Simple is best, or in the case of lease accounting, simple is preferred. Since 2006 The U.S. Financial Accounting Standards Board and the IASB have been collaborating on a lease accounting overhaul, an attempt to address how significant off-balance sheet leases contribute to inaccurate portrayals of a company’s financial position. The latest proposal up for review presented a compromise where companies could record their leases in one of two ways: Type A, similar to amortization of a financial asset with lease expenses front-loaded as the asset’s value depreciates over its life, or Type B, similar to the operating lease classification under GAAP guidelines, which follows a straight-line expense method.

The controversy regarding these options for capital lease holders stems back to a recurring theme in our study of accounting practices: the role and agenda of management in influencing or potentially manipulating financial reporting to skew stakeholders’ and investors’ views and confidence in a company’s stability and performance level. Fear that this compromise provides too much leeway and too little guidance to management highlights the opinion of the majority of investors who would prefer a single measurement model rather than this two-type model. There are others who believe FASB and IASB should abandon these adjustments, rather than complicating the classification process.

While change may not be for the worse, FASB and IASB must consider how these changes will impact companies with various asset amounts across diverse sectors. Furthermore, it must consider whether it will lean towards IFRS principle-based methodology or GAAP’s current rule-based methodology in its readjustment. In so doing, the amount of influence left in the hands of management and greater professional judgment will be determined. With the prospective deadline of any adjustment being instituted by February 2014, policy makers and stakeholders alike need to investigate how these potential changes will impact their company’s financial reporting and valuing in the stock market.

Sources:

http://blogs.wsj.com/cfo/2013/11/18/compromise-for-lease-accounting-overhaul-starts-to-fall-apart/?KEYWORDS=capital+lease

http://online.wsj.com/news/articles/SB10001424052702304213904579091122175205920

On November 12th, 2013 a settlement was reached regarding the 17 billion dollar merger between American Airlines and US Airways Group.  This merger came with concessions that looked substantial but are actually very light in consequence.

The combined company, “American Airlines Group, Inc.,” agreed to give up 112 flight slots including 52 coveted slots at Reagan National Airport near Washington and 17 slots at La Guardia Airport in NY.  Essentially to make the merger happen, both airlines agreed to give up space in popular airports to allow for more competition amongst the airlines.

This merger would mean that the industry would be dominated by three major players in the industry, The new American Airlines Group, Delta Airlines, and United Continental Holdings inc.  Those opposed to the merger are afraid that these industry giants will cooperate on price and raise fare.

Critics believe that the settlement does little to address the demands of the Justice Department but…

“The Justice Department described the divestitures as the biggest ever in an airline deal. Bill Baer, the department’s antitrust chief, said that the settlement was better for competition than if the government had won a court injunction against the merger, because the concessions will allow low-cost carriers to expand at major airports.” – WSJ

This claim is supported with the idea that smaller low-cost airlines will now be able to enter big market airports and compete on price.  While it seems to make sense to the Justice department, it begs the question what is considered a low cost airline?  Now I can agree that airlines will absolutely fill the slots that are left open from the merger, but will that really reduce fares and prices?

It doesn’t seem likely as low-cost carriers target under-serviced airports to reduce airport fees.  If it were to enter a popular airport like Reagan National, its fares will be hiked up to adjust for the extra cost of providing flights.

Sources:

http://online.wsj.com/article/BT-CO-20131112-709747.html

http://en.wikipedia.org/wiki/American_Airlines

On November 6 2013, the Financial Accounting Standards Board (FASB) voted to authorize its staff to prepare and issue the final draft of the revenue recognition standard. This vote constitutes the final phase of the joint project on revenue recognition between the FASB and its global counterpart, the International Accounting Standards Board (IASB). In a statement, FASB Chairman Russell G. Golden announced [1]:

“The FASB will issue a standard that both improves and substantially converges guidance on how revenue is recognized in financial statements… Today’s vote represents a major milestone in our 11-year effort to create greater comparability in an area of financial reporting that affects all industries”.

