What would Delta-Northwest merger cost flying public?
The deal could lead to further airline consolidations.
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That's particularly important, they argued, in light of the record high oil prices. Fuel is now the single largest expense for Delta and Northwest. And it's managed to erode most of the financial benefits each company garnered when they restructured and emerged from bankruptcy last year.Skip to next paragraph
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"Since 2001, the US airline industry has shed more than 150,000 jobs and lost more than $29 billion," says Mr. Anderson. "Today's announcement stands in stark contrast to that as we build an airline with a resilient business model that is better able to withstand the volatility of fuel [prices] and manage effectively the ups and downs of business cycles."
But some aviation analysts contend that the benefits for consumers will be slim to none, and the only real winners will be stockholders and hedge funds that invested in the airlines. They point out that both Delta and Northwest are already large, efficient airlines that streamlined their systems when they came out of bankruptcy. They doubt that the estimated $1 billion in "annual synergies" (savings from increased efficiencies), which the companies tout as another reason to merge, will materialize.
"Neither of these companies has a lot of fat in their systems and both of these airlines are already huge, so it's not like they're going to realize all of these economies of scale," says Hubert Horan, an aviation consultant in Phoenix. "The savings that are there are trivial especially compared to the cost of fuel."
Mr. Horan also says the real drivers in this merger are Wall Street analysts and hedge funds that invested heavily in the airlines over the past few years. What they're looking for is a "short-term spike in the stock price."
"These hedge funds made big gambles on the airlines without knowing much about the business," says Horan. "Now they're putting huge pressure on these management groups to merge so that it will drive up the price of the stock and then they can get out without that much of a loss."
Consumer advocates like Ed Perkins agree that the touted efficiencies and economies of scale may not come about and that the real winners will be hedge funds. "There's been a lot of smoke blown about how this will benefit consumers, but as far as I'm concerned that's pretty much blowing smoke," says Mr. Perkins who was the founding editor of Consumer Reports Travel Letter.
But he adds that he doesn't necessarily believe that a Delta/Northwest merger on its own would hurt consumers, either. "There are enough players in the industry that even a combined Delta and Northwest would not have a heck of a lot more pricing power," says Perkins. "Unfortunately, I think this is just a bunch of fast-buck people trying to make a fast buck, and they don't really care much about what happens to consumers or to the airlines."
The airlines' CEOs, who also would benefit from a spike in the stock prices, disagree. "The goal here is to create a stronger foundation and a more secure business so the airline is better able to invest in product enhancements and better able to invest in training, all of which will translate into a better customer experience," says Mr. Steeland.
The merger still must be approved by the Department of Justice and other federal regulators.