24 April 2008 - April 2008 will be remembered as a watershed month in the histories of Delta Air Lines and Northwest Airlines, and indeed the entire domestic and global airline sectors, should the carriers' conditional antitrust immunity with European partners and proposed merger come to fruition.
The former appears more likely than the latter, certainly in the short term, after the U.S. Department of Transportation gave the public until this week to object to its decision to approve transatlantic immunity for SkyTeam members Air France, Alitalia, Czech Airlines, Delta, KLM Royal Dutch Airlines and Northwest. If finalized, that approval would free those airlines to coordinate pricing, scheduling, distribution and information systems, as well as pool costs and revenues and promote "metal neutrality" on transatlantic routes.
The merger proposal affects both the domestic U.S. and international markets. If approved by regulators and shareholders--and not scuttled by Northwest's angry pilots union--the transaction would create a combined carrier called Delta, headquartered in Atlanta and led by current Delta CEO Richard Anderson. It would generate $35 billion in annual revenue--making it the world's largest commercial airline.
The two carriers heralded their proposed union as "pro-competitive" and "complementary," designed to create a financially stable and stronger global competitor. Combined, it would fly to about 400 destinations in 67 countries--including "6,000 new city pairs"--with a fleet of 1,400 aircraft.
"This really does, for the first time in the U.S., create an airline that has breadth and scope of service around the world," Anderson said. It would be "the second largest to Asia, largest to Japan, largest to the U.S. and Canada, second largest in Latin America, and the largest to Europe, Africa, the Middle East and India."
Air Transport Association chief economist John Heimlich during an Association of Corporate Travel Executives webcast this week said Delta and Northwest are attempting to catch up with carriers in Europe and Asia, which already have engaged in consolidation. "At today's fuel prices, restructuring is clearly of interest to the carriers, especially in terms of having the scale to compete with their foreign rivals to attract corporate volume agreements, frequent flyer loyalty, etc., that you cannot fully do with alliances."
Having such scale opens (or re-opens) many possibilities for the carriers. For example, Northwest's domestic operation is "not optimally sized to support those great Asian assets," said NWA president and CEO Doug Steenland, referring to the carrier's Pacific operations. "Years ago, we discontinued service from Tokyo to [New York] JFK. Now, because of the strong presence Delta has at JFK, we're going to be able to relaunch nonstop service in the JFK-Tokyo market."
But contrary to what many industry observers would advise, the combined entity would maintain "all hubs" in the United States, including smaller ones in Cincinnati, Memphis and Salt Lake City. "This merger is not predicated on domestic capacity rationalization," said Delta president and CFO Ed Bastian. "The hubs we have today are self-sufficient and profitable."
Long seeking deeper domestic capacity cuts to help the airline industry weather another challenging period, Wall Street analysts rejected the notion that the airline need not close hubs. "We have little doubt that smaller hubs will be deemphasized," according to a research note issued by UBS analyst Kevin Crissey. "There simply are too many hubs," said Credit Suisse analyst Dan McKenzie, speaking this month during an ACTE forum.
"Unfortunately, by the time Delta and Northwest consummate their marriage (if at all) and potentially revisit their aversion to hub closures, industry losses are expected to have escalated," according to JP Morgan Securities analyst Jamie Baker, who ascribed an "80 percent probability" to the deal closing by next year's first quarter.
Travel Buyer Impact
Northwest on its Web site said the combined airline "will maintain its agreements with valued corporate partners of both airlines ... All existing sales agreements will continue to be honored according to their terms and conditions."
Looking ahead, TRX vice president of strategic initiatives Scott Gillespie said travel buyers should expect "more harmonious fare movements, probably in the upward direction," as well as capacity reductions in overlapping hub-to-hub markets and an improved negotiating position for an enlarged Delta.
But based on a continuation of relative capacity levels, Gillespie said "the degree of [negotiating] limitation facing buyers is certainly not severe, and it may not even be significant" since there is little network overlap, which "won't change typical leverage from a pure market share perspective." However, he suggested that fewer suppliers in smaller markets could have "longer-term consequences" for buyers.
A first-quarter survey conducted by the
National Business Travel Association showed mixed perceptions regarding a potential Delta-Northwest merger. Fifty-three percent of 207 buyers expected a better international route structure, but a plurality of respondents expected worse access to smaller markets, worse flight schedules, worse customer service and worse corporate account management.
Amadeus director of airline distribution David Doctor used the Air France-KLM merger as an example of the potentially positive developments for the corporate travel community. "They made their products a lot more consistent, as well as their policies toward the corporates," he explained. Moreover, the "very tight codeshare environment" Air France and KLM created "would be difficult to do unless you merge, because the amount of technical setup needed to make that work is quite complex--and we know that because we have had to supply it."
Delta and Northwest executives expect the merger to close by year-end.
In the meantime, speculation on additional M&A in the United States is rampant. Continental Airlines is free to pursue any deal it likes now that it has redeemed a "golden share" previously controlled by Northwest. That share gave Northwest a say over Continental's future, but with Northwest entering a definitive agreement with Delta, Continental was entitled to redeem it.
Although mainstream press reports have identified United as a Continental merger partner, JP Morgan's Baker sees "considerable merit to a United-US Airways combination," including some degree of fleet commonality and no alliance complications. Both are part of Star Alliance. "United was interested in America West in 1998, US Air in 2000; today, both are available under one roof," Baker wrote. "An integrated United-US Airways management structure could potentially be more committed to supply cuts and hub rationalization than a Continental-United team."
SkyTeam Gets Preliminary Immunity Nod
On the global scene, SkyTeam's conditional antitrust immunity--based around a joint venture between Delta, Northwest, Air France and KLM--likely would precede additional alliance integration. A oneworld alliance request for antitrust immunity--covering American Airlines, Iberia, Finnair, Malev Hungarian Airlines and Royal Jordanian Airlines--still is pending at the U.S. Department of Transportation.
While that does not include oneworld founder British Airways,
AA and BA may be considering another run at securing their own antitrust immunity. Previous attempts were stymied by the price regulators demanded: hundreds of take-off and landing slots at London Heathrow Airport to allow for greater competition. AA CEO Gerard Arpey last week during a conference call with analysts said, "Our competitors have found a way to access the Heathrow market, so we think that letting that play out, letting regulators see that there is access, will help our case. Speaking from American's perspective I think there will be an appropriate time to cross that bridge."
"It will be interesting to see what American Airlines and British Airways do, and how this may give SkyTeam a stronger platform to go after multinationals with renewed vigor--giving Star Alliance a run for its money," added TRX's Gillespie.
DOT said the SkyTeam partners must abide by certain conditions and implement their planned joint venture within 18 months. In explaining its proposal to approve the alliance's application, DOT concluded that nonstop market shares claimed by transatlantic competitors do "not change significantly as a result of this transaction" and that the competitive landscape does not change "to any significant degree."
At press time, DOT had posted no new comments from parties opposing its tentative approval. The deadline passes this week. Previously, only American formally objected to SkyTeam's ATI request.
Meanwhile, the European Commission continues its examination of SkyTeam's plans for an immunized alliance. To win EC approval, the airline partners in October committed to surrendering slots at certain European airports and forming interline agreements with new-entrant carriers.