The FASB has been working on the project for several years and has published two preliminary versions of the standard in 2010 and 2011. Once the final draft is issued, it will be submitted to the FASB for approval and the final standard will be published as part of the FASB Accounting Standards Codification TM. The goal of the project is to develop a unified system of revenue recognition for all industries. It also moves the FASB and the IASB a step closer toward reconciling their standards. Currently, the most significant difference between the US GAAP and the International Financial Reporting Standards (IFRS) is the general approach. While the IFRS standards are based on basic accounting principles with limited application guidance, the US GAAP standards are based on elaborate rules with specific application directions. For revenue recognition, the IFRS provides two specific standards: IAS 18 Revenue and IAS 11 Construction Contracts. The US GAAP on the other hand, outlines several concepts and provides detailed standards for revenue recognition in different industries [2]. The table below summarizes the current differences between the GAAP and the IFRS guidelines for revenue recognition [3].

                                                   (click on table to enlarge)

In order to develop a unified set of standards for revenue recognition, the new FASB draft will [4]:

• Add guidance on how to determine when a good or service is transferred over time;
• Simplify the proposals on warranties;
• Simplify how an entity would determine a transaction price (including collectibility, time value of money, and variable consideration);
• Modify the scope of the onerous test to apply to long-term services only;
• Add a practical expedient that permits an entity to recognize as an expense costs of obtaining a contract (if one year or less);
• Provide exemption from some disclosures for non-public entities that apply US GAAP.

Finally, the FASB draft is expected to be issued during the first quarter of 2014. The standard should take effect for public companies in 2017, and for private companies in 2018.

Sources:

[1] FASB votes to move forward with final standard on revenue recognition. News Release 11/06/13. FASB website. Accessed 11/22/13.

http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB/FASBContent_C/NewsPage&cid=1176163581355&rss=1&utm_source=twitterfeed&utm_medium=twitter

[2] Rapoport M. FASB Votes to Move Ahead With Revenue-Recognition Plan; New Accounting Rule Could Be Finalized Next Year. Wall Street Journal (Online) issue 06 Nov 2013. Accessed 11/22/13.

http://online.wsj.com/news/articles/SB10001424052702304448204579182111497140526

[3] Bohusova, H. Revenue Recognition under US GAAP and IFRS. The Business Review, Cambridge Vol. 12 (2) 2009.

[4] IASB and FASB publish revised proposal for revenue recognition. News release 11/14/11. FASB website. Accessed 11/22/13

http://www.fasb.org/cs/ContentServer?site=FASB&c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176159289959

 LAMA LTEIF.

On February 13, 2013, US Airways filed a Form 8–K with the Securities and Exchange Commission declaring that AMR Corporation, the parent holding company of American Airlines, would “merge with and into US Airways…with US Airways as the surviving corporation and as a wholly owned subsidiary of AMR.”[1] This agreement would effectively create the largest airline in the world.

Such a turn of events was not entirely unexpected, as consolidation of airlines had been taking place for years. Following Delta Airlines merger with Northwest in 2008, United merged with Continental in May of 2010 and Southwest merged with AirTran in September.[2] Ever since January 2007, when American Airlines’ stock reached a high of 37.05, the share price had plummeted as the company hemorrhaged capital, finally forcing it to file for Chapter 11 bankruptcy in November 2011. Soon after, US Airways tendered an offer to buy the ailing company for $11 billion, which was promptly accepted.

The United States Department of Justice wasted little time in filing an injunction against the action, arguing that “the merger was not key to the survival of either airline, and the resulting loss of competition in the industry would ‘result in passengers paying higher airfares and receiving less service.’”[3] The DOJ had not prevented any of the earlier consolidation, likely because none of the deals were as high profile or as demonstrative of the sea change taking place in the sector.

Despite the uncertainty it precipitated, the DOJ’s antitrust suit survived only three months before it was announced that the deal “would…go ahead but…[involve] far less comprehensive concessions than most observers had expected.”^[4] Specifically, a settlement was reached that defined an agreed-upon number of airport “slots” to be relinquished by AMR/US Airways in favor of smaller, lower-cost airlines such as JetBlue, Virgin, and Southwest.

A slot, as defined by the International Air Transport Association (IATA), is “a permission given by a coordinator for a planned operation to use the full range of airport infrastructure necessary to arrive or depart at a Level 3 airport on a specific date and time.”[5] Two slots are required for both takeoff and landing, and these permissions are crucial for the ongoing logistics and coordination of plane traffic, especially at busier airports where unrestricted use of the runways would lead to massive delays. The IATA organizes airports into three main categories by infrastructure adequacy. Level 1 airports are considered to have little enough activity that the facility can easily manage most day-to-day airplane traffic. Level 2 airports represent a medium-traffic complex, and Level 3 airports are considered to have a high level of regular activity and frequent competing interests. For the latter category, “A process of slot allocation is required whereby it is necessary for all airlines and other aircraft operators to have a slot allocated by a coordinator in order to arrive or depart at the airport during the periods when slot allocation occurs.”

