What would Delta-Northwest merger cost flying public?
The deal could lead to further airline consolidations.
SOURCE: Bureau of Transportation Statistics/AP
Skepticism about the proposed consolidation of Northwest and Delta airlines is growing by the day.
The merger, which has been talked about for months and was finally given a green light by the companies' boards on Monday, would create the world's largest airline. If approved by regulators, it's also expected to unleash an unprecedented round of consolidation in the aviation industry that could cut in half, from six to three, the number of major network carriers that serve the nation's traveling public.
Aviation industry watchdogs and Wall Street analysts are eyeing the deal from different perspectives.
In general, Wall Street analysts favor the merger as a way to increase efficiencies and bolster the companies' financial stability as they cope with record fuel prices and international competition.
Consumer advocates counter that the merger will decrease aviation competition and bring in even worse service and higher prices. But there is one thing that both advocates and opponents agree on: If this merger is approved, it has the potential to bring about a major transformation of America's aviation system and federal regulators must be ready to address that.
"We are at one of those defining moments where a tectonic change is occurring," says Robert Mann, president of R.W. Mann & Co., an aviation analyst in Port Washington, N.Y. "We have to look at what this portends for an industry that is about to change radically."
Congress is already planning hearings on the deal. The chairman of the House Transportation and Infrastructure Committee Rep. James Oberstar (D) of Minnesota criticized the Delta and Northwest merger when it was first rumored three months ago.
Representative Oberstar remains concerned that if the merger is approved, it will spur other major carriers to consolidate to compete with the bigger carrier.
"He feels that will necessarily bring about a degradation of service, loss of competition, higher fares, and a loss of jobs," says James Berard, communications director of the House Transportation Committee. "This is for the stockholders. It's not necessarily going to benefit the employees and it's not necessarily going to benefit the traveling public."
The two airlines say this marriage between the Minnesota-based Northwest with its Atlanta-based competitor Delta will be a boon for customers, ushering in better service, more choice, and "competitive fares." They're calling it the nation's "Premier Global Airline." At a press conference Tuesday morning, Northwest CEO Douglas Steeland and Delta CEO Richard Anderson praised the deal as one that will bring about "a seamless, global network" that will create the ability to compete with other international, global airlines.
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.
"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.