The Delta Air Lines (NYSE: DAL) / Northwest Airline (NYSE: NWA) merger discussions and chatter that Germany's Lufthansa is considering an investment in a potential merger between United (NASDAQ: UAUA) and Continental (NYSE: CAL) suggest to independent equities analyst C. Leonard Bauer that a new commercial aviation paradigm may be up ahead.
"When you look back at the last 30 years, you can say that the 1980s, clearly, was the decade when mergers were needed to meet the demands of the new market, basically the mass consumer market in the U.S.," Bauer told BloggingStocks Wednesday. "Those larger carriers' lowered seat prices led to a huge increase in domestic travel, which helped bring flight travel to the typical citizen."
New market: the world
Further, Bauer said today's potential mergers would -- you guessed it -- "help create carriers large enough to handle the new, mass market of this decade, the global mass market."
Bauer said the potential Delta/Northwest merger speaks to that new paradigm of commercial aviation. A Delta/Northwest merger would create the world's biggest airline in terms of traffic: Delta served about 74 million passengers in 2007; Northwest, about 56 million.
"A Delta/Northwest union would create a carrier with far more than intercontinental range, resources and hubs. It would create a truly inter-hemisphere carrier reaching all developed global zones," Bauer said. "Other U.S. carriers see this, and other foreign carriers are watching this as well, which explains why Lufthansa may be interested in a United/Continental relationship."
Lufthansa is mulling investing in a merger between United Airlines and Continental Airlines, sources said, a deal that could bring a major new player into a global marketing alliance, The Chicago Tribune reported Wednesday.
In Wednesday afternoon trading Delta rose 13 cents to $16.92, Northwest gained 43 cents to $17.40, UAL Corp. climbed 80 cents to $36.61, Continental rose 49 cents to $29.97, and AMR Corp. fell 13 cents to $14.79.
To be sure, Bauer recognized that economies of scale advantages and increased efficiency are two factors driving U.S. airline merger discussions -- many sector analysts argue that the U.S. market has 2 or 3 too many carriers -- but current deal discussions "are not merely about how much money we'll save by eliminating redundant afternoon flights to Kansas City." They're about global market share and positioning the new carriers for the increase in international travel in the decades ahead, he said.
Any potential U.S. airline merger would be subject to federal anti-trust and national security reviews, Bauer added.
Further, similar to the 1980s merger period, Bauer sees benefits for international business and leisure travelers, including lower international ticket prices, among other benefits, as more international routes become "truly competitive." But more on those consumer benefits some other time. For now, Bauer said, look for the new flight era's start with the first merger announcement.
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Reader Comments (Page 1 of 1)
2-20-2008 @ 6:44PM
NewsVisual said...
Corporate ties that link Delta and Northwest reveal a strong web of personal connections that perhaps helped motivate the partnership: Delta CEO Richard H Anderson previously spent 14 years with Northwest, last serving as the company’s CEO from 2001 to 2004; Delta Executive Vice President, Operations Stephen E Gorman was previously an EVP at Northwest; Northwest EVP and Chief Financial Officer David M Davis was previously Delta’s Director of Finance; and Delta Director Paula Rosput Reynolds and Northwest Director Michael J Durham are well acquainted as Durnham joined AGL Resources as a Director when Reynolds was Chairman, President and CEO. These close ties should also prove useful in facilitating the change for the airlines as they transition into the merger.