Common Type 3 airports in the United States include Washington D.C.’s Reagan National Airport and New York’s LaGuardia Airport, both of which required the acquiring company to surrender slots. At Reagan, it was announced that “JetBlue Airways [would] be offered 16 of those slots, which it currently leases from American. The Federal Aviation Administration [would] distribute the other 88 slots to various airlines.”[6] At LaGuardia, “The two airlines will also give up 34 landing and takeoff slots…. Southwest will be offered 10 of those slots…[and] the rest will be allocated by the FAA.” In addition, the new iteration of American will be stripped of gates at Boston’s Logan Airport, Chicago’s O’Hare Airport, Los Angeles’ International Airport, and other sites.

This purposeful redistribution of what are – in essence – tokens of airline dominance will make some progress toward subduing the “oligopolization” of the airline industry, but it may not go far enough in terms of protecting the consumer. The Airline Deregulation Act of 1978 was enacted with the motive to make air travel more efficient and cost-effective for the consumer by introducing free market economic effects. Over thirty years in, we have witness marginal price declines, but there is little doubt that deregulation has not provided a one-size-fits-all solution to the immanent problems.

In fact, the reorganization and conglomeration of these companies may well lead to an unsustainable imbalance of power that forces the federal government to again step in. The Financial Times reports that “after the [American Airlines and US Airways] merger, the four biggest airlines – Delta, United, the new American and Southwest Airlines – will account for about 80 per cent of US domestic flights.” Due to the barriers to entry and high fixed costs of airlines, it remains to be seen whether the discount airline business model remains lucrative or if the larger national airlines will inevitably push the industry further and further towards monopoly.

I chose couple of articles. This is because the reason why Japan Airline, JAL, went bankruptcy was similar to the reason why Pan Am went bankruptcy. Furthermore, comparing there two, there is a big difference between these two.

First of all, JAL went bankrupt in 2010. There were a couple of reasons. First was bad management, especially political interference. For example, politicians asked JAL to set unprofitable routes. In addition, labor union was too strong, and it was veto against management. Thus, if the management tried to cut benefits, the union did not agree with the opinion. Thirdly, JAL purchased a lot of Boeing 747, however this aircraft was not energy efficient. Consequently, fuel expenses had bad effect on management. Finally, Leman Shock was the trigger to bankruptcy. JAL unfortunately was not able to recover revenue as it used to be.

On the other hand, Pan Am went bankruptcy. The reason was as follows. Firstly, the top management was not able to develop its policy in order to adopt “deregulation in 1978.” Certainly, it merged with National Airline, but it did not create synergy. Secondly, since oil shock, oil price increased and fuel expenses raise sharply. In addition, labor union was too strong, and it continuously rejected offers by the management. Especially, although the management intend to cut salaries in order to make Pan Am cost efficient, it could not help but abandoning its strategy. Thirdly, Pan Am purchased more Boeing 747 than it needed. As a result, high running cost let Pan Am struggle to generate profits.

So far, comparing JAL and Pan Am, it turned out that both JAL and Pan Am got losses and their losses did not decrease but accumulated. Finally, both of them went bankruptcy. However, final breath was totally different. While JAL succeeded in revival, Pan Am never returned. What is difference? The answer is government protection. JAL was forced to shut it down by the government. The government appointed new chair person. On the other hand, Pan Am asked Delta Airline to support. Nevertheless, stockholders of Delta Airline rejected this idea. Thus, Pan Am abandoned its dream. By the way, how JAL revived?

Since bankruptcy, JAL has done its best, and it becomes one of the profitable carriers all over the world. The key is new chairperson, Kazuo Inamori. He had a clear vision. In specific, he created new mission statement and tried to convince board members, his subordinates, other employees in the office, and even other front line workers to share it. Nowadays, all employees understand and have mission statement with them in their pockets. Additionally, he introduced new way of accounting, which is called as “Ameba Management.” In this way, each department, section, front line etc. record every financial items by themselves in order to review its financial statement immediately. This way allowed JAL employees to think about revenue and cost by far more carefully than they used to be.

