High fuel prices and the possibility of recession have sparked talk of a new round of mergers in the economically fragile airline industry.
For weeks, reports about a proposed Delta and Northwest Airlines deal have prompted aviation analysts to also contemplate the possibility of a merger between Continental and United. Such consolidation is supposed to bring about increased efficiencies as it helps improve the carriers' bottom lines. But the Northwest-Delta deal is hanging in the balance as both carriers' pilots demand that their seniority rights be protected in any deal.
That's stalled the talks. But Wall Street is speculating that the impasse is a negotiating tactic and will be short-lived. If a new round of consolidation does occur, the number of major network carriers could shrink from six to four or even three.
That has consumer and business-travel advocates lining up to fight any proposed deal. They argue that despite the short-term profits to be made on Wall Street and the improved bottom lines for carriers, customers will lose in the long term.
"Most people in the traveling public think we've hit the floor in terms of customer service in the airline industry, with the delays and congestion," says Kevin Mitchell, chairman of the Business Travel Coalition, which represents corporate travel managers. "We're going into the basement if this happens. Forget the floor."
Airline mergers have a very mixed history of success, in part because they entail combining companies with different cultures, operating systems, seniority arrangements, and union agreements. They also have to be approved by the Justice Department to ensure that industrywide competition isn't lessened and prices don't increase for consumers.
In 2001, after US Airways and United spent more than a year on a merger plan acceptable to Wall Street and their labor unions, Justice Department officials nixed the deal as bad for competition. Two years ago, US Airways did merge with smaller America West. The combined airline was supposed to create all kinds of efficiencies. But to a large extent, the two companies are still operating as separate entities. That's because the pilots at each airline have not worked out an acceptable way to integrate their seniority lists. Seniority determines not only pay, but also schedules, vacations, and which planes a pilot gets to fly.
Finding a way to merge pilot seniority lists is the main stumbling block in the proposed Delta and Northwest merger. Northwest's senior pilots tend to be older. At Delta, pilots with equivalent seniority tend to be younger. Finding a way to integrate those groups will be key to a successful merger.
"That's where you get the economies on the scheduling side," says Richard Golaszewski, executive vice president for GRA Inc., an aviation consultant in Jenkintown, Pa. "If you can't get that or don't get it right away, a lot of the savings don't materialize."
The leaders of the Delta and Northwest pilot groups are expected to resume negotiations in the near future. Even if a deal is reached, consumer advocates and antitrust experts argue that the efficiencies to be gained will be minimal because the airlines already cooperate extensively on things like their ground and baggage operations. They say that consolidation will lead only to more crowded planes, fewer consumer choices, and higher prices. They're also worried that if a Northwest-Delta merger is approved, it will prompt other mergers.
"If other airlines say, 'This merger should be justified because everybody's getting bigger,' that's just not good policy," says Diana Moss, vice president of the American Antitrust Institute in Washington. "The fewer carriers you have, the more opportunity you have for anticompetitive coordination."