In a previous life at Bloomberg, I wrote about mergers and acquisitions, including a handful of deals that collapsed under US regulatory scrutiny such as Anthem Inc.’s failed pursuit of Cigna Corp. and Canadian Pacific Railway Ltd.’s rebuffed overtures to Norfolk Southern Corp. Health insurance and railroads are consolidated industries of national import, so a tough stance by regulators made sense. But the same could be said of aerospace. After all, the domestic air-travel network is considered such critical infrastructure that the US government has now allocated almost $150 billion for grants and loans to support airlines, contractors, manufacturers, airports and their employees through the coronavirus pandemic. That’s why it has always been curious to me that the aerospace giants have largely skirted US antitrust scrutiny in recent years. The topic is newly relevant after AerCap Holdings NV announced last week that it would acquire a majority stake in General Electric Co.’s GECAS jet-leasing business for a total consideration of more than $30 billion.
The deal combines the world's two largest jet lessors, with the merged entity set to control more than 15% of the global leased passenger fleet, including planes on order, according to data from Cirium. The market for jet leasing will still be “fragmented” after the deal, GE CEO Larry Culp said, pointing to a wave of new competition. Fresh entrants indicate low barriers to entry and the ease with which airlines can switch leasing suppliers, which may help the companies convince regulators that their ability to raise prices is limited, Bloomberg Intelligence analyst Aitor Ortiz wrote in a report. At the same time, analysts are already predicting a wave of follow-on consolidation among smaller jet lessors that would struggle on their own to compete with a behemoth like AerCap-GECAS. AerCap expects to seek regulatory signoff in 20 countries and "we are confident that we should be able to get those approvals,” CEO Aengus Kelly said on a call to discuss the deal. “Obviously we wouldn't be going ahead if we weren't confident in that.”
Based on antitrust precedent and current legal standards, that seems like a reasonable conclusion. There’s a bigger question, though, as to whether consolidation like this is actually good for the economy — and it's a question the Biden administration seems keen on addressing. The Federal Trade Commission’s acting chairwoman Rebecca Kelly Slaughter and likely nominee Lina Khan have both called for a bigger-picture approach to analyzing the effect of mergers on competition, innovation and the broader economy. In Congress, Senator Amy Klobuchar, a Minnesota Democrat, has proposed legislation that would lower the bar for proving competitive harm from large mergers and tighten the rules around vertical integration. The spark for this antitrust rethink is the technology sector, but the FTC sent a clear message this week that it’s eying a broader overhaul. Slaughter proposed a review of regulators’ process for approving pharmaceutical mergers amid soaring drug prices and concerns about anticompetitive behavior. It’s worth wondering whether the aerospace sector might get its day under the microscope, too.
For all the recent consternation over the power wielded by internet giants, Big Aerospace’s efforts to use market dominance as leverage aren’t that dissimilar in practice from the tactics employed by Facebook Inc., Amazon.com Inc. and Alphabet Inc. that have drawn such political ire. Boeing Co. is one of the more extreme examples. The company created an effective duopoly with Airbus SE when it acquired McDonnell Douglas Corp. in 1997. It tried to bully Canada’s Bombardier Inc. out of the commercial aerospace market by getting the Commerce Department to slap tariffs on its jets in 2017. Before the 737 Max crisis, Boeing was also moving aggressively to bring more of its supply chain in-house, including the $4.25 billion purchase of parts distributor KLX Inc. in 2018 and joint ventures for aircraft seating and auxiliary power units. The company’s attempt to take majority control of Brazilian jet-maker Embraer SA’s commercial business did run into tougher-then-expected scrutiny from European regulators, but Boeing walked away amid the financial challenges of the pandemic, leaving the outcome of that review a question mark (the US signed off).
