Should US Airways succeed in purchasing bankrupt Delta Air Lines for $8 billion, the merged airline would rank among the world's largest, and would be an integral component in a global alliance. But for whichever alliance the combined carrier were to abandon--Delta's SkyTeam or US Airways' Star Alliance--the loss could be significant.
A Delta-US Airways tie-up also could prompt new partnerships or additional consolidation, and lead to higher fares and fewer seats on certain routes. It certainly would impact many multinational and U.S. domestic corporate travel programs.
Publicized this week, the US Airways proposal is by no means assured of success. If it withstands any competing offers, it would face a complex approvals process in which the bankruptcy court, federal regulators, labor groups, financial backers and other Delta and US Airways stakeholders will have their say. Delta management this week reiterated its intention to develop its own restructuring plan and emerge from court protection as an independent competitor in the first of half of next year.
"We ascribe an 80 percent likelihood of ultimate creditor and regulatory approval for the proposed US Airways-Delta merger and/or, at a minimum, a competing bid for Delta," wrote J.P. Morgan Securities analyst Jamie Baker in a research note. "Clearly, lots of twists and turns lie ahead."
US Airways executives already are discussing the choices they would have after acquiring Delta, including marketing, network and partnership decisions that would affect commercial arrangements on multiple continents.
"It would be a high-class problem for us," said US Airways president Scott Kirby, referring to conflicting SkyTeam and Star loyalties. "We would have the option of two outstanding alliances and will work with partners in each alliance to make a decision down the road."
Should the "new Delta," as US Airways executives named it, remain in SkyTeam, Star would lose a domestic U.S. partner with some international flights. If the new carrier went with Star, the loss for SkyTeam would be severe; as the world's fourth-largest airline in terms of revenue and capacity (behind American, United and Air France-KLM), Delta is a major U.S. player, a top competitor across the Atlantic and Air France's primary ally.
In either scenario, one carrier would have to reorient its client base to a different global brand, customer service framework and loyalty program, and disregard certain alliance-wide corporate sales efforts it had previously cultivated.
"When companies start the bid process, they are learning they can bid as SkyTeam versus Oneworld versus Star," said Lee Macenczak, Delta executive vice president of sales and customer service, in an interview last week with The Transnational. "And account managers are learning. It has picked up steam over the last year."
But under this latest merger scenario, much of what had been learned by one camp about coordinating with specific international partners would be moot. Some corporate buyers with pre-existing alliance deals or plans to pursue global air programs also would have to re-assess objectives and supplier options as partnership rosters shift again, perhaps more dramatically than at any point during the last decade's alliance ebb and flow.
Regardless of which alliance it would choose, new Delta would serve 350 destinations on five continents. Across the Atlantic, it would nose ahead of market leader British Airways in terms of daily departures and seat share, according to Aviation Dailyand Eclat Consulting.
From the United States, service to Europe would operate predominantly from Atlanta, New York JFK and Philadelphia. However, some flights could be cut to reduce overlap. For example, US Airways from Charlotte and Delta from Atlanta both serve Frankfurt and London. US Airways from Philadelphia and Delta from New York JFK both serve several European destinations (including London, which Delta began serving from JFK yesterday).
According to J.P. Morgan's Baker, such overlap could prompt a combined management team to resolve "certain network deficiencies ... essentially re-anchoring much of Delta's un-fed JFK international flying to US Airways' feed-rich Philadelphia hub." That development, he added, would help Continental Airlines become "the New York-to-Europe monopolist, despite some forecasted loss to its Newark connecting service as Philadelphia tries to replicate Newark, albeit 100 miles to the south."
From the West Coast, Parker said, the new entity would use Delta's long-range aircraft "to present nonstop international opportunities for the first time ... something US Airways can't do today."
In the U.S. domestic market, US Airways executives said new Delta would lead in total aggregate capacity, rank "no lower than fourth" in each region and operate as the top competitor at 155 airports. It would maintain operations in "all" U.S. destinations now served by one or both, they added. Northeast domestic operations would center on New York LaGuardia, though the company would look to sell either the Delta or the US Airways Boston-New York-Washington shuttle.
Parker said the combination would produce "new connectivity and an enhanced Northeast and East Coast position that would allow the new Delta to better compete for corporate accounts."
US Airways executives also said they would "optimize flows" through other hubs and reduce total available seat miles by 10 percent. "Some smaller hub operations would be closed or sharply downsized," according to a research note from Calyon Securities analyst Ray Neidl. He suggested that Delta hubs in Cincinnati and Salt Lake City, and US Airways hubs in Charlotte and Philadelphia are "most at risk."
In addition to rationalizing its melded network, the new entity would have to reconcile disparate corporate sales strategies. Delta, for example, this year reorganizedand fortified its global sales presence to coincide with a massive expansion in international services. "We have seen very little in terms of accounts going away," said corporate sales director Bob Somers, "and we are seeing an influx of accounts coming on, based on the new markets we are flying to."
Following its own merger with America West (in which several issues remain unresolved, including labor group integration), and amid a pursuit of lower costs, US Airways has not made the corporate market a top priority, though it has not outwardly abandoned it, either. Sources told The Beatthat the carrier has significantly reduced its salesforce and support for corporate clients. US Airways last week also confirmed it lost the Lockheed Martinbusiness travel account, one of the world's largest.
More broadly, the merger would shrink the pool of suppliers and potentially lead to higher fares, though Parker said, "The synergies we anticipate are not premised on raising fare levels."
"Corporations would pay more for air transportation services as the number of competitors is reduced and capacity is unilaterally removed by the new Delta," according to a statement by Business Travel Coalition chairman Kevin Mitchell. "Some city-pair markets would likely see significant jumps in business travel prices as hubs are rationalized. Some communities would see reduced service (frequencies) to important U.S. business centers."
Even so, Mitchell said BTC had not yet taken a position on the potential merger and cited possible benefits: "Given the alternative of a weak Delta emerging from bankruptcy, and the continued erosion of U.S. network carriers' financial strength vis-a-vis foreign carriers, the stability this merger could bring to the domestic U.S. industry, largely through capacity reduction, could likely justify the transaction."
To kick start the process, US Airways said it obtained from Citigroup $7.2 billion in new financing, though analysts expect competing offers to emerge, potentially from United parent UAL Corp. Should Delta-US Airways go through, more consolidation likely would follow. Speculation has again surfaced on a much-theorized United-Continental union and Baker suggested that "Northwest specifically would fit very nicely into American Airlines' network." Baker also said American parent AMR Corp. "at a minimum" would bid for whichever Northeast shuttle assets are divested.
"Three full-service network carriers can provide adequate competition in the U.S., while enforcing ticket prices that would better enable profitability, even in economic downturns," wrote Calyon's Neidl.
"The industry has changed dramatically since the U.S. Department of Justice reviewed the [proposed] United-US Airways merger in 2000," Parker said, citing the growth of low-cost carriers, domestic codeshare partnerships, international alliances and industry "turmoil" in the wake of the 11 Sep terror attacks.
Beyond competitive concerns within the United States, the international regulatory environment is at a crossroads as governments debate foreign ownership of their national carriers, cross-border mergers materialize in Europe and Asia, and negotiators on both sides of the Atlantic struggle to finalize a long-awaited "Open Skies" agreement. Those developments, and any potential consolidation among major U.S. carriers, undoubtedly would be interrelated.
Related resource:
National Business Travel Association statement