Delta Air Lines announced its long-speculated deal to acquire Northwest Airlines Monday, a combination that will create the world's largest airline and could lead to a series of other deals to reshape the U.S. airline industry.
The deal could lead to less competition and higher fares on some routes where the two carriers now compete. But there is relatively little overlap between the current Delta (DAL, Fortune 500) and Northwest systems.
The greater impact on competition and fares could come if other major carriers follow suit and negotiate their own deals in response. Some experts have suggested that several deals could eventually leave three mega-carriers handling about 80% of the nation's air traffic between them.
A deal announcement could open the way for No. 4 Continental Airlines (CAL, Fortune 500) to hold its own merger discussions. Northwest has held a so-called "golden share" of Continental, which allows it to block a deal for its codeshare partner. But it loses that veto by entering its own combination. There has been talk that United Airlines parent UAL Corp. (UAUA, Fortune 500) and Continental are eyeing their own combination.
Consolidation would come at a tumultuous time for the industry. Earlier this month, low-cost airline ATA filed for bankruptcy and said it would cease operations. Aloha Airlines ceased scheduled flights last month. Last week, Frontier Airlines also filed for bankruptcy protection but said it would continue flying during its reorganization.
Also this past week, American Airlines, the unit of AMR Corp. that is the world's largest airline, was forced to cancel thousands of flights due to safety inspections of its MD-80 jets.
The deal has been rumored since late last year amid widespread talk in the airline industry that a round of airline mergers were needed to deal with rising fuel costs and a tougher outlook for earnings.
While figures from the Air Transport Association show the average fares are up nearly 6% in the first two months of this year compared to a year earlier, Energy Department figures show average jet fuel prices were up 55% during the same period. And fuel prices shot up another 20% in March compared to the first two months of this year.
But a Delta-Northwest deal, even if agreed to by both managements, won't bring any cost savings from a combination until late this year at the earliest and probably not until 2009. In fact, it is not certain Delta and Northwest will be able to complete this deal.
United Airlines parent UAL Corp. failed in its attempt to complete its purchase of US Airways that was announced in 2000. Concerns about the impact on passengers and airfares is likely to bring intense scrutiny of this deal from both Congress and antitrust regulators here and in Europe.
Delta and Northwest also could run into trouble with the pilot unions of both companies even though the airlines do not necessarily need the approval of these unions for a deal to go through. Objections from the pilots' unions helped hold up the deal that was first said to be imminent as long ago as January.
But working in favor of approval of the deal by both regulators and the unions is the financial straits faced by both airlines and by the industry as a whole. Delta and Northwest both filed for bankruptcy court protection at almost the same moment in September 2005, and used that process to significantly reduce their capacity and labor costs.
Delta had to fend off a hostile takeover attempt by US Airways in late 2006 and early 2007, just before it emerged from bankruptcy in April 2007. But since that battle, its management has said it was open to the right combination.
Delta posted 5% growth in the number of miles flown by paying passengers last year, which is better than the industry average. In fact, it is the No. 3 carrier by that measure, behind only United and AMR Corp.'s American Airlines.
Still, after making money in its first six months out of bankruptcy, it returned to a loss of $70 million in the fourth quarter in the face of high fuel prices, and has said it expects to lose money in its recently completed first quarter as well.
Northwest, which emerged from bankruptcy in May 2007, had flat traffic last year and essentially broke even in the fourth quarter, posting an $8 million net loss after two quarters of profit. It is forecast to see a bigger loss in the first quarter though.
Northwest was the No. 4 airline in the country when it entered bankruptcy, but it has shaved capacity enough to fall to No. 5. It is just barely ahead of Southwest Airlines (LUV, Fortune 500), the carrier that has helped reshape the industry by devising a lower-cost business model than the traditional hub-and-spoke system used by more established carriers.
In the end we'll have maybe three airlines. They'll give the impression of competition by having multiple brands under one hat, but in the end they'll be like US banks are becoming.
Now, if only Wal-mart, Microsoft, and GM would start their own airlines...