Bid to buy Delta is good news for Atlanta
By RAJEEV DHAWAN
Published on: 01/18/07
The people of metro Atlanta are the clearest winners when you stack up the real benefits and obvious costs of US Airways' offer to buy Delta Air Lines. This may be contrary to what you've heard from op-ed writers, Delta's management and Atlanta city boosters.
Let me start with one very simple but neglected truth about the workings of Atlanta's economy, especially when it comes to the core areas such as Buckhead, downtown and Midtown: Our economic viability is tied irrevocably to the future health of the city's convention business.
A real estate lawyer working in a venerable Midtown law firm is advising a commercial developer on a project in Buckhead that is financed by German investors and uses the services of a downtown architect firm founded by a local university grad. Every link in the chain is dependent upon the regular business flow of the hospitality sector.
Most restaurants would have to shut their doors if it weren't for the out-of-town visitor and the ensuing ripple effect that reverberates all the way from the local clothing boutique to state government coffers. Thus, most businesses (except, to some extent, the headquarters of big firms with a global sales reach) live off the seed capital provided by the hospitality activity.
This is hard to swallow if you think the universe rotates around the axis of real estate activity in Atlanta or if you are a city booster who thinks we are about to become the nanotech capital of the world. The vitality of any region depends on a key activity that generates its ripple affect. However, our standard multiplier models will not do justice to this question: they can tell us only the marginal impact of an additional activity from the hospitality sector, but cannot handle the issue if the sector vanishes overnight.
Just look at the evolution of New Orleans in the aftermath of Hurricane Katrina — an economic experiment that is playing out in real time. That city's attempts to bounce back toward normalcy is suffering from a lot of inimical forces: a lack of law and order (real or perceived is beside the point), a lack of a suitable and readily available work force to work in the hospitality sector and, last but not the least, the inability of airlines to bring in visitors for big events. This lack of airline seats has now become the bottleneck in New Orleans' recovery.
Convention bookers are complaining that they can't funnel their clients to the city as the airlines lack flights to bring in people. The airlines, on the other hand, say they need proof of convention bookings first before committing planes to the New Orleans route. This chicken-and-egg problem will get solved — sooner rather than later, one hopes — but in the meantime it gives us a clear picture as to Delta's importance to Atlanta's economy and viability.
One can build modern arenas, nice affordable hotels, seal the potholes, police the rogue cabbies and provide adult entertainment and fine dining, but if you don't have a bulk carrier or two bringing in people at affordable prices, then all this preparation goes to naught quickly. The transportation sector plays the role of a catalyst in this economic chain reaction.
This brings me to the US Airways bid for Delta. Six months ago, my biggest fear was Delta being unable to restructure on its own and emerge out of bankruptcy, thus leading to liquidation. My immediate focus was the cost of a temporary disruption in travel to local businesses and travelers from Delta going belly up.
This would have caused some lost business deals in the short run and higher ticket prices in the long run as other airlines filled in the vacuum left by Delta's demise. Whether this vacuum would last 15 days or 15 months was the only debatable issue. I hadn't talked about the hospitality angle because the New Orleans chicken-and-egg problem had not developed yet.
As luck would have it, and beyond my wildest prognostication, a suitor has now emerged for Delta. Either Delta will stand on its own, spurred in no small way by a hostile suitor, or it will get bought out. Either way, I can now sleep better at night assured that, come springtime, there will be an airline not only bringing people to already booked conventions but also ensuring future convention activity.
The probability that the lawyer, financier, developer, architect and builder will be able to do that real estate deal is much higher now than it was just a few months ago. The possibility that the majority of Delta employees will remain employed has also shot up, though that can't be said for the ranks of upper management in case of a merger.
Yes, metro Atlantans will surely pay higher ticket prices as excess airline capacity is reduced and Delta restructures or merges, but that's a small cost to incur to stave off the real possibility of an economic meltdown if Delta decided to fold its tent. Subsidies or tax breaks at any stage only pad the pockets of the creditors.
We shouldn't care who owns the airline and where it is headquartered as long as we can get its services with a decent guarantee. That's all that matters, folks. We are the winners in this economic story.