To summarize, both Pan Am and JAL experienced bankruptcy from similar reasons; severe environment, expenses, management, labor union, and fixed assets. However, government protection and new chairperson saved JAL, whereas Pan Am was waked out by Delta.

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=awsj000020011109dncb009uw&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=wsje000020011110dnc500k7g&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=j000000020011109dnc400vkc&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=j000000020011109dnc300v6y&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=AWSJ000020100119e61k0000g&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=AWSJ000020100421e64m0000v&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=WSJO000020100228e62s00335&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=WSJO000020100110e61b002pg&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=AWSJ000020091230e5cv0000p&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=WSJO000020100118e61i009vo&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=WSJO000020100119e61j006va&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=WSJE000020100120e61k0001s&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=WSJE000020100111e61b0000x&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=AWSJ000020120514e85f00019&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=AWSJ000020111108e7b90001g&pp=1&fcpil=ja&napc=S&sa_from=

http://global.factiva.com.remote.baruch.cuny.edu/aa/?ref=AWSJ000020121104e8b500016&pp=1&fcpil=ja&napc=S&sa_from=

http://www.bbc.co.uk/news/business-20293487

America Online (AOL) has dramatically changed as a company since its peak as the largest internet provider in the United States in past decades. Over the last couple of years, AOL has embarked on a turnaround strategy under the leadership of Chief Executive Tim Armstrong. The strategy intended to transform AOL from a subscription based internet provider to a digital media company, who invests in online websites and content, generating revenue through advertising sales.

Following this strategy, AOL is now the operator of sites such as the Huffington Post, Patch, and TechCrunch and has positioned themselves to collect on the inevitable transition from television to digital and internet based advertising. Additionally, AOL has invested heavily automated advertising exchanges, a technology that accumulates consumer data and trends across a spectrum of different websites, enabling them to sell advertisements directly to marketers. This will benefit marketers as they can by ad slots based on needs and will not have to negotiate and broker deals with websites.

In the news this week were reports on AOL’s third quarter results from 2013. The company posted earnings $0.04 per share above estimates, and also revenues six percent above estimates. The company has done this through the expansion of their digital capabilities with the acquisition of Adap.tv and also through increased advertising technology revenues. Adap.tv is part of AOL’s strategic plan to invest heavily in automated advertising exchanges. This is being heralded by the media as a big step towards a trend in digital advertising sales and the “automation of advertising.”

Side-note: Even though net income decreased in the third quarter results, this is attributed to the restructuring of the Patch network and not reflective of AOL’s total performance.

Chief Executive Tim Armstrong believes AOL is building itself into one of the leading technology companies in the industry and paving the way for advertising technology. In my opinion, Armstrong has done a tremendous job turning around AOL. He has taken a long term investment approach and has stuck with his turnaround strategy amid much turmoil. When he took over AOL and began investing in companies such as Patch (which he originally founded prior to joining AOL) and TechCrunch, there were many who doubted these moves in the short run and were not able to see the big picture like he has. In my former career in education research I worked on assignments pertaining to school turnarounds. From extensive research, I saw that the main factors to a successful turnaround was leadership, patience, and maintaining a long term vision. You cannot simply implement strategies and expect them to work immediately, and you also cannot fledge when there is no immediate improvement, or in this case profitability. AOL was able to make it through the first years of its transformation and transition itself into a major player in an industry that it not only believes in but is already innovating.

– Jonathan Shrem

Sources:

AOL’s Revenue Rises on Higher Ad Sales. (2013, 11 4). Retrieved from Wall Street Journal: http://online.wsj.com/news/articles/SB10001424052702303482504579179443498659788

CNBC. (2013, 11 5). Ad surge a big ‘megatrend’ helping AOL: CEO Armstrong. Retrieved from CNBC with Reuters: http://www.cnbc.com/id/101170622

Steel, E. (2012, 11 6). AOL surges on robust results. Retrieved from Financial Times: http://www.ft.com/intl/cms/s/0/a137f92c-2827-11e2-a335-00144feabdc0.html#axzz2jyq4feNQ

Much have being said about how companies’ usage of our personal data. Some might say that they refuse having their private information out there. But is there anything to do about that? I personally think that it’s to like fighting windmills. We need to embrace progress.

