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March 02, 2008


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Victor Cook


Thanks for the tip on the USA Today article. US Airways (LCC) closed today at $11.56. The high reported in the article was booked on November 22 (and again on the 24th), 2006. The loss of value between those two points is 81.6%.

A better baseline comparison is with LCC's closing price the day it went public on September 29, 2005 after emerging from bankruptcy: $20.21 per share. The loss of value between those two points is 42.8%. The run up to the high of $62.95 was due in large part to the merger itself. And to their bid for Delta.


Richard Lewis

Victor, thanks for your comments. Your discussion about unintended consequences is echoed in today's USA Today in an article about the 2005 AmericaWest-US Airways merger. The merged airline has seen some solid results from their merger, though the stock price for the combined firms has dropped, says the article, nearly 80% since the merger. Meanwhile, integration issues of service, operations, and employee relations persist. See the full story at this link:


Victor Cook


P.S. I like the way you handled the references at the bottom of your comment. Rather like an academic journal article. This way they don't get in the way of the story.

Thanks again,


Victor J. Cook, Jr.


Your link to the list of dissapointing mergers is a great primer on the risks of over-hyped M&A adventures.

Roger Lowenstein's penetrating look at domestic airline industry dynamics in his 2002 NYT article "Into Thin Air" is the real gem among your links. Readers might remember his account of the Long Term Capital meltdown in "When Genius Fails." That book provides the quintessential lessons in both the magic and misery of extreme financial leverage.

Readers interested in an historical account of the top eight domestic airlines' performance should consult "Key Success Factors." It's an eye-opener!

Thanks for this value packed comment. I intend to draw on these sources in my next post in this series.

Richard Lewis

From the standpoint of corporate strategy, the merger probably looks good to DAL and NWA management. The share of revenue of the merged twosome goes up, they can imagine synergies in losing duplicated routes, personnel, and facilities, and for no good financial reason they will gain market share, for all the good it'll do them. Incidentally, fully agree with your comments about the limited understanding the business press has of the importance of market share and even of what it is.

The economics of the airline industry, which you have discussed in past posts, and your current numbers reflect, also suggest that this merger will have to struggle to succeed. The industry as a whole lost money in 10 of the 15 years from 1990 to 2005. (McCabe, 2006). In the 1990s, airline carriers filled 72.4 percent of their seats. Their break-even point was 70.4 percent. From 1995 to 1999, airlines earned 3.5 cents on every dollar of sales. American industry typically earns 6 cents. Through the entire 1990s, airlines made less than a penny on every dollar of sales (Lowenstein, 2002). Only ruthless economizing, shown in the widely-reported decline in service levels, has made some airlines profitable in the last two years, enabling both NWA and DAL to emerge from Chapter 11.

Recently as part of my Ph.D. studies I’ve been wrestling with stats. This has increased my understanding of the numbers you present. Five standard deviations! That's a long way down the negative tail. Your measure of corporate valuation for the merged firm should give management pause, as should the well-recognized fact that mergers are at best iffy propositions. In a July, 2007report, The Boston Consulting Group Inc., found that nearly 60 percent of the M&A deals it tracked from 1992 to 2006 caused the acquiring company's stock price to fall. And it noted that on average, "larger deals have a higher probability of failing." (Lai, 2008) This is supported by no less than Alfred Rappaport, who, in a 2002 column for The Wall Street Journal, reported that buyers as a rule pay too much for the companies they target. This comes from the acquiring companies being overoptimistic about cost-cutting opportunities and overestimating their management capabilities. Two-thirds of acquiring companies see their stock prices fall as soon as a deal is announced, Rappaport stated. This drop "usually corresponds" to the performance of merged stocks over the next year. The "sobering facts" about mergers and acquisitions, said Rappoport, are that "a majority of them don't work (Rappaport, 2002)."


Lai, E. (2008, February 6). A list of disappointing mergers. Cio.com. Retrieved March 3, 2008, from http://www.cio.com/article/180451/A_List_of_Disappointing_Mergers

Lowenstein, R. (2002, February 17). Into thin air. New York Times Magazine. Retrieved February 17, 2007, from http://query.nytimes.com/gst/fullpage.html?res=9C05E2D6103CF934A25751C0A9649C8B63&scp=1&sq=into+thin+air+lowenstein&st=nyt

McCabe, R. (2006). Airline industry key success factors. Graziado Business Report. CA: Pepperdine University. Retrieved March 3, 2008, from http://gbr.pepperdine.edu/064/airlines.html

Rappaport, A. (2002). Shareholder scoreboard (A special report)---To avoid a tumble, look for these red flags. Wall Street Journal, p. B.5.

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