Synergies, Sanctuary & Survival

In reaching a tentative agreement between pilots at Delta Airlines and Northwest Airlines, the merger to form one of the worlds biggest airlines amidst a backdrop of surging wholesale fuel costs and ticket increases, is the wider industry going to either sit up and take notice or perhaps even initiate a few moves of their own to secure their long term survival?

Even as the intended pace of the Delta-Northwest merger quickens, by no means is this marriage one that will either be a match made in heaven or whether it will stay the course.

Peering over to US Airways merger with America West, the internal wrangling that has been a constant factor mars whatever projected synergies the two had into a botched love affair with neither party being entirely satisfied with the other. Equally concerning is the slow rate at which major US carriers have collectively woken up to realise that they cannot forever rely on older airplanes.

In a “catch-22” situation, without new airplanes, airlines can’t cut costs and they can’t make money using gas-guzzling aero-relics. Why some of these carriers were not better prepared financially to make allowances for fleet renewals is anyones guess - Continental Airlines, while rolling back capacity and removing older 737’s from its fleet seems to have by far the best business model in the USA.

Image courtesy of Rick Schlamp

At the same time, it is taking delivery of new 737’s and has orders for the hot selling Boeing 787 Dreamliner too. Its recent announcement to join the Star Alliance and co-operate with ailing United Airlines is somewhat bizarre to say the least, however the carrier has shown that diligence and proactive management can indeed negate the desire to merge in times of uncertainty.

Back in the late 1990’s, the red tape bureaucrats resident in Brussels were up in arms over Boeing’s big deals with the likes of American Airlines and Delta Airlines. Yet looking back in hindsight, it is a wonder why more deals on this scale were not seen given the desire to secure long term airplane renewals with the flexibility to switch models to demand and various markets. Surprising then, that a decade on from these mega-deals, a plethora of US carriers languish behind their Asian, European and even Latin American counterparts on a variety of fronts.

So what’s the answer?

Well, one solution emanated from former American Airlines CEO Bob Crandall when he spoke recently at the Wings Club in New York.

He advocated revising U.S. bankruptcy laws “to deprive failed carriers of the right to use lower costs to undercut the fares offered by their more prudent rivals.“

Not many airlines can rely on such protectionism outside of the USA.

In being a vocal proponent for the EU-US Open Skies deal, many US-based airlines have to wake up and smell the coffee that not everyone is entitled to sanctuary. Once we see the demise of at least one major US airline, synergies may present themselves more clearly to those that survive.

4 comments July 1st, 2008