Airlines have started collecting personal data, to help their flight crew with providing a better service to their passengers. The flight attendants can easily access the information about each passenger including their allergies, seat preferences and whether the carrier lost both their bags last trip. It’s as simple as few IPad’s screen touch.

The airlines would try and using this data to increase their revenues. For example this data can help with the onboard sales numbers. Buyers trapped in one place for several hours. “And the best they can do is SkyMall” (Thomas Davenport, a Babson College professor). Another example is with United’s sales of economy-plus seats, which surged since it started using data to target fliers.

There is a fine line “between providing excellent customer service and suddenly becoming creepy” (Maya Leibman, chief technology and information officer at AMR Corp.’s American Airlines). Delta upset some customers when they discovered their personal information in obscure computer code on Delta’s website, including their ages, estimated annual incomes and home values. Some might say that Delta has crossed the line to the “creepy” side.

To conclude, data is and always was one of the companies’ most important intangible asset. Today, however, it is much easier to use it for more profits, but the company should be careful not to cross the line. They should keep it as an asset without any contra-asset.

Source:  Jack Nicas (2013, November 8). How Airlines Mine Personal Data In-Flight; Flight Attendants Are Likely to Know What Fliers Will Buy on Board. The Wall Street Journal Online.

Niel Patel

AOL’s Patch, a website reporting local news to over 1,000 local communities, hasn’t been as profitable as AOL hoped. The program was launched in 2007, bought by AOL in 2009, and has recently incurred a $44 million restructure and impairment costs. Third quarter financials reveal that net income for the program has dropped by 90%, to $2 million.

The site is actually a nifty way to get your local news and it’s loaded with content but the brand development is still a work in progress. The current substitute, local newspapers, are reputable names and generally accepted by communities for quality articles. AOL groups Patch along with brands such as Huffington Post and TechCrunch. Perhaps AOL can leverage the established brands to help build the newcomer by advertising or integrating Patch’s local news into Huffington Post.

Another potential issue with Patch could be the operating costs for running the program. 1,000 local news sections require over 1,000 professional jounralists/editors, more office locations, and generally too much overhead. Will the online platform take off? The concept is great, but the accepted local newspapers could compete in the online space unless Patch can bring better content. Tim Armstrong (Chief Executive at AOL) believes the project is actually doing well despite the losses.

Sources:

1. AOL’s Revenue Rises on Higher Ad Sales

http://online.wsj.com/news/articles/SB10001424052702303482504579179443498659788

2. AOL ad sales rise, but Patch websites weigh on profit

http://www.reuters.com/article/2013/11/05/us-aol-results-idUSBRE9A40I520131105

3. AOL may never be able to patch up Patch

http://tech.fortune.cnn.com/2012/02/15/aol-patch/

Weijia Yan (Jennifer)

According to a latest article from Financial Times1, AOL is experiencing big operational changes and seeking new partners that would “make operational and financial improvements to the company”. It is not a pleasant time for AOL in such a transformation, though.

Let’s take a look at the latest financial performance2 of AOL. The revenue in the third quarter this year was increased by 6%, which was actually beyond the market’s expectation. However, according to the analysis of this article, the author claims that this increase was caused by a 14% increase in advertisement. Yes, AOL has always been quite good at using marketing strategy to pull over its revenues in its long history. Then, we move on to look at AOL’s subscription business, which generates the majority of the revenues. It dropped by 7% in the third quarter. Furthermore, we may notice that AOL’s operating income dropped by 61% to $61.7 million in the third quarter compared with number in the same year-earlier period. Such a huge decrease was mainly caused by a $19 million pre-tax restructuring and $25 million impairment, both tied to AOL’s network of local sites Patch. Even Patch has brought so huge a loss to AOL, AOL does not show any intentions to sell Patch out to others “at current moment”. Therefore, AOL’s management is under pressure in recent days because investors haven’t seen any improvements for its profitability so far.

But change may not be a bad thing at all. As AOL’s CEO Tim Armstrong said, AOL was on a track to meet those expectations via operational changes and partnerships. Negotiation is under way and both sides have not reached a confirmed result yet. Investors still have hope in AOL, which we can tell from its recent stock price trend.

