Date: April 16, 2008
Source: Wall St. Journal
Author: Scott McCartney

History Doesn't Bode Well For Delta-Northwest Combo; A Legacy of Dropped Routes

The names change, but the problems remain. Airline mergers often mean travel headaches for customers -- and they often don't work so well for the airlines involved, either.

One constant of the U.S. airline industry since it was deregulated in 1979 has been change. In 1987, the largest U.S. airlines included Trans World Airlines, Eastern Air Lines, Pan American World Airways, Western Airlines and Piedmont Airways -- all names that have been painted over on the side of airplanes because of mergers. Now Delta Air Lines Inc. plans to paint over the Northwest Airlines Corp. name. In each case, airlines exasperated by years of economic struggles saw acquiring assets as a path to stronger finances. But in few cases does it work out that well.

The history of airline combinations shows that travelers face a couple of years of more frequent missed connections, vanished reservations and lost baggage, flight delays and unhappy employees. Equally daunting for the companies themselves, many airlines have ended up losing the assets they bought.

"The track record of airline mergers is checkered, with few examples delivering on promised benefits," Standard & Poor's airline analyst Philip Baggaley said in a research report.

UAL Corp.'s United Airlines bought Pan American's Miami hub and South American routes -- and lost all of it to competitors. Delta bought Western Airlines and a hub in Los Angeles, and has little to show for it except a nice, underutilized terminal at Los Angeles International Airport. Delta/Western carried 12.4% of all passengers at LAX in 1988, the first full year after their 1987 merger. Last year, Delta had just 7.6% of the passengers at LAX. And Delta/Western is considered one of the more successful airline mergers.

AMR Corp.'s American Airlines bought AirCal and Reno Air to compete up and down the West Coast, but nearly all of that flying has gone to other carriers. US Airways Group Inc. bought Pacific Southwest Airlines on the West Coast and wiped the smile off of PSA planes. The result was the same -- US Airways retreated from the West Coast.

Bottom line: Hubs and routes that were able to generate profits before the merger typically survive, and air service that struggled to make money before a merger often disappears after a merger.

"There's no history of anything good that happens in mergers," said Adam Pilarski, senior vice president at Avitas Inc., an aviation-consulting firm. "Two drunks holding each other up is not a good idea."

Yesterday, Delta executives said their deal will be a different kind of airline merger, pairing airlines of equal strength. Customers will benefit from a larger combined route network offering greater travel choice in Asia, where Northwest has extensive operations, and Europe, where Delta thrives, they said. A spokeswoman for Delta said the Western merger worked because it "married complementary networks successfully."

In theory, airlines should be the poster children for the benefits of corporate mergers. The air-travel business is a network business, not so different from telecommunications or banking. A bigger network should give you a disproportionately higher share of customers.

Today, the airline business is splintered between 10 major carriers in the U.S., and executives have argued that the industry would be financially stronger with fewer players. With oil topping $100 a barrel and recession at hand, airline CEOs who have slashed salaries and service and reorganized their businesses feel there are few arrows left in their quivers other than mergers to ride out the next major downturn.

"It's the only real big idea we have left," US Airways Chief Executive Douglas Parker said at a recent conference. He argues mergers would result in more efficient travel in the U.S. -- better for airlines and for customers.

Putting two big airlines together puts all their corporate accounts and frequent fliers under the same umbrella. A Delta flight to Barcelona, Spain, or Boise, Idaho, or Boston should, in theory, have more demand for its seats, producing higher ticket prices. At the same time, a merger should generate savings by combining all kinds of departments in two separate headquarters into one.

But executives also acknowledge that there is tremendous complexity involved, and to merge airlines is far more difficult than simply changing airport signs and repainting airplanes.

For airlines, few new trips are generated simply because one airline can offer more destinations -- airlines end up fighting to steal customers from competitors.

What's more, airlines already share passengers and, in the case of alliance partners, already price and sell their product as if they were the same airline. That's true in the case of Delta and Northwest; they've already merged their flight schedules as SkyTeam partners. Generating new revenue may be tough.

At the same time, history has shown that competitors can take away customers of the merged airlines when their flights run late or labor groups stage protests. Another pitfall: Losing alliance partners. Continental Airlines Inc. is currently partnered with Delta and Northwest, but could well enter into its own merger feeling the need to get bigger. That could result in the Delta-Northwest combination losing substantial presence in New York and Houston, two of the four biggest cities in the country.

"If Delta and Northwest merge, in a couple of years they will be smaller than they are today as separate entities," said Mr. Pilarski of Avitas.

Discounters often step in, too. Since its 2005 merger with America West Airlines, US Airways mainline passenger boardings had dropped 16.5% in Philadelphia by last year; Southwest Airlines Co.'s increased 64.1% over the same two-year period.

While it's tough to generate new revenue, it's even harder to reduce costs at merged airlines. Sure, there's some savings to be had by combining departments at headquarters and consolidating gates at airports. But costs can rocket upward quickly at airlines when things go wrong.

New contracts for employees can push costs higher. Different types of airplanes drive expenses up by requiring more spare parts, more training for pilots and mechanics, and refitting of cabins and cockpits, for example.

Even when planes are the same, there may be huge differences. TWA food carts didn't fit American's planes, for example. Cockpit switches are often different in aircraft: Some airlines set up switches so that the forward position on a toggle switch is "on," while others set that as "off." Pilots have to be trained on the differences, or new equipment has to be installed, or the merged airline has to segregate its labor so only pilots trained on those airplanes fly those airplanes. It all adds to expenses.

As with Daimler/Chrysler, merging corporate cultures can weigh down a pairing. Airlines also have the particular trip-wire of merging seniority lists at labor unions. At US Airways, East Coast pilots who flew for the former US Airways are challenging an arbitrator's ruling on combining seniority lists, which determine pay and schedule for pilots.

That's the last major hurdle for integrating those two companies, but whether the merger works long-term remains to be seen. Many argue that both US Airways and America West might have been liquidated by now had they not merged. US Airways was last among the 10 biggest airlines in on-time percentage last year and worst in baggage handling, according to the U.S. Department of Transportation.

"Be careful what you wish for because you may not like the results," says aviation analyst Edmund Greenslet of ESG Aviation Services. "There has never been a successful combination of equals."