Why Airline Mergers Don'T Fly

Why Airline Mergers Don't Fly

Section: FIRST

Delta's bid for Northwest creates a dangerous precedent

EVER SINCE THE DAYS OF JUAN TRIPPE'S PAN AM, there has been a persistent fantasy among aviation CEOs: He who has the most planes (and flies the most routes) wins. In today's parlance, you might call that the Delta model. Richard Anderson, Delta's CEO, believes that the best way to survive $100-a-barrel oil is by combining with Northwest Airlines to create the world's largest carrier, one with potential revenues of $30 billion. But in doing so, he plans to defy the conventional wisdom of airline mergers and create what some believe would be a dangerous model for the industry's long-term sustainability.

There are two strategies management traditionally deploys in airline mergers-cutting overlapping flights to slash costs or expanding globally to increase revenue. Trimming routes was the approach touted by US Airways in its unsuccessful bid for Delta last year. At the time, US Airways suggested it could save nearly $1 billion by combining the two carriers and lopping 10% off the flight schedule.

In a recent "internal memorandum," Anderson made it clear he was not cutting routes or hubs. He promised Delta employees that if there was a merger with Northwest, they would maintain their seniority, the airline's route network would be strengthened, and "most importantly" they would have greater job security. Absent was any mention of shareholder value.

Delta's plan rests on combining two complementary networks of routes. That makes sense in theory: Northwest has a large Asian network, and Delta has a large European and Latin American one. So why not combine the two while better utilizing the company's airplanes? Use Northwest's large Boeing 747s through high-traffic Atlanta instead of Minneapolis. These proposed efficiencies are meant to save the new company "hundreds of millions," according