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Airlines to Couple Up?
In October, 2008, Delta Air Lines (DAL) acquired Northwest Airlines, creating the largest domestic air carrier in terms of revenue generation. Cost benefits gained from the combination, such as economies of scale, may assist Delta in contending with rising industry competition, among other challenges. It is a distinct possibility that further consolidation may be on tap for the Air Transport sector. If this occurs, it would likely help bring airlines back to profitability and improve their service offerings, though likely making it harder for consumers to find discounted airfares.
Therefore, another major airline merger could be on the radar screen. Ahead we will discuss the impact a potential merger may have on the industry, as a whole, and on consumers.
It is still unclear if the Delta/Northwest combo will have a positive impact on that carrier’s bottom line. Delta had already operated more efficiently than its peers, thanks to a recent Chapter 11 restructuring. In fact, several airlines succumbed to bankruptcy during this decade, because of a falloff in flight demand, in tandem with inflated cost structures. A repeat of this scenario could happen should the U.S. sink back into a recession or jet fuel prices start to soar, once again. In order to avoid a scenario like this, airlines could look to combine and potentially reap gains from the integration of infrastructures, and elimination of shared routes. This move may well help a struggling carrier to stave off bankruptcy during a tough environment.
There are several factors that could continue to stir headwinds for the airlines’ over the coming years. Consolidation might ease the impact of these trends. For one, competitive pressures are mounting on domestic airline routes, as smaller carriers, such as Southwest (LUV), JetBlue (JBLU), and AirTran (AAI), build their presences. As a result, fare discounting activity has been considerable, and airlines have resorted to increasing food and baggage fees. A reduction of competition through merger could provide the major airlines with improved pricing power.
Along the same lines, there exists excess seating capacity and the legacy carriers have been cutting domestic available-seat-miles. Fewer airlines would mean the elimination of overlapping flights, also cutting costs and boosting fares.
Finally, labor costs could very well be on the rise in the coming years, given that many union agreements are currently amendable or become so 2010. These extra expenses would limit any bounce back in profits, but the effect may be alleviated with the integration of another carrier.
One possible hindrance to a merger is if regulators disapprove. When Delta merged with Northwest, the industry was suffering from difficult economic conditions, marked by a substantial slowdown in business travel, as well as intensifying competition on intra-U.S. routes. Now, the industry appears to be beginning its ascent out of the difficulties it has endured. The most likely combination is UAL Corp (UAUA), owner of United Airlines, and Continental (CAL), because of their differing route systems.
From a consumer’s perspective, the positive aspect of a consolidating airline industry is seamless travel. Flyers would less often be required to change carriers to find a connecting flight, as most routes would be offered by a single airline. This factor is becoming less of a concern as international airline alliances are expanding. In fact, Continental and United already operate in the same global alliance. The negative, though, would be fare hikes eased by increased aircraft occupancy and less competition on a given route.