Merge, Buy Or Die

April 15th, 2008

After viewing Delta Airlines as the most likely candidate to spur a new round of mergers in the US airline industry, observers now keenly wait to see the next couple making their way down to the alter.

(Check out their new combined website right here.)

In announcing the merger with Northwest Airlines, the soon to be world’s largest airline will reap the combined benefits of operating into places like London Heathrow Airport under the recent Open Skies deal that came into force. Standing independently, neither Delta or Northwest were ever likely to make serious inroads into expansion at Heathrow without either buying up slots at extortionate prices, or taking over a smaller rival such as bmi and acquiring slots that way.

Already, unions are against this new deal. “We are confident the transaction will go forward and be approved,” says Northwest CEO Doug Steenland.

Last years failed hostile takeover bid from rival US Airways may be seen as the catalyst for Delta to seek a willing partner and enact major change for the face of the US airline business.

Images courtesy of Delta Airlines

Whatever the rights and wrongs of US Airways’ moves and overtures toward Delta, their own merger with America West has been nothing short of volatile. On the face of it, US Airways promised much with its merger with America West yet has delivered very little.

It is not surprising therefore, to see that in the age of climbing oil prices, airplane fleets getting older and recent maintenance woes, Delta’s ambitions to move beyond the norm since leaving Chapter 11 has shown what can be done if steered in the right direction.

One only look at United Airlines since exiting bankruptcy to see that the airline has made virtually no moves to either address its fleet or cost base, while seeing key markets like that of the USA-Heathrow being opened up to greater competition from both European and USA based carriers.

As part of the SkyTeam Alliance, Delta Airlines, Air France, Alitalia, Czech Airlines and KLM Royal Dutch Airlines gained antitrust immunity from the US Department of Transportation - in effect, they can act as a single carrier for EU-US services.

The pendulum of favour has certainly swung Delta’s way - the bigger issue now is to work towards amalgamating these two legacy carriers and avoid the labour pitfalls that has seen US Airways stagger behind in these times of greater competition, financial uncertainty and increased operational costs.

Just how many US airlines have ceased operations in the last calendar month alone?

ATA, Aloha and everyone’s favourite, SkyBus(t). There’s always the prospect more will follow, particularly since Frontier Airlines embraced protection in Chapter 11 too.

Whether other carriers like Continental Airlines entertain the prospect of alignment with United Airlines remains open to debate. What is no longer debatable is that US legacy carriers now have a simple choice - merge, buy or die.

As questionable as it may be for some of those junk credit rated airlines that have spurred record airplane orders in 2005, 2006 and 2007, the bottom line is that the worlds biggest domestic air travel market is in need of an overhaul.

In contrast to superior products as seen by Singapore Airlines, Cathay Pacific and a plethora of other airlines, those carriers resident in the USA have a lot of catching up to do.

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