Airline Consolidation

How Could Proposed Changes Affect Travelers?
Rumors of proposed mergers, acquisitions, and consolidation of air carriers have long spawned speculation in the travel industry of whether or not these combinations will actually take place and how those activities would affect the traveling public. Industry analysts tell us that the time is now right and that 2008 could be the year of consolidation.

In January of this year, The New York Times reported that executives at Delta Airlines will seek approval from the National Transportation Board to initiate detailed merger talks with United Airlines and Northwest Airlines. The main reason that Delta CEO Richard Anderson gave for his request to start talks is that the two airlines’ route networks complement those of Delta.

Atlanta-based Delta, the nation’s third largest carrier, is strong in the eastern U.S. and across the Atlantic while Chicago-based United and Minnesota-based Northwest, ranked number two and five respectively, are strong across the Pacific.

If the Board approves Delta’s request, the proposed merger would create the largest airline in the U.S., a position currently held by American Airlines which is based in Fort Worth, Texas. The Delta consolidation could also lead to similar efforts among other U.S. carriers.

Soaring fuel costs and intensifying competition among American carriers in recent years have led many airlines to consider consolidations, especially since the drastic hit the airlines took after 9/11. In only one instance, however - the America West-US Airways deal in 2005 – have negotiations resulted in a merger. Analysts point to many different reasons for the unusual difficulty of a successful merger, chiefly the federal scrutiny involved, resistance from the unions, and the high volatility of the airline industry.

Delta, however, has for months eyed such a consolidation. In 2007, the airline established a special committee and hired advisers to explore numerous strategic options, including a merger.

Approval of the proposed Delta merger appears right now to be very uncertain. The Times noted that officials at each of the three airlines involved declined to comment specifically on the proposal to the Board or on their opinions on the prospects for a merger.

Even if the Board approves Delta’s request for approval for talks to begin, Delta’s own board would need to sign off on the move. Officials point out that approval would only be permission to start formal talks. Negotiations could possibly lead to nothing and regulatory blessings from the NTB would still be required.

If approved, however, the merger’s impact on the industry and on the consumer could be dramatic. Fuel, for example, is the air carriers’ largest single expense today, especially with crude oil prices again flirting with the $100 per barrel benchmark. Consolidation could allow airlines to eliminate redundant airport hubs and overlapping routes. This would allow for an improved competitive position against foreign carriers.

Travelers could see a change in the industry landscape as once-familiar hubs might disappear. Would fewer hubs lead to more airport congestion and longer lines? And would an improved competitive position among the newly created mega-carriers lead to higher ticket prices?

We’ll be watching.