On April 14,Delta Air Lines and Northwest Airlines announced a $3-billion merger that is sending ripples through the airline industry. In the wake of this agreement, it is expected that other airlines could forge similar deals, leading to concerns about a new monopolistic air system with less service, higher fares, and more frustration for passengers.
With airlines facing huge losses due to increasing fuel chargesfor every penny per barrel that fuel costs go up, airlines stand to lose as much as $200 million annuallyand a general economic slowdown, cost-cutting strategies are at the forefront of every company's minds. For Delta and Northwest, a merger would save the companies an estimated $1 billion a year. And in a time where smaller airlines are declaring bankruptcy and ceasing operations (see April 21 MN cover story), and the number one airline is reporting losses of $328 million in just the first quarter of this year, there's no denying that an extra $1 billion could be key to keeping both airlines in the sky.
The all-stock Delta-Northwest transaction, with a combined enterprise value of $17.7 billion, would leave the newly formed companyto be called Deltawith more than $35 billion in aggregate annual revenues, a fleet of nearly 800 planes flying to 390 destinations across 67 countries, and a workforce approximately 75,000 people strong. Branding itself as a global airline, the merged company would marry Delta's strong presence in the Southeast, New York, Latin American, and European markets with Northwest's dominance in the Midwest and Pacific Rim.
"By combining Northwest and Delta, we are building a stronger, more resilient airline that will be a leader in providing customer service and value," said Doug Steenland, president and CEO of Northwest.
Getting Passengers Aboard
Despite Delta and Northwest's sunny outlook, customersincluding meeting planners-are concerned about what the deal will mean for them. Fare hikes, already on travelers' minds due to fuel surcharges and more capacity on planes, are the biggest concern, with fewer options in the marketplace. With the Delta-Northwest merger, however, airline consultant Darryl Jenkins does not expect resulting price increases because the two airlines only fly about a dozen of the same routes.
"There are only fare increases if a tremendous amount of capacity is removed," explained Jenkins, who has worked with both Northwest and Delta for more than 20 years and advised a third-party consultant during merger talks. "This merger won't factor in because there is so little overlap."
Another concern is that smaller cities will lose service, but Delta and Northwest executives have said that they have no intention to close any hubs or cancel any routes. In fact, they claim that smaller communities will benefit from their new global reach, with more than 130 of these destinations getting access to international travel.
The company has also tried to allay meeting planners' fears by stating that all previously negotiated contracts will be honored. However, said Jenkins, those contracts will most likely be renegotiated next year. If the new Delta focuses on attracting global corporationswhich is highly likelyplanners for small and midsize companies may have less leverage during the renegotiations. Costs could go up even more if other airline mergers occur.
"It's difficult to see how this could be a positive thing for passengers," said Claes Fornell, founder of the University of Michigan's American Customer Satisfaction Index (ACSI).
Obtaining Flight Approval
In order for the merger to be completed, shareholder approval is required. More importantly, it must pass before the Department Of Justice, where an antitrust review could take six to eight months. Many experts expect that the deal will go through, despite concerns of lawmakersmainly Democratswho have come out against the deal and its potential effects on the airline industry as a whole.
Senator Herb Kohl (D-WI), chairman of the Senate Antitrust Judiciary Subcommittee, said that the group would hold hearings on the impact of the mergerand further airline consolidationon competitors and consumers.
"While we understand the financial pressures under which the major airlines have been operating, it is nonetheless also vital that this deal does not lead to fare increases and service reductions," he said. "We are especially concerned with the consequences of this deal for travelers in small and midsize markets, many of whom already have the fewest choices for air carriers today."
Merger insiders have brushed those concerns aside: "Approval should be easy because there is so little overlap," said Jenkins. "There will not be many anti-competitive or monopolistic routes formed."
Jenkins also noted that the timing of the merger means that it will be reviewed under the Bush Administration, which is more amenable to big business than a potential Democrat-led alternative.
Cleared for Takeoff?
The biggest-and perhaps most alarming-implication of the merger, if approved, is the wave of mergers that may follow. It has been widely speculated that United Airlines and Continental Airlines, which have openly explored the idea of merging in the past, will forge a similar deal. Continental previously resisted merger attempts, but chairman and CEO Larry Kellner and president Jeff Smisak released a message to the company's employees a day after the Delta-Northwest announcement that left the door open to possibilities.
"As we've said repeatedly for more than a year and a half, our preference has been to remain independent as long as the competitive landscape remained the same," the letter read. "However, the landscape is changing. We will review our strategic alternatives and make sure that we remain a strong long-term competitor."
Should a deal be in the works, it likely would move at an accelerated pace so that it can be reviewed simultaneously with the Delta-Northwest merger plan by the Justice Department. It is expected that a Continental-United merger would have more effect on passengers due to the carriers' service overlap and the monopoly the company could hold over certain routes.
It could be almost a year before the dust settles, but it's clear that economic factors are forcing the airline industry to adapt.
Originally published May 5, 2008