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Airline merger rush is on hold, for now

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Airline merger rush is on hold, for now


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The headlong rush toward consolidation in the airline industry continues, albeit at a slightly slower pace. While there’s a better than 50:50 chance we’ll see the current Big 6 pared down to the Big 3, through mergers between Delta and Northwest, United and Continental, and American and a partner to be named later, such a scenario is hardly a certainty.

In the short term, the talks between Delta and Northwest have been at least temporarily derailed by the inability of the two airlines’ respective pilots unions to agree on terms for assigning seniority when the union memberships are consolidated.

But even assuming the pilots can resolve their differences, there remain significant hurdles both to the success of the merger initiatives, and to the ultimate success of merged carriers.

Before any of the envisioned mergers take place, they will face scrutiny from Congress and ultimately require the blessing of the Department of Justice. And the current credit crunch makes financing of such mega-deals more challenging than would be the case in a more hospitable environment.

Looking ahead to the ability of merged airlines to operate more profitably than their constituent airlines could individually, the conventional wisdom that bigger is better—more profitable, more efficient—is under attack from a number of different quarters. For example, industry analyst Adam Pilarski is quoted in a recent Air Transport World column as follows: “I don’t see any synergies that get translated into cost savings or revenue enhancement.” The biggest payoff of the mergers, according to Pilarski, will be the fees and bonuses earned by consultants, lawyers, and airline executives.

In a Fortune article, “Why Delta-Northwest won’t work,” Barney Gimbel sizes up the prospects for a merged Delta-Northwest airline thusly: “An analysis of the likely deal terms suggests this merger won’t overcome the many problems facing airlines. In the end, we might just have a bigger company plagued by the same problems, including sky-high oil prices and powerful labor unions.”

And what about the future, if the mergers are approved and enacted? The picture painted by Fortune’s Gimbel is an unappealing one. “After a Northwest-Delta deal, expect to see the remaining large carriers—American, Continental, United and US Airways—attempt similar mergers with similar terms. And then what do you have? Bigger companies flying the same routes with the same airplanes—only now with higher labor costs. For some reason, in the airline business, people always forget that bigger doesn’t mean better.”

Whether the merger cheerleaders or the skeptics turn out to be right, the consumer experience of a consolidated airline will be the same: fuller planes and higher prices.

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