, how much of a hit? That's a major presence in downtown Tempe for quite a while now? It is, and there's -- there's an image issue, there's a philanthropic issue--headquarters, you know, when you have your headquarters in a particular town, there's greater investments in terms of philanthropy in that town, signage in that town, investments in that town. We're clearly going to see a much greater presence of American Airlines in that's the name presumably if they go this direction, it's going to be American, and that's what we're going to see in place of U.S. air.

TED SIMONS: And if the operation does move to Dallas and headquarters does move to Dallas, does that change in terms of flights coming in and out, and does that change the local economic climate?

DENNIS HOFFMAN: You know, what we have significant hub here with U.S. air, Southwest hubs here. Those are our two main carriers here. Interestingly, American hubs in all of the major cities across the U.S., I think it
S like Miami, Chicago, Dallas, New York and L.A., and so the question is, "what do you do? Do you maintain both L.A. and Phoenix?" And my guess is there's plenty of room to do that. You could -- you have a lot of your international flights would go out of L.A. We don't have a strong international presence here, but we do serve in Phoenix, we serve routes across the U.S. back to the Midwest, back to the south, that kind of thing. So it would seem to me that there's plenty of room to have routes in L.A.--hubs, excuse me in L.A. and in Phoenix.

TED SIMONS: Last question: we've gotten used to these rumors, used to this kind of talk; we actually saw a merger in the not too distant pass. The changing nature of the airline industry. Do you just ride with it if you're Tempe? If you're the valley, do you just say, "We have to expect this every few years"?

DENNIS HOFFMAN: I think it's not just Tempe and the valley; I think all of us as airline consumers, we're going to have to ride with consolidation in this particular industry. You might be referencing the banking consolidations we've had also in the Phoenix area. Yes, I think it's part of the nature of the beast. Firms are looking to exploit efficiencies, and they're going to do so whenever they can. In terms of airlines, it's an imperative because if you look at historically, the real price, the inflation adjusted price of air travel, has been coming down relentlessly year after year, decade after decade.

TED SIMONS: All right. Well we'll see where this goes. Good information. Thanks for joining us. We appreciate it.

DENNIS HOFFMAN: Thank you, Ted.

Dennis Hoffman:Economist, ASU;

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