The proposed U.S. Airways/Delta Air Lines merger could be the first move in what observers are saying could be an industry-wide consolidation craze. According to a Reuters report, United Airlines Chief Financial Officer Jack Brace yesterday said, "The industrial logic of mergers in the airline industry is so compelling. We believe mergers in the airline industry have significant synergies, and we believe the industry needs to consolidate."
In the meantime, Delta’s CEO Gerald Grinstein has said that while Delta will “of course” review the U.S. Airways proposal, he remains determined to bring Delta out of bankruptcy in the first half of 2007, “as a strong, stand-alone carrier.
“Our plan is working and we are proud of the progress Delta people are making to achieve this objective,” said Grinstein in a statement. “The bankruptcy court has granted Delta the exclusive right to create the plan of reorganization until February 15, 2007. We will continue to move aggressively towards that goal.”
In a preliminary analysis released yesterday, Business Travel Coalition Chairman Kevin Mitchell said the stability the proposed deal would provide to the airline industry “could likely justify the merger.” He pointed out that a larger, more efficient Delta Air Lines could “effectively compete with LCCs [low-cost carriers] instead of fleeing into increasingly risky international markets.”
But, Mitchell also warned that the proposal could have some negative consequences for business travel. For example, U.S. Airways has stated the proposed merger could result in a capacity decrease of 10 percent for the two combined airlines, which could mean higher ticket prices for business travelers, Mitchell said. He also predicted that important business centers could see reduced service.
Mitchell characterized the proposed merger as only a “near-term” fix to the industry’s problems. “As capacity would come back into the system during the next couple of years, yields would decline at the same time labor would be seeking snapbacks in pay and benefits,” Mitchell said. “Unable to generate adequate full-economic-cycle return levels on the cost of capital, network airlines would go back to the death spiral of near-constant restructurings and slow liquidations.”