By RAJEEV DHAWAN
Published on: 01/18/07
The people of metro Atlanta are the clearest winners when you stack up the real benefits and obvious costs of US Airways' offer to buy Delta Air Lines. This may be contrary to what you've heard from op-ed writers, Delta's management and Atlanta city boosters.
Let me start with one very simple but neglected truth about the workings of Atlanta's economy, especially when it comes to the core areas such as Buckhead, downtown and Midtown: Our economic viability is tied irrevocably to the future health of the city's convention business.
A real estate lawyer working in a venerable Midtown law firm is advising a commercial developer on a project in Buckhead that is financed by German investors and uses the services of a downtown architect firm founded by a local university grad. Every link in the chain is dependent upon the regular business flow of the hospitality sector.
Most restaurants would have to shut their doors if it weren't for the out-of-town visitor and the ensuing ripple effect that reverberates all the way from the local clothing boutique to state government coffers. Thus, most businesses (except, to some extent, the headquarters of big firms with a global sales reach) live off the seed capital provided by the hospitality activity.
This is hard to swallow if you think the universe rotates around the axis of real estate activity in Atlanta or if you are a city booster who thinks we are about to become the nanotech capital of the world. The vitality of any region depends on a key activity that generates its ripple affect. However, our standard multiplier models will not do justice to this question: they can tell us only the marginal impact of an additional activity from the hospitality sector, but cannot handle the issue if the sector vanishes overnight.
Just look at the evolution of New Orleans in the aftermath of Hurricane Katrina — an economic experiment that is playing out in real time. That city's attempts to bounce back toward normalcy is suffering from a lot of inimical forces: a lack of law and order (real or perceived is beside the point), a lack of a suitable and readily available work force to work in the hospitality sector and, last but not the least, the inability of airlines to bring in visitors for big events. This lack of airline seats has now become the bottleneck in New Orleans' recovery.
Convention bookers are complaining that they can't funnel their clients to the city as the airlines lack flights to bring in people. The airlines, on the other hand, say they need proof of convention bookings first before committing planes to the New Orleans route. This chicken-and-egg problem will get solved — sooner rather than later, one hopes — but in the meantime it gives us a clear picture as to Delta's importance to Atlanta's economy and viability.
One can build modern arenas, nice affordable hotels, seal the potholes, police the rogue cabbies and provide adult entertainment and fine dining, but if you don't have a bulk carrier or two bringing in people at affordable prices, then all this preparation goes to naught quickly. The transportation sector plays the role of a catalyst in this economic chain reaction.
This brings me to the US Airways bid for Delta. Six months ago, my biggest fear was Delta being unable to restructure on its own and emerge out of bankruptcy, thus leading to liquidation. My immediate focus was the cost of a temporary disruption in travel to local businesses and travelers from Delta going belly up.
This would have caused some lost business deals in the short run and higher ticket prices in the long run as other airlines filled in the vacuum left by Delta's demise. Whether this vacuum would last 15 days or 15 months was the only debatable issue. I hadn't talked about the hospitality angle because the New Orleans chicken-and-egg problem had not developed yet.
As luck would have it, and beyond my wildest prognostication, a suitor has now emerged for Delta. Either Delta will stand on its own, spurred in no small way by a hostile suitor, or it will get bought out. Either way, I can now sleep better at night assured that, come springtime, there will be an airline not only bringing people to already booked conventions but also ensuring future convention activity.
The probability that the lawyer, financier, developer, architect and builder will be able to do that real estate deal is much higher now than it was just a few months ago. The possibility that the majority of Delta employees will remain employed has also shot up, though that can't be said for the ranks of upper management in case of a merger.
Yes, metro Atlantans will surely pay higher ticket prices as excess airline capacity is reduced and Delta restructures or merges, but that's a small cost to incur to stave off the real possibility of an economic meltdown if Delta decided to fold its tent. Subsidies or tax breaks at any stage only pad the pockets of the creditors.
We shouldn't care who owns the airline and where it is headquartered as long as we can get its services with a decent guarantee. That's all that matters, folks. We are the winners in this economic story.
