Analysts ponder long-term impact of Delta-Northwest merger

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Though the "new Delta" has released details about how some fees and charges will be integrated, what the merger with Northwest will mean in the long run for passengers in terms of airfare and capacity remains an open question.

The main uncertainty for longer-term ticket costs or fleet alignments lies in questions about what impact the worsening world economy is going to have on the merger plan.

Combining Delta-Northwest operations will be difficult enough. Doing it in a down market is unlikely to make it easier. "Nobody knows how bad the global recession is going to be," said Darin Lee, principal of LECG.

Ed Bastian, Delta's CFO and CEO of Delta's Northwest subsidiary, said it would probably "take us two years before we can really operate as a single carrier."

For the moment, though, the new Delta has taken off at full throttle, wasting little time integrating certain key fees and charges as it combines $35 billion in revenues, 75,000 employees and 770 jets.

The big question now is what will happen with capacity and overall ticket pricing, especially in light of declining demand. In Q2, the Transportation Department recorded the highest average base ticket price of this decade.

Most analysts say that Delta and Northwest, like their competitors, have already cut capacity through the bone to the marrow. More trimming, they said, was not only unlikely but unnecessary. Airline executives across the industry agreed, saying they thought they had the right fleet sizes and deployments to match demand, even with the economic slowdown.

Aviation analyst Robert Mann said that instead of further capacity cuts, airlines would likely start to reconfigure their aircraft on certain international flights because of a drop in first-class passengers and a greater need for business class. "You'll see an evolution to more productive work space," he predicted.

Those predictions, along with Delta's anticipation of $2 billion in savings over time as a result of the merger, are based on a belief that passengers, especially business travelers, will return to the air as the global economy stabilizes.

But Kevin Mitchell, chairman of the Business Travel Coalition, predicted that airlines would not see the kind of business travelers for whom they're planning, and thus the new Delta would come up short. "They're not going to get the kind of revenue they hope to get," Mitchell said.

That's when airfares will likely go up, he added.

But Bastian and other analysts are hoping for a bounce on the international market.

LECG's Lee said that perhaps the most important aspect of the merger was the international brand the new Delta will enjoy.

Now, competitors have to seek to develop or solidify partnerships, analysts said. The idea of a merged Delta-Northwest helped drive Oneworld carriers American and British Airways to seek closer alliance ties, Mann said.

And more of the same is on the horizon, not only in response to the new Delta but also in reaction to the new economic disorder.

At the World Air Transport Forum in Paris (coincidentally just after the Delta-Northwest approval), CEOs of European airlines said they anticipated having to cut more costs, merge or go out of business.

 

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