Merge hazard ahead

The merger of Delta and Northwest (see: Delta and Northwest to merge) is undoubtedly the first in a string of tie-ups for the airline industry, which is facing rocketing fuel prices, a deepening US and global economic slowdown and tightening financing options due to the credit crunch. Throw in the impact of severe disruption from renewed safety inspections and the situation looks even more difficult.

The Delta-Northwest deal enables the combined airline to improve pricing power while limiting overcapacity in the US domestic market by trimming unprofitable routes in the joint operation. The new airline will also have a healthy liquidity position, a valuable asset in the credit crunch.

Speed-dating

US airlines must now be considering speed-dating for potential new partners and the industry is long overdue for consolidation which could release large cost savings. Already United Airlines and Continental Airlines are said to be in talks.

The recent bankruptcies of smaller carriers in the US (see: Airlines go bust after US boom) show the urgency for action and the need for leaner operations and cost-cutting.

The rub is that mergers have the potential for synergies but experience in the past has shown they can also lead to labour unrest, turf fights between pilots for seniority and passenger unhappiness as the delicate dance to weave together what are essentially different cultures leads to confusion. What seems like a good idea in the boardroom short-term can actually become much more expensive over the long-term.

Also, the question must be asked - does this mean that a wave of tie-ups will spread across to European carriers?

Ties to Europe?

 Unlikely, say analysts who point to European flag-carriers being different animals to their US counterparts. They have greater exposure to global passenger markets, which are holding up better than US domestic and European short-haul business. European carriers have also been more prudent in hedging (buying forward) their fuel bills over the next few years and are therefore less stressed by fuel-price inflation.

A tie-up between a US and European airline is also less likely as stricter labour rights and capital control issues make European carriers less attractive to struggling US airline companies. The fact that airlines can also lose some landing rights if taken over by a foreign carrier is also a blocking factor.

While loss-making Alitalia’s future is more tied up with the new Italian government since Air France-KLM has stepped away, eyes must now turn to Iberia, British Airways and, some say, Lufthansa.

Iberia may be a target for Lufthansa or Air France-KLM, although shareholdings by Caja Madrid and British Airways would make it a less than smooth option.

For many years British Airways has been a potential takeover target mainly because of its lucrative slot portfolio at Heathrow Airport. Of all the carriers, British Airways is more likely to join up with a US carrier due to its links across the Atlantic and its stated preference to have an American partner. Counting against this is a looming and potentially damaging pilots’ strike (see: Pilots blame BA managers for Terminal 5 woes).

Reduced restrictions under a new administration?

When the new administration takes control in the US after November’s Presidential election we may also see a relaxation of restrictions on foreign ownership of its carriers, paving the way for the likes of British Airways to buy into the US market.

So how will this consolidation affect airports? The first is that bigger carriers mean more power to drive down landing fees or at least resist any increases. The airlines will no doubt use this clout to seek concessions on a range of costs. It will also mean that there will be winners and losers as secondary and smaller hubs lose out to big centers that can offer economies of scale.

This will be less prevalent in Europe where national flag-carriers are more entrenched with political support for facilities, but US airports may need to brace themselves for interesting times ahead.

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