Bangkok--16 Apr--Centre for Asia Pacific Aviation Two weeks ago, UBS wrote down its book by 12 billion euros as a result of the subprime crisis. In the first quarter of 2008, the same bank announced a net loss of 7.6 billion euros. Yet the market barely blinked. A proposed merger between two US airlines - that would make it the biggest airline in the world - involves potential combined enterprise value of less than the amount of UBS’ recent write-down. Yet it holds the promise of reshaping the airline world. It is important to maintain some perspective in looking at this major event for the airline business, especially if it were to create a sustainable precedent. It comes at a time when the industry is on the brink of a long-overdue revolution to overthrow a burdensome and illogical 60 year-old regulatory structure. That industry contains hundreds of airlines across the world, last year carrying over two billion passengers. It is marginally profitable at the best of times; as an industry, it returns (but only in some years) perhaps 5%, well below other industries. Today airlines are confronted by fuel prices which have grown to account for around 40% of costs, up from 5-10% just a few years ago. All but one of the US’ major airlines has recently been through Chapter 11 bankruptcy. And today, in a highly price sensitive market, US airlines are confronted by a serious economic downturn. Merger is a no-brainer. Yet the prospects of the merger actually occurring are probably not even as good as 50%. Why? Because suddenly all the forces of inertia come to bear. Rationalism and logic are left on the shelf. First of all, cross-border merger is out of the question, because of archaic, nationalistic foreign ownership restrictions. So the scope for full merger is effectively limited to domestic options. Secondly, at least one of the airlines involved in this transaction is heavily unionised (many international airlines deal with a dozen or more unions). Pilots in particular, who pack enormous clout, tend to be intransigent, often regardless of their own best interests, when it comes to merging seniority systems. Union opposition has the power both to foil the initial merger and its implementation. Thirdly, the merger will change the competitive balance of the US industry, as well as the international marketplace, where the Skyteam alliance, led by Air France/KLM and Delta, will become a much greater force. So, as soon as the deal is formally agreed between the two US airlines, US anti-trust and European competition law authorities will all swing into (inertial) action. The prospects of a speedy and unconditioned response from all of the relevant bodies rank as high as winning the national lottery. And then, the special feature of the moment, a Presidential election campaign is under way. Many established interests, including those of unions, are affected by any merger and a common feature of election campaigns is a desire to protect the status quo for potential voters. For example, Minnesota has in the past committed substantial funding to support Northwest, and that State may lose some service if Northwest’s hub in Minneapolis is downgraded. According to Minnesota’s Metropolitan Airports Commission, “Northwest Airlines made legally binding commitments to keep the airline's hub and headquarters…here.…(and) we will work to the best of our ability to leverage those commitments”. It will not be long before the Presidential candidates are lining up to protect these and other vested interests. The sharks are circling and the minnow is not yet even fully formed. This is a merger that needs to happen, both for the airlines concerned and as a precedent for immediate imitation. If this opportunity is lost, there will be blood.