Come Fly With Us
STELZER, IRWIN M.
Come Fly With Us Delta-Northwest will be the biggest, but it probably won’t be better. BY IRWIN M. STELZER Travelers can be forgiven if their first reaction to the proposed Delta-Northwest...
...In the period immediately following every airline merger, chaos is the order of the day—or year...
...Those reviews will focus on whether the formation of the largest airline in the world in terms of traffi c, with 75,000 employees worldwide, $35 billion in annual revenue, serving 390 destinations in 67 countries, would have what airlines have been seeking since the protective blanket of regulation was removed, leaving them shivering in the competitive market: pricing power...
...Remember, the single largest cost component is jet fuel, and while a bigger Delta might wring concessions from its caterers, it is not likely to persuade OPEC to lower the price of oil...
...Carriers plying Pacifi c routes are facing increased competition from lowcost, high-service Asian carriers, and the new “Open Skies” deal opens transatlantic routes to increased competition by allowing European and U.S...
...Regulatory authorities might kill the deal, in response to pressure from such as Minnesota Democrat James Oberstar, chairman of the House Transportation and Infrastructure Committee, who in advance of his fact-fi nding hearings pronounced the merger “probably the worst development in aviation” since deregulation...
...Not a word about possible fare increases...
...From the evidence available, it just doesn’t seem likely that mere size will convey the power to raise fares...
...This tough environment hasn’t gotten any easier, and there is reason to wonder whether an airline of this size can be managed effi ciently by the same crew that has given us the service standards we have today...
...front costs of consolidation...
...Airways abandoned the West Coast shortly after it acquired Pacifi c Southwest’s routes in that part of the country...
...American Airlines might make a bid for Northwest, especially if United and Continental go through with rumored plans to wed, displacing Delta-Northwest as the world’s largest carrier...
...Fairness also requires that we consider the possibility that higher fares might not be completely bad for passengers...
...So there isn’t much competition to eliminate...
...To the extent that the new carrier does have increased pricing power, the fare increases it will be able to impose will be limited by the ability of newcomers to challenge it on most, but not all routes...
...What of increased revenues...
...The airline industry is not the only one in which mergers have failed to produce increased savings or revenues...
...Which is understandable, given the congressional and regulatory reviews...
...The airlines’ press releases are careful to pin their hopes on “more customers,” especially big corporate accounts...
...baggage losses mount, as they did when Northwest acquired Republic Airlines in 1986...
...All of these are in the new Delta’s future (the Northwest brand is to disappear), with a pilots’ strike the largest looming obstacle to a peaceful integration of the two carriers...
...Nor can it be a reduction in leg room: Knees-against-chest is already the posture of choice for most carriers...
...Nor will Delta have a free hand on international routes, which Ed Bastian, Delta’s president, predicts will provide “the majority of the growth we are seeing in this combined entity...
...strikes occur as disgruntled employees fi nd the new pension package inferior to the old one...
...Delta’s pilots, on the other hand, seem likely to ratify a deal that hands them a 17 percent pay rise over four years, better pensions, equity in the new company, and guaranteed jobs for the next two years...
...Delta and Northwest expect an initial run-up in costs due to “harmonizing wages and benefi ts”—read, a $400 million annual bribe to employees to get them to go along—and other upeconomic Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London...
...It is not unreasonable to assume that a fi nancially healthier carrier will phase out the old aircraft a bit more rapidly and “accelerate the upgrading of existing international aircraft with lie-fl at seats and personal on-demand entertainment,” as the new Delta claims it will...
...Some of the Delta-Northwest airplanes are old—not unsafe, but not as comfortable as newer aircraft...
...Only 12 of the nonstop city pairs that both airlines serve overlap, and the carriers compete with each other for only 3 percent of the seats they fl y, according to Doug Steenland, Northwest’s CEO...
...And anticipated cost savings have often failed to materialize...
...So most passengers will probably just shrug, on the principle that things are so bad they can’t get worse...
...Throw in an anticipated $400 million in additional revenue from passengers attracted by improved connections, reduced travel times, and the like, and you have about $1 billion in “network synergies...
...That might give travelers a price-quality combination not now available to them...
...Both Delta and Northwest only recently emerged from bankruptcy, a condition into which four smaller airlines (Aloha, ATA, Frontier, and Skybus Airline) have descended in recent weeks, and in which most carriers have found themselves at one time or another...
...Nor will labor costs come down if management sticks to its plan to minimize layoffs...
...In the end, much will depend on whether we’ll just glide starry-eyed and hear angels cheer when the new Delta gets us up there, where the air is rarefi ed...
...But the frequent travelers who have learned to fi ght their way through airports, onto uncomfortable planes that might or might not take off with or without their baggage, in fact fear we might be living through the halcyon days of air travel: A majority (54 percent) expect the merger to result in deterioration in service...
...Dave Stevens of Northwest’s Air Line Pilots Association is telling his members that the deal is not in their interests...
...carriers to invade each other’s markets free of regulatory restrictions...
...It might be a reduction in the value of frequent-flyer points, but since most are now good only at 3 A.M...
...Which brings us to two key questions...
...It can’t be deterioration in the quality of the peanuts now offered in lieu of meals in most classes of service...
...About one-third of the industry’s capacity is operated by low-cost, low-fare airlines, and these show no sign of reluctance in invading domestic routes if the incumbents get greedy...
...BY IRWIN M. STELZER Travelers can be forgiven if their first reaction to the proposed Delta-Northwest merger is to wonder what additional atrocities will be inflicted on them...
...Delta will be free to fl y anywhere in Europe from anywhere in the United States, but British Airways, Lufthansa, and other European carriers will be equally free to compete on any Atlantic routes...
...This is a recipe for failure...
...History suggests this is far from certain, which is why investors dumped shares when the merger was announced...
...Will the merger result in effi - ciencies that strengthen the fi nancial position of Delta, and end periodic trips to the bankruptcy courts...
...Possible, but far from certain...
...If indeed the merger is consummated...
...on one Thursday each month, there isn’t much to lose on that score...
...American could not hold onto the West Coast business it thought it acquired when it bought Reno Air and AirCal...
...History is on the side of the pessimists...
...We will if the merger produces a fi nancially stable carrier capable of upgrading equipment and service, at fare levels not far from those now prevailing...
...the merging of reservation systems causes kiosks and websites to malfunction, as U.S...
...This is an industry that has not netted a profi t over the more than 100 years since the Wright Brothers proved that man can fl y, that has seen periods of boom followed by devastating periods of bust...
...Think of Northwest as serving the upper Midwest, West, and Asia, and Delta serving the East and Europe...
...Pilots fi nd that the control panels on the merged carriers differ...
...Replacing these geriatric aircraft will involve buying out long leases and investing something like $20 billion in new aircraft...
...Or antitrust enforcers might reject the deal on the grounds that it would trigger a wave of mergers that would unreasonably increase the market power of the surviving airlines...
...United bought Pan Am’s Latin America routes and proceeded to lose the business to competitors...
...In a letter to his fellow pilots, he writes, “No pilot group is going to put up with this...
...And when the initial trauma is over, will passengers be better off...
...Delta has about 120 MD-88s with an average age of 18 years, and Northwest’s 90 DC9s have an average age of close to 40 years...
...Airways and America West discovered...
...In the longer term, the new Delta expects to be able to wring better terms from some of its suppliers, and to save between $400 million and $600 million by using the combined fl eets better to match supply to demand...
Vol. 13 • April 2008 • No. 31
