If Delta merges: fares up, fewer seats
US Airways' takeover bid might not help passengers, but it could improve the industry's bottom line.
Whenever a big airline deal is proposed, the first question that arises usually is: What will it mean for the flying public?Skip to next paragraph
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In the case of US Airways' announcement this week that it hopes to acquire bankrupt Delta Air Lines for $8 billion, the simple answer is: higher prices.
That's because the merger would cut capacity by about 10 percent – in other words, passengers would have 10 percent fewer seats to choose from when they fly, which usually drives up prices. That would be good for the overall industry's bottom line.
But the dynamics behind this proposed merger, and the still precarious state of the nation's recovering aviation industry in the post-9/11 world, make the ramifications for the public far less clear. Add to that, it's far from a done deal: It still needs approval from the bankruptcy courts and the Justice Department. As a result, analysts have starkly different assessments of "just what this will mean."
One camp thinks it's the best thing to happen to the industry bottom line since jet fuel prices dropped below $70 a barrel. That's because it will cut capacity. "Anytime you take capacity out of the industry, I would view it favorably," says Helane Becker, an analyst at the Benchmark Company in New York.
But a different school of thought says that with planes already flying 80-to-90 percent full, overcapacity in the industry is no longer a major issue. After all, the traditional, so-called legacy carriers are making money even with oil at $60 a barrel.
"Forget the capacity canard: Everything is already full. There's already a resurgence in the industry," says Michael Boyd, president of the Boyd Group, an aviation consulting company in Evergreen, Colo. "If we take another 10 percent capacity out, that means airlines will carry fewer people and charge them more. Congress will just love that."
Then, of course, there's the question of what it will mean for competition. US Airways contends the combined company, which would become the "New Delta," would be more efficient and thus a better competitor in the recovering marketplace. The combined operations would save $1.65 billion a year by doing away with duplication, consolidating information systems, and reducing overhead, it says. And all those efficiencies can be achieved without cutting a single destination that's currently served by either airline, according to Doug Parker, US Airways chairman and chief executive.
"Even with a 10 percent reduction in capacity, all existing U.S. destinations served today by US Airways and Delta will remain part of the new, improved network," Mr. Parker wrote to Delta's chairman in an open letter released Wednesday morning. "Consumers will have the advantages of a larger, full-service airline with the cost structure of a low-fare carrier, and the communities we serve, as well as those Delta serves, will have access to a wider range of network options."
Some analysts like Mr. Boyd doubt those touted savings can be achieved. He also thinks the airlines' route structures – which are similar, particularly in the South and East, where they own the competing Northeast corridor shuttles – could cause problems at the Department of Justice.
"It doesn't make any sense at all. The synergies aren't there like they're claiming," says Boyd. "And the DOJ might turn this down in a heartbeat, because it just decimates competition, particularly in the Deep South."
Other analysts also question whether the cut in capacity brought about by the merger would result in anything but a short-term gain for the industry as a whole, particularly if there's a recession next year. In that case, the majors might start increasing capacity to fend off competition from low-cost carriers, which have continued to expand their market share, says Kevin Mitchell of the Business Travel Coalition in Radnor, Pa.
And then, the industry could find itself right back where it is today: charging prices that are so low it is just barely able to make a profit.
Another question is how easy it will be to make one company from two that have very different corporate cultures. There are seniority lists to merge and very different unionized workforces to integrate. The companies even fly different planes.
"This is not an industry where mergers often go smoothly, even when both parties are willing participants," says Clint Oster, an aviation expert at Indiana University in Bloomington. "It's hard to believe that it's not going to be very difficult to do in this case, particularly because it appears to be more of an equivalent to a hostile takeover."
But other analysts, who believe next year will be a good one for the industry, say the merger will help consolidate what is still a fairly fragmented industry. They also believe that higher prices brought about by a merger not only are necessary, but could be here to stay.
"If you compare by historical standards, we're still flying very cheap," says Ray Neidl of Calyon Securities in New York. "Longer term, if you can continue to get some of the peripheral capacity out of the system, it will give [the majors] even stronger pricing power."
In the end, all the analysis could be academic. US Airways still has to convince Delta's creditors and a bankruptcy judge that a merged company could do better than Delta alone. It also has to win approval from the Department of Justice, which frowned on a merger between US Airways and United just a few years ago.