After airline stocks took a nearly unprecedented beating during the last few weeks on concerns about higher fuel costs and a falling economy, they rallied like mad yesterday. Some of its may be that the selling was a bit overdone. But, the biggest cause was news that Delta (DAL) was considering a merger with Northwest (NWA) or United (UAUA).
Mergers in the airline industry are often used to keep one or the other carrier out of Chapter 11. The courts have been the refuge of the flying business for decades. If a carrier can’t pay its bills, it goes into bankruptcy. When things get better, it comes out again. Creditors and unions usually get the short end.
The assumption that putting two big airlines together will save money is undoubtedly true. Compared to overall costs, those savings are probably very, very modest. Running Northwest costs about $12 billion a year. So much of that goes into fleet costs, fuel, and labor that there is not much to cut. Employees can be pushed out over time, but the unions are sensitive about it.
The largest single problem with merger two carriers is that consumers already hate airlines. The quality of service keeps dropping. They don’t serve free peanuts anymore. The planes are dirty.
The head of US Air recently admitted that its merger with America West had been a train wreck of the first order. Reservation systems don’t work. The employees of each company dislike one another. To put a point on it, the new company has all the hallmarks of an operator that is driving customers to rival airlines.
A merger between Delta and another large airline is not going to solve any problems. The modest savings of the combination will likely be offset by customer defections due to the poor service that comes from integrating two big carriers.
Like many other business proposals, it looks good on paper.
Douglas A. McIntyre
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