Creating Stability in the Airline Industry through Merger

I. Introduction

In the mid-1980s the airline industry experienced merger mania. Delta bought up Western. [1] Pan Am merged with National [2]. Texas International and New York Air merged with Continental and People Express. [3] Now this trend has reemerged through the possible merger of Delta, the third-largest U.S. airline in terms of passenger traffic, with Northwest, the fifth-largest carrier, to create the largest passenger airline in the world. [4] Executives of both airlines have agreed on most of the basics of a merger, but talks have stalled over the issue of integrating workers. [5] As talks have stalled, the question remains whether Delta and Northwest should merge. This article will discuss the implications of the Delta-Northwest merger. First, it will discuss the antitrust considerations. Second, it will examine the likely impact of the merger on employers, shareholders, and customers. Finally, this article will conclude on whether or not the Delta-Northwest merger will be beneficial for the two companies and the airline industry.

II. Antitrust Considerations

In order for the Delta-Northwest merger to occur, it must pass the Horizontal Merger Guidelines of the Department of Justice (DOJ) and the Federal Trade Commission (FTC). [6] The purpose of the Horizontal Merger Guidelines is to prevent mergers from creating, enhancing, or facilitating market power. [7] Market power to a seller is the power to maintain prices above competitive levels for a significant time. [8] The DOJ and FTC do not respond well to high market concentration. If the merger will result in a significant increase in market concentration, the DOJ and FTC will most likely prohibit the merger.

However, the Delta-Northwest merger will most likely not significantly reduce competition. First, the flight routes of Delta and Northwest do not significantly overlap. There are only ten city pairs between the two airlines that have overlap, which is trivial compared to over 1,200 city pairs in airline routes. [9] Furthermore, the airlines have different hub facilities. Northwest's hub facilities are in Minneapolis and Detroit whereas Delta has its hubs in Atlanta and New York. [10] Internationally, there is little to no overlap between Delta and Northwest. Delta has a powerful market in Latin America while Northwest has a strong market in the Pacific. [11] Since the combination of the two companies would be complementary, the merged entity would not have too much power in one market. Therefore, the airline industry would be more efficient and still have competitive prices. Even if there were any concerns about reduced competition in a market, the Delta-Northwest merger could give up some city pairs or routes. [12]

III. Implications of the Airline Consolidation

Although the potential Delta-Northwest merger creating a more efficient but competitive airline market is likely to pass antitrust standards, the implications of the airline consolidation on employees, shareholders, and customers still needs some consideration.

A. Employees

When an airline merger occurs, employees of different wage scales and work rules must be integrated into a single body. This can result in low employee morale and a tense atmosphere as workers compete over how the group should be integrated into the seniority system. [13] In an attempt to prevent a strained environment, the two airlines are having their pilots negotiate an agreement among themselves on integrating their ranks. [14] Although the pilots have not agreed on how to combine seniority lists, they have already come into accord on a common employment contract for all 11,000 pilots. [15] The potential for pay cuts and layoffs are also of concern. [16] The seniority list dictates pilots' pay. [17] Through the combining of the two companies' seniority lists, pilots may have to take pay cuts as they fall down the seniority list. [18] Furthermore, the large combined work force resulting from the merger may need to be reduced for efficiency purposes, especially in areas where Northwest or Delta may need to reduce or abandon service due to route overlap. [19] Although the merger may result in short-term wage reductions and layoffs, this merger may help employees retain their jobs in the long run. Both Delta and Northwest have in recent years suffered financially. They have had difficulty adapting to increased fuel costs and competing with low-cost carriers, which resulted in both airlines declaring bankruptcy in 2005. [20] As a result, Delta and Northwest have had to consistently cut employee's jobs and pay in their attempts to relieve their financial troubles. [21] By combining assets this will result in a healthier, unified company that will be more capable to respond to the needs of the consumer and as a result, be able to compete with low-cost carriers. [22] Therefore, the airlines will be able to survive market forces resulting in more jobs retention in the long run for their employees.

