Delta-Northwest, United-Continental mergers soon?


The Wall Street Journal is reporting that a merger deal between Delta Air Lines and Northwest Airlines could happen as soon as next week. Talks between the two were previously strained as the senior management of both carriers disagreed over whom would keep high-ranking management positions, but they have since come to an agreement.

As a result of Delta and Northwest's merger potential, merger discussions between United Airlines and Continental Airlines have also reportedly "grown more serious," said the article. United has proposed a merger with Continental before and has been turned down, but if Delta and Northwest announce a deal, Continental could change its mind very quickly and agree to merge with United, which has been actively looking for a merger partner for some time now.

An interesting point in all of these merger talks is Northwest's so-called "golden share" in Continental. This is basically some preferred stock that allows Northwest to abort a merger between Continental and another carrier. If Northwest and Delta do merger, however, Continental has the option to acquire the "golden share" for $100. Continental would be able to get the stock even if the Northwest-Delta deal later falls through.

The mergers raise a lot of inevitable questions - what types of aircraft will the combined operations operate (what will happen to Northwest's A330s)? Which hubs will stay open and which will close or be downscaled (Memphis, Cincinnati, etc.)? What international routes will be dropped or added? It's most likely that the answers to these questions will be worked out before the merger is announced (after all, it would be pretty stupid to merge first and then tackle those problems). As always, lots of things could happen. American Airlines, which is being left out of all of the "merger madness" at present, could intervene somehow. Labor unions or antitrust regulators could always prevent these mergers from going through (and with the size of these airlines, any mergers would get a high amount of scrutiny from the antitrust folks).

2 comments:

Raphael said...

It seems the goal of mergers such as this is to achieve profitability by creating one BIG airline out of two marginally solvent smaller ones. I think this is the wrong way.

In the airline industry today, size is no longer the exclusive driver of value to the shareholder. Sheer size can certainly assuage supply-chain woes, creating economies of scale and reining in costs- an attractive proposition in this age of rising fixed expenses. But the real path to profitability for Legacy carriers is an overhaul the existing business model. Take any of the LCCs: Southwest, AirTran, EasyJet, ryanAir, Atlas Blue… they are all smaller, leaner, internet-driven and highly profitable. They have been able to develop ancillary revenue streams much more efficiently than the legacies, and have effectively demonstrated the benefits of point-to-point flights versus the limitations of the “hub and spoke” concept. They have adapted to the prevailing demands of the travelling public, tethering their fortunes to internet booking and unbundling their core services.

In the process, LCCs have transformed themselves into thriving e-commerce enterprises, creating value for shareholders and maximizing profits; legacies are still trying to be the biggest kid on the block.

Raphael Bejar, CEO
Airsavings, SA France

Anonymous said...

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