Airline Mergers Are Expected to Take Off
Friday, January 11, 2008JEFF YASTINE: Some of the nation's largest airlines are expected to have lost money in the fourth quarter, ending the industry's short-lived recovery. Those losses are fueling talk of airline mergers, specifically a merger of Delta Airlines and either United or Northwest. In a new report out today, Standard & Poor's says airline mergers offer rewards, but also pose risks. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Soaring jet fuel prices, a slowing economy and growing competition from low-cost carriers are some of the drivers behind the merger talks. Airline consultant Darryl Jenkins says U.S. carriers also want to reach the size and scope of KLM Air France, which is now the world's largest airline.
DARRYL JENKINS, AIRLINE CONSULTANT: To get large corporate contracts you need these global alliances and so this whole idea of having a global airline that either partners with KLM Air France or is as large as KLM Air France, is going to be one of the big motivating factors behind this.
DHUE: A combination of Delta with either United or Northwest would give the new airline that kind of global reach. But any merger faces a hurdle with labor unions. United, Northwest and Delta all negotiated their current labor contracts while in bankruptcy and its employees are still working under those concessions.
PHILIP BAGGALEY, SR. AIRLINE ANALYST, STANDARD & POOR'S: If you reopen those contracts, there's a lot of pressure for pay increases and you could easily offset a lot of the savings that are expected in a merger in the form of higher labor costs.
DHUE: Baggaley says the airlines also risk increasing their debt loads if the financing for a deal moves beyond a stock swap.
BAGGALEY: If you have a bidding war and there's more cash being offered, that means that the airlines have to raise more debt and it could begin to undo some of the benefits they got from going through bankruptcy.
DHUE: Analysts say competitors like Southwest and Jetblue could also benefit from a merger of their rivals. The Justice Department would have to review any deal and would likely negotiate concessions. Jenkins says that could put low cost carriers in a position to pick up routes.
JENKINS: There are certain things that they want, which they could not get elsewise (sic), for example, Charlotte. Charlotte's a great airport that I know Southwest and others would want to be in.
DHUE: For passengers, a merger would likely mean higher ticket prices with fewer carriers competing for their business, both reasons why regulators could ground a deal. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
