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Entries in antitrust analysis of airline markets (1)

Sunday
Feb102008

Continuing to Ponder a Northwest – Delta Combination

Over the past weeks, I have written about what I see as catalysts behind the current consolidation talk/activity that is enveloping the industry. In addition to the catalysts I have talked, as have many others, that the two biggest hurdles to a deal are labor and the regulators. Further I have addressed an influential member of Congress that supported open skies and increased competition in the name of consumer benefits but fails to recognize that a healthy US industry lies at the core of delivering those very consumer benefits.

The Labor Hurdle

Unlike the naysayers who continually point to labor issues as likely to derail any potential deals, I actually see labor as a catalyst to the current activity. Why you may say? Because simply, any enlightened leader understands that the next round of Section 6 negotiations cannot, and will not, make their respective members whole following the restructuring round of negotiations.

The industry is no position to return to labor the $11 billion in concessions made over the period particularly when faced with a fuel headwind of $14 billion over the same period. What labor can do in a consolidation scenario is to position themselves in multiple ways to address their most pressing near term concerns while doing their best to ensure that their members will survive the ongoing Darwinian Struggle.

The three most significant issues facing labor in any consolidation scenario are: 1) determining labor representation; 2) seniority integration; and 3) negotiating a single collective bargaining agreement. I recently wrote a post on the first two items which discussed the nuances of potential Delta merger scenarios. The next day, Susan Carey and Paulo Prada of the Wall Street Journal filed a story in which they write “Executives at Delta Air Lines Inc. and Northwest Airlines Corp. are trying to build a common labor contract for the 11,000 pilots at both airlines before they complete a merger deal, according to people familiar with the matter”.

Further they write, “Delta and Northwest want to quickly achieve the synergies that would flow from a merger and avoid a messy, protracted labor wrangle that could arise if they wait to get pilots' agreements after a merger were announced or consummated.”

What is encouraging with all of this news is that the current industry is working hard to address many of the issues that the talking heads of the industry like to use to create doubt. If a single collective bargaining agreement construct is agreed to, Delta and Northwest have placed a high hurdle for any deals that might follow. I guess Delta and Northwest are redefining what conventional wisdom has come to accept as a labor hurdle.

The Regulatory Hurdle

If the current “odds on favorite” deal plays out, nearly 14 months to the day after Delta began its work to fend off a hostile bid from US Airways, Delta will be put in the position of defending why a consolidation scenario makes sense for the carrier, and the US industry, versus pulling out the guns to explain why a deal makes no sense. Ironic, yes. Surprising, no. Aside from Atlanta and a good market position in New York, the Delta network is anything but an envy of the industry. As for Northwest’s network with it hubs in Detroit and Minneapolis/St. Paul, the best description of their domestic network remains – it is cold, it is dark and it is ours. Just not high traffic volumes to Fargo and my Duluth home.

In the link to the powerpoint presentation entitled “Proposed US Airways/Delta Merger Would Be Highly Anticompetitive” above, it is easy to see how Delta played on the small community air service fear. It is also true that a combination with Northwest will result in a very different competition analysis given the more end-to-end attributes of the two networks. My guess is the combination will be looking for similar synergies that US Airways recognized -- read fixed cost savings while not undermining the pro forma revenue line of the merger scenario.

It is true that the Atlanta and Charlotte hubs have significant overlap. It is true that Salt Lake City overlaps with Phoenix and Las Vegas. It is true that Cincinnati overlapped with Pittsburgh (particularly before the downsizing). I am not going to acknowledge the suggested cited competitive overlap between New York JFK and Philadelphia as problematic.

There have been some reports suggesting minimal reductions can be expected at any of the hubs utilized by either Northwest or Delta. Look at page 6 of the powerpoint presentation. If Charlotte and Atlanta served 90 similar points, just imagine what percentage of cities served at tiny Memphis are served by Delta’s Atlanta megahub? The same statement would apply between Cincinnati and Northwest’s megahub at Detroit. And this is before we throw Midwest into the network mix.

Yes the restructuring that just recently concluded removed some of the redundancies between the Delta and Northwest networks. When US Airways made that hostile play for Delta, traditional anti-trust analysis would have shown this combination (DL/NW) to drive a higher concentration of market power than most other possible combinations. And a Continental – United combination would create a relatively low measure of market power across their respective networks.

But Is This What Is Really Important?

I am actually troubled by my own post. I have just spent 1000 words talking about what happens inside the 48 contiguous states and not what is transpiring around the globe. I am not talking about competition for China traffic between US carriers with authority today and what Korean Airlines carries over its global hub at Seoul. I am not talking about the global elite carriers that have prospered while our carriers have languished in a fragmented and hypercompetitive home market. I am not talking about the prospects of Singapore serving London Heathrow and New York with a far superior product.

No, I just did what many will try to do and limit the analysis to competition at home and not around the globe. And isn’t it the economic forces of globalization that are really at the heart of change? The naysayers will continue to fight those forces. In the end the forces always win. And in the end it really is about what structural changes need to be made to ensure that the US is in best position to regain a world leadership position. Let’s really think this through before dismissing it out of hand like Congressman Oberstar.

More to come.