Hostile bid for Delta

Merger could spur price increases

US Airways' $8 billion offer is likely to spark others in the financially weak airline industry

November 16, 2006|By Meredith Cohn | Meredith Cohn,SUN REPORTER

East Coast passengers are likely to see fewer choices and pay higher fares if a US Airways takeover of Delta Air Lines is successful, a move that industry analysts expect will accelerate airline consolidation and further shake up air travel.

Discount carriers such as Southwest Airlines are likely to make up some flight losses, but they also face pressure to raise fares to cover higher oil and labor costs.

US Airways announced yesterday its $8 billion hostile bid for Delta, which is likely to spark other offers for the airline. The financially weak industry has worked for years to fly fewer planes with passengers who pay more for their seats. The best way to make that happen quickly is for major airlines to consolidate, which is why analysts and industry insiders say that if this merger doesn't happen, another one or two will.

"From the populist perspective, it's not good," said Robert Mann, president of R.W. Mann & Co., an airline consultant. "But from the standpoint of having an industry that is around for the next business cycle," a merger is almost a necessity.

If this merger is completed, US Airways said it would cut flight capacity by 10 percent. Analysts predict some routes would be filled by Southwest, JetBlue Airways and AirTran Airways. Still there would be fewer seats for passengers, which would enable airlines to raise prices. The industry wants to charge passengers more because of soaring fuel costs and labor obligations that have sent airlines into bankruptcy, said Aaron J. Gellman, a professor in Northwestern University's Transportation Center.

"Of course it means higher fares," Gellman said. "Any time there is more concentration in the industry, there are higher fares. If the market can stand higher prices, they will keep them up."

Airlines say raising fares more in the current environment is difficult because of low-cost competition and the high supply of seats. Many have cut flights or shifted service overseas to reduce domestic capacity bit by bit, analysts say.

This kind of pressure is what led US Airways to merge with America West in September 2005, Mann said. He said that new airline cut 15 percent of its capacity on overlapping routes and raised fares in many markets.

The merger isn't a given. Other carriers will likely vie for Delta, the nation's third-largest airline, and all potential bidders would face federal anti-trust issues. Delta also said that it wants to stay independent once it emerges from bankruptcy, which is expected next year.

But if the merger does happen, the north-south routes on the East Coast could see the most losses in flights from the new airline, Mann said.

US Airways has major hubs in Philadelphia and Charlotte, and Delta has major hubs in Atlanta and New York. Both airlines offer service from Washington Dulles International and Ronald Reagan Washington National. Those areas would likely see route consolidation.

Both airlines also operate shuttle services from Washington, which are popular in the Northeast, but one would likely be sold for anti-trust reasons, US Airways said.

Several airlines might be interested in the shuttle because it serves big airports in New York, Boston and Washington. They would need to use their own gate space or pick up more from the merged airlines to handle the hourly operations. Candidates include American Airlines and United, the nation's two largest carriers.

But if there is reduced service on those shuttle routes as expected, fares would go up even more than they have in the past year for the business travelers who predominantly use them.

A US Airways-Delta merger would likely have minimal influence at Baltimore-Washington International Thurgood Marshall Airport, which is dominated by the low-fare carriers Southwest and AirTran. Delta has 6 percent of the market share, and US Airways, the dominant airline until the late 1990s, is no longer in the top five.

The big impact would likely be on business travelers who fly on the new airline, said Bob Harrell, president of Harrell Associates, an industry analyst.

He said that business fares offered this week on major carriers compared with fares for the corresponding week in 2005 are up 8 percent. But on US Airways, in the year after its last merger, fares rose 24 percent. Delta's rose 22 percent.

Overall, leisure fares in the same time period dropped 14 percent. But US Airways' dropped 36 percent and Delta's 9 percent.

"The data suggests that nothing is going to help the businessman," Harrell said.

For his part, US Airways' Chairman and Chief Executive Doug Parker insists the merger would make the airline more profitable and better able to compete with low-fare airlines such as Southwest. Industry observers say Southwest was partially responsible for US Airways' retreat in Baltimore and Philadelphia. Travelers also would benefit from the larger airline, to be called Delta, because they would have more connection options to more places, Parker said.

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