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Bigger is better

The merger of Delta and Northwest? It makes sense for a struggling airline industry

Published on Monday, Apr 21, 2008

If you're interested in a healthy airline industry, you must applaud the proposed merger of Delta and Northwest airlines. And yes, push aside the concerns expressed by pilots (at Northwest, in particular), Wall Street and James Oberstar, the chairman of the House Transportation and Infrastructure Committee who represents Minneapolis, the home of Northwest. The two airlines have been talking about a merger for years — with good reason. The industry suffers from overcapacity and a lack of investment.

Consolidation addresses the former issue. The subsequent size of the new airline (keeping the name Delta as it becomes the largest American air carrier) makes much easier acquiring the credit necessary to deal with the latter challenge.

The airline industry suffered a withering blow when terrorists struck on that bright September morning. Congress came to the aid of airliners, and in recent years, the carriers had rebounded, travelers returning to the skies along with sufficient profitability. That was before oil prices soared past $100 per barrel, adding monumentally to fuel costs. Add the slowing economy and spreading credit crunch, and no wonder four smaller airlines, including Frontier, have filed for bankruptcy protection.

Airline mergers haven't been received kindly. The Department of Justice blocked a deal between Northwest and Continental. It did the same when United and US Airways wanted to marry. The difference now? The hope is the department will recognize the economic realities. The merged airline still would dominate its hubs. It would not significantly diminish competition overall in the airline market. More, low-cost carriers, such as Southwest, would remain a substantial presence, keeping prices in check.

The recent regulatory troubles have reflected the inconsistency of the Federal Aviation Administration as much as anything. A successful effort to improve safety, starting in the 1990s, morphed from enlightened collaboration to misguided corner-cutting. True enough, air travel has never been safer. Yet lax regulation risks catastrophe. The heightened attention has brought to the forefront the aging fleets of many airlines. These older airliners require more maintenance, and they guzzle more jet fuel.

An updated fleet leads eventually to the savings necessary to help achieve financial stability.

Not surprisingly, Chairman Oberstar will examine closely every detail of the deal. Consumer groups will warn against higher prices (as if that is avoidable in today's oil market). These and other questions have much merit. Mergers are notoriously turbulent affairs, even when passing antitrust muster.

Deserving, too, of attention are the essentials of surviving in the airline industry today. This has never been an easy industry for making money. It is even more difficult now, so labor-intensive and requiring such massive capital outlays. Thus, the industry must restructure. The hope is, the merger of Delta and Northwest will lead the way.

If you're interested in a healthy airline industry, you must applaud the proposed merger of Delta and Northwest airlines. And yes, push aside the concerns expressed by pilots (at Northwest, in particular), Wall Street and James Oberstar, the chairman of the House Transportation and Infrastructure Committee who represents Minneapolis, the home of Northwest. The two airlines have been talking about a merger for years — with good reason. The industry suffers from overcapacity and a lack of investment.

Get the full article here.


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