Then, of course, there was Boeing’s infamous “Partnering for Success” program, under which the company demanded aggressive cost cuts from suppliers who had little choice but to comply lest they be frozen out of one half of the aerospace manufacturing duopoly. In an interview with trade publication the Air Current earlier this month, Emirates Airlines President Sir Tim Clark drew a connection between Boeing’s relentless focus on shareholder returns and the two fatal crashes of the Max: “Many of the suppliers working with both Boeing and us on the same program would come to us and say, ‘We’re absolutely on our knees.’ These people are demanding 15%, 20% reduction in our costs. Of course, I didn’t see that [reduction] in the prices [for aircraft] by the way, but it was this kind of culture.”
The seemingly never-ending series of crises engulfing Boeing of late may have upended this power dynamic, but its twisting of the screws has already forced the supply chain to bulk up as well: United Technologies subsumed Goodrich Corp. in 2012, then acquired the combination of Rockwell Collins Inc. and B/E Aerospace Inc. in 2018, and finally merged with defense contractor Raytheon Co. last year — largely without issue. I was struck by this comment about the AerCap-GECAS deal from Alexandre de Juniac, the outgoing head of the International Air Transport Association: “You have two aircraft manufacturers, you have two or three big [equipment manufacturers], monopolistic air traffic control, monopolistic airports and now we have monopolistic lessors,” he told the Financial Times. “Lovely.”
De Juniac left airlines off that list — perhaps because IATA is an airline industry trade body — but that’s a sector where antitrust enforcement has arguably been lax, too. Depending on how you define the category, there are essentially four major US airlines after years of consolidation. It went relatively unnoticed amid the carnage of the pandemic, but American Airlines Group Inc. last year announced a marketing alliance in the US. Northeast with JetBlue Airways Corp. that will allow the carriers to book travelers on each other’s flights and link their rewards programs. The partnership was blessed by the Transportation Department in the final days of the Trump administration, but the Justice Department and some states are conducting further investigations into whether the alliance unfairly limits competition. The partnership is “quasi-consolidation,” William Swelbar, an aviation consultant and a director at the airline Hawaiian Holdings Inc., said in an interview. “That relationship is a lot bigger than a press release. There’s a lot of power. I’m absolutely amazed that it skated through the way it did.”
It's not a coincidence that consolidation has spread up and down the aerospace food chain. Once one corner of the market becomes consolidated, suppliers and customers feel compelled to get bigger as well just to maintain negotiating power. And it's often not in the consolidated companies' interest to put up much of a fight over subsequent dealmaking. For one, it's a tad hypocritical. Aerospace is also a tough business that requires enormous amounts of capital in the best of times and even more in a crisis such as the pandemic. With the AerCap-GECAS combination, for example, the instinctive reaction is that the deal would be bad for Airbus and Boeing. But the planemakers “would much prefer to have a customer base that is well-financed and stable, versus a plethora of small airlines and leasing customers that cannot survive through a downturn like 2020,” Vertical Research Partners analyst Rob Stallard wrote in a report. They may even see an opportunity to secure benefits for themselves in exchange for their blessing; Boeing memorably withdrew its opposition to United Technologies’ takeover of Rockwell Collins after the companies agreed to participate in the “Partnering for Success” cost-cutting initiative, effectively ensuring a share of the deal's targeted savings would flow to itself.
You have to go back to the early 2000s to find examples of major aerospace mergers that were successfully blocked by the US for antitrust reasons, according to data compiled by Bloomberg. The Justice Department scuttled a proposed merger between the former parent of United Airlines Holdings Inc. and the former US Airways in 2001. That same year, though, it approved GE’s pursuit of fellow aerospace supplier Honeywell International Inc., a deal which ultimately failed because of objections from European regulators. Is that healthy? One former executive doesn’t think so: “We have fewer and fewer companies and therefore less and less competition and fewer people making all the decisions. That's a very bad thing for the vibrance of the economy,” former American Airlines CEO Bob Crandall said in an interview. “The problem is we've simply abandoned common sense in the US,” he added. “We have antitrust laws but we don't enforce them.”
Bloomberg
