Op-Ed: Merging Airlines Playing The Fuel Card

Delta Air Lines and Northwest Airlines, in announcing their intention in April to merge, have been playing the "fuel card" in suggesting their merger is an inevitable response to high fuel costs. This fuel card is a joker—it's an argument that should be trumped by consumer welfare concerns.

The Delta/Northwest merger math does not add up. Even given the benefit of the doubt that they will achieve $1 billion in annualized synergies by 2012, many analysts believe 75 percent of that would be captured by a new pilot's agreement- leaving just $250 million. The projected pro forma fuel bill for the combined carriers for 2008 is $12 billion.

So, how is it possible that $250 million will materially help with fuel costs, especially given the $1 billion in projected upfront integration costs? The math simply does not work. What's more, these mergers were planned when fuel prices were less than half of today's level. The idea that they are a necessary response to $130-plus fuel is absurd.

What is true is that airlines and consumers who depend on the health of this troubled industry should focus on policy responses that could return the skyrocketing price of jet fuel to more sustainable levels. It's not time to use high fuel prices as a pretext to justify anticompetitive mergers. Indeed, as the price of jet fuel dangerously drains the carriers' remaining cash reserves, it seems more obvious that expensive mergers are precisely the wrong thing to do for all concerned.

Delta and Northwest would have us focus on just 12 overlapping non-stop markets when the real story, as far as domestic U.S. competition is concerned, is the 550 non-stop and one-stop citypair markets where the combined carrier would have 50 percent marketshare, or higher. In 139 one-stop markets, the marketshares soar past 70 percent. These are the communities where capacity will surely be ripped out and fares increased.

Despite Delta/Northwest pronouncements, there are scenarios for airlines other than mergers, and some could produce far better results. What are the choices?

Status Quo. In this scenario, airlines accelerate their own unilateral reductions of uneconomic capacity and continue to address cost and efficiency issues. American Airlines' announcement in May to reduce capacity by 12 percent is an example.

Robust Recovery. If oil prices should fall back to sustainable levels, the cost-cutting initiatives of the past few years could put the major network carriers on the other side of the current U.S. economic slowdown and experience robust airline sector recovery.

Liquidations. If the proponents of "let the market work its will" truly believe what they say, then let major carriers fail instead of propping them up with government-sanctioned anticompetitive combinations. Antitrust law is not meant to be sympathetic to industries and competitors that cannot solve their own problems.

The most authoritative voice about airline options, however, comes from Delta itself. When asked if Delta had a "plan B" ready if the Northwest deal fails, Delta's CFO said, "It's not a plan B, it's a plan A." He said the company expects solid growth for the year and that the airline has "a great stand-alone plan."

Requiring airlines to play their own hands is the right way forward. Common sense and the competitive structure of the U.S. airline industry are consumer welfare imperatives that should trump all the wild cards and jokers Delta and Northwest executives have lately been pulling out of their socks.