Reference:

1. AOL Feels Pressure to Hit Profitability at Patch Network, Emily Steel, New York, Financial Times, November 5, 2013.

http://www.ft.com/intl/cms/s/0/2b63b708-463b-11e3-b495-00144feabdc0.html?siteedition=intl#axzz2k1VS2yyC

1. The earnings release of AOL for third quarter 2013.

http://ir.aol.com/phoenix.zhtml?c=147895&p=quarterlyearnings

Blog

Baruch Caplan

Acc 9110 Blog

Free market competition enables consumers and producers to meet and let the market determine the appropriate price for goods and services. Throughout history, there have been many cases of monopolies or cartels manipulating prices and taking advantage of consumers. To combat this, the United States has passed legislation to promote competition and limit the formation of monopolies. The Sherman Anti – Trust act of 1890 was a historic legislative act granting the Federal Government the authority to oversee competition in industry and gave it power in fighting against monopolies.

In 1978, the government deregulated the airline industry. This caused the airlines to compete against each other, bringing with it better prices for consumers, but lower profits for the airlines. Over the last thirty plus years, the airline industry has been plagued by low profits or losses and many bankruptcies.

In the mid 2000’s Delta Airline entered bankruptcy. In April of 2008 Delta merged with Northwest. This merger formed the current largest airline in the world. In 2010 United Airlines acquired Continental Airlines creating what is currently the second largest airline in the world. In 2011 Southwest Airlines announced it would acquire Airtrans Airlines creating what is now the third biggest airline in the world.

In November 2011, AMR the parent company of American Airlines (4^th biggest in the world) filed for chapter 11 bankruptcy protection. It emerged from bankruptcy with a federal judge ordering it in Feb. 2013 to merge with US Airways (6^th biggest in the world) as part of its reorganization plan, subject to approval from the justice department. This merger would create the largest airline in the world. The merger was approved by both the creditors of AMR as well as by its three biggest labor unions.

In august of 2013, the Justice department, in conjunction with six state attorney generals, filed an anti-trust suit against the proposed merger claiming it would drive up prices off flights, cause the level of service provided by the airline to decline, and create an unfair monopoly where four airlines would control 80% of all flights. The trial is set to begin November 25, 2013, with briefs due late December, and closing arguments set for Jan 6, 2014.

The airlines feel that the government’s claim does not have merit. They believe the merger will offer more choices to consumers, increase route networks, and cite the three mergers of the other airlines which have occurred recently.

The airlines are attempting to mediate and hope to avoid trial. They are willing to offer certain concessions to appease the Federal Government, including giving up certain slots at Reagan Airport, where these two airlines control two thirds of the slots, as well as other concessions.

Recently, the Attorney general of Texas has dropped its anti-trust suit, and it appears that the Florida Attorney general will be dropping charges as well. Many industry and legal experts also believe that the government has a very weak case.

This past week, the Justice Department has begun talks with the Airlines regarding concessions. This indicates that there is a good chance the trial can be avoided and a compromise can be worked out. AMR stock was up 25% Monday November 4, 2013 on the speculation that the merger will now go through.

It is my humble opinion that the merger should be allowed. The combined airline will create cost savings for these two airlines that may get passed on to consumers. As the industry already has a few huge airlines, another large airline will make the industry a four company game instead of a three company industry. This will help competition. They will all keep each other in check. As we have seen in the accounting industry there needs to be a few large companies competing with each other. As long as there are numerous large competitors, competition will create the best market for customers. Additionally, there is always a risk that one of the current three airlines will go bankrupt or have some other crisis hurt its competitive abilities. Should that occur there would only be two airlines left. The allowance of the current proposed merger would remove such a risk from occurring.

Furthermore, there is a school of thought (Chicago University is a big proponent) that by the government attempting to stop monopolies from occurring it is only helping the consumer, but not the competitor. If there would be a monopoly created, the conditions would attract new entrants creating a more efficient market. The intent of the government could be counterproductive. It could be better to leave things alone.

Sources:

1)      Wall Street Journal, Thursday Oct 31.,2013 “Airlines Seek Settlement”, by Jack Nicas and Susan Carey, page B3

2)      New York Time, Tuesday November 5, 2013, B1,  “US in talks to settle suit over merger of 2 airlines”

3)      Wickipedia

4)      Baruch Caplan