B. Shareholders

When Delta and Northwest filed for bankruptcy in 2005, the stocks of these companies plummeted. [23] Many of the airlines' biggest shareholders today are hedge funds or private equity firms waiting for their investments to become profitable. [24] The Delta-Northwest merger may produce a large profit for these shareholders just as the 2004 Air France-Koninklijke Luchtvaart Maatschappij (KLM) merger accomplished. [25] The Air France-KLM merger was strong because the entity was more concentrated on growth than cost cutting. [26] Therefore, customers benefited from the increased flight destinations.  Although the Air France-KLM merger was international and the Delta-Northwest merger will be domestic, when the merger benefits the consumer, the shareholder will benefit from the increased business.

C. Customers

This merger will most likely be favorable to customers. Foremost, the Delta-Northwest merger will increase available routes. [27] For instance, both Delta and Northwest have extensive international routes but in different areas of the international market. If Delta and Northwest will merge, the consolidated entity will have clout in more of the lucrative business routes in major international markets. [28] Opponents of the merger have been apprehensive of the extended reach of the combined entity in both the U.S. and international markets. [29] They fear that since this merger would produce the largest U.S. airline, this would result in a reduction in free competition, which they argue may lead to increased prices and less options for the consumer. [30] These fears are unjustified since Delta and Northwest complement each other; these airlines cover different routes and hubs. [31] As a result of this, low-cost carriers could fill these gaps and provide customers with lower prices on plane tickets for these areas. [32] Therefore, customers will have more of a choice in selecting their airline service. [33]Customers will be able to fly either low-cost carriers that have lower priced tickets or the Delta-Northwest entity that will have more travel routes. Furthermore, in order for Delta and Northwest to compete with low-cost carriers, they may need to reduce costs, which may in turn lead to better fares for customers. [34] Finally, in the consolidated entity customers will be able to combine their frequent flyer miles from each airline into the merged entity's frequent flyer program. [35]

IV. Conclusion

The Delta and Northwest merger should occur because of the benefits of this consolidation. Although opponents of the merger are concerned that it may reduce competition since the consolidation of the two airlines would produce the largest passenger airline, the opposite is true. Instead, a more efficient and competitive airline industry will result. Delta and Northwest do not have significant overlapping routes and have different hub facilities. Therefore, the combination of the two airlines will not create a high market concentration. The merger will also have positive impacts on employees, shareholders, and customers. Although pay cuts may result from the merger and an agreement on seniority has been difficult to reach, consolidation will allow for the long-term benefit of job retention for employees. Furthermore, shareholders will benefit from the increased profits this merger will produce. Finally, customers will benefit from the increased flight destinations, lower cost tickets, and combined frequent flyer program. Therefore, a merger between Delta and Northwest is best for all parties.

[1] James L. Oberstar, Airline Consolidation? Hell no, Bus. Wk. Feb 15, 2008, http://www.businessweek.com/bwdaily/dnflash/content/oct2007/db20071030_734268.htm?chan=search.

[2] Id.

[3] Id.

[4] Susan Carey and Paula Prada, Talks Between Delta, Northwest Stall; Airline Hesitate on Merger As Pilots Grapple With Integrating their Ranks, Wall St. J., Feb. 27, 2008.

[5] Id.

[6] Kristina McQuaid, Delta & Northwest File for Bankruptcy: Is it Time to Ground a Major Airline?, 29 Hous. J. Int'l L. 663, 675 (2007).

[7] Horizontal Merger Guidelines, April 8, 1997,  http://www.usdoj.gov/atr/public/guidelines/hmg.htm.

[8] Id.

[9] Rick Seaney, Do Airline Mergers Mean Higher Prices? ABC News, Feb. 13, 2008, http://abcnews.go.com/Business/BusinessTravel/story?id=4278717&page=1.

[10] McQuaid, supra note 6, at 677.

[11]  Id.

[12]  Id.

[13]  Id.

[14] Carey & Prada, supra note 4.

[15]  Id.

[16] McQuaid, supra note 6, at 685.

[17] Carey & Prada, supra note 4.

[18] Id.

[19] McQuaid, supra note 6, at 683-684.

[20] Id. at 665.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] McQuaid, supra note 6.

[26] Id.

[27] Id.

[28] Id.

[29] Marilyn Adams and Barbara Hansen. Airline Merger Would Have a Big-City Impact, USA Today, Jan. 20, 2008, http://www.usatoday.com/money/industries/travel/2008-01-20-airline-merger-market-share_n.htm.

[30] Id.

[31] Oberstar, supra note 1.

[32] McQuaid, supra note 6, at 691.

[33]  Id.

[34]  Id.

[35]  Id.

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