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 this week. Some of it may be that the selling was a bit overdone. But the biggest cause was news that Delta (NYSE: DAL) is considering a merger with Northwest (NYSE: NWA) or United (NASDAQ: UAUA).
According to Reuters, "most of the largest U.S. airlines are likely to post fourth-quarter losses, possibly signaling the end of an industry recovery that began in 2006 and further building a case for mergers."
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. But 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 a merger of 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.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
2-07-2008 @ 4:48PM
Jack Miller said...
The money saved will be the result of consolidation of traffic to help fill high value international flights. In the case of DAL and NWA, the Cincinnati and Memphis hubs will be de-emphasized. For example, planes leaving Atlanta for international locals will be more efficiently filled.
The problems you speak of are primarily the remains of the regulated system that was shot in 1978 but that only died over the past couple of years.
2-08-2008 @ 10:00PM
denn942 said...
The largest problem with the merger of two oil companies is that consumers hate oil companies. Oh, and employees can be pushed out over time, but Unions are sensitive to it. Hum... after 25-years in the airline business I don't think I have ever heard a description of a union's position on terminating employees as, they are sensitive to it... And as to the quality of service; the quality you get now is based on what you pay. Why not compare the Ritz with Motel 6. If you want to go 1000 miles for $79.00 on a 40-million dollar aircraft that cost 1.35 a gallon to fuel, you really cannot expect lobster, now can you? My 12-year old could have done a more insightful article, what a wast of ink.
2-20-2008 @ 11:33AM
Leslie said...
Airlines need to back to flying BIGGER planes to most requested routes, so there is less congestion on the runways, which adds to takeoff and landing delays. It takes as long for a jumbo to take off as a much smaller plane. And eliminate hubs that no one needs to fly to. Secondly, make the seats large enough to fit a normal adult human being, and then charge a FAIR price for it. Not a bargain price, a FAIR price. People will pay it, and it will shake out some of the low-lifes who create problems when they fly.