Ask the pilot

Who benefits when airlines merge? Who gets hit the hardest?


Patrick Smith
February 15, 2008 4:02PM (UTC)

Fulfilling many months of rumor and speculation, the long-predicted consolidation of the U.S. airline industry is finally upon us. As of this writing nothing is official, but reports are that Delta Air Lines and Northwest Airlines, the nation's (indeed the world's) third- and fifth-largest carriers, respectively, are close to agreeing to terms, and will announce their intentions to merge. It may already have happened by the time you are reading this.

With the first merger on the table, expect at least two, and probably three, additional ones in short order. Don't be surprised if a United-Continental deal is struck in the coming weeks -- or even days. There is talk of a Southwest-AirTran union as well.

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Whether this is good news or bad, and to what degree, remains to be seen and depends where you stand. Stockholders, employees and the traveling public each have their own perspectives and self-interests at stake. Airline mergers are notoriously knotty, and things could grow contentious as the paperwork wends its way through the approval process. Nothing will be official until the Department of Justice, the Department of Transportation and the unions all sign off. How long that might take is anybody's guess, but I imagine there will be a push to have everything signed and sealed before next fall's election. A change of presidents -- or, more important, a potential change of parties -- could hamper things substantially. The existing Republican administration would presumably be more merger-friendly than an incoming Democratic regime, especially if large-scale layoffs are part of the plan.

Why is this happening? Well, although the legacy carriers have mostly recovered from the calamitous stretch that began just prior to Sept. 11, their long-term health is hardly ensured. Among other problems, the airline industry suffers chronically from oversupply -- that is, too many seats chasing too few passengers. Periodically it gets so bad that some airlines cannot remain economically viable. The weakest go out of business, either by ceasing to operate or, as happens more often, by being swallowed in a merger or acquisition. It's nature's way of thinning the herd. Meanwhile, for six years the majors have been selling tickets at unsustainable prices in order to remain competitive with the likes of JetBlue and Southwest. Call it collusion, monopolizing or whatever you want, but banding together provides them a competitive edge that will help stabilize a battered and teetering industry, dampening what has for decades been a wildly cyclical pattern of highs and lows.

It's also a hedge against future catastrophes such as a terrorist attack, a severe recession or continued spikes in petroleum prices. If, as many are predicting, the so-called peak oil crisis hits in the next five or 10 years, massive consolidation will be the only means of survival. Best to start now. The eagerness to merge is in many ways a survival tactic.

Mergers are nothing new; the main difference, this time, will be the scale of the combined companies. At a minimum, four of the industry's six biggest names will be pairing up. The resulting entities will be immense. To give you some idea, below are the world's top 10 carriers, measured in annual RPKs (revenue passenger kilometers, shown in millions), the standard gauge of airline size.

1. American (224)
2. Air France/KLM (197)
3. United (189)
4. Delta (159)
5. Continental (127)
6. Northwest (117)
7. British Airways (115)
8. Lufthansa (110)
9. Southwest (109)
10. Japan Airlines (96)

Granted a merger would bring about the trimming of redundant routes and the reshuffling of aircraft, but either way a Northwest-Delta and United-Continental axis would instantly cast American Airlines into third place. The absence of American from the ongoing merger talks leaves the airline at a bit of a disadvantage. The pairing off of its four chief competitors might send AA scurrying after a dance partner of its own, but options will be limited. Somehow an American-US Airways combo wouldn't be as mutually beneficial as those already in play.

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Take Delta and Northwest, for example. Delta has a gigantic transatlantic network, with hubs out of JFK and Atlanta. It covers much of Europe, reaching into India and the Persian Gulf, with up to seven destinations in Africa actively served or on tap. Northwest, meanwhile, has been flying across the Pacific for 50 years, serving more than a dozen Pacific Rim cities, and owns several coveted routes into China. United-Continental presents much the same thing. United's routes to Asia and Australia would be a fitting complement to Continental's presence in Europe, India and the Middle East.

(Delta had initially been in talks with United, which among other things compels us to remember Pan Am. United purchased almost all of Pan Am's Asia network back in 1986. Delta, meanwhile, took possession of most of the dying Pan Am's European routes, as well as its lucrative Shuttle operation, in 1991. A Delta-United combo would have been the closest thing possible to a Pan Am reincarnation. Of course, airline stockholders don't make billion-dollar decisions based on nostalgia.)

Aircraft integration will be one of the many challenges. Fleet issues aren't of primary concern when determining mergers, but it's something to consider. Looking at United-Continental, the task shouldn't be too difficult. There's strong commonality between the two. Continental operates an all-Boeing family of 737s, 757s, 767s and 777s. United, too, flies each of these. The only additions would be United's Airbus A320 and Boeing 747 fleets.

Delta-Northwest, on the other hand, looks like a nightmare. Delta flies five types: the MD-88, 737, 757, 767 and 777. Northwest has a hodgepodge of planes spanning five decades of design: the Airbus A320 and A330; the Boeing 757; two very different types of 747, including a "classic" freighter variant; a back order of 787s; and of course its venerable fleet of McDonnell Douglas DC-9s, the majority of which were built in the 1960s. Only one aircraft type, the 757, is shared by the two airlines. In the long run this mix would need to be optimized around a core of three or four basic airframes. How you would even begin to approach this is something I can't fathom. (It will be a long, slow process, but methinks those DC-9s will be phased out more quickly than is currently planned. And from an enthusiast's point of view, I'd love to see a 747 in Delta colors.)

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Then again, perhaps the traditional merger formula, with an all-out unification of workers and equipment, will be postponed or avoided altogether. In Europe, Air France and KLM completed a recent merger, but they continue to operate separately, with their own employee groups, fleet structures and so on (heck, they don't even speak the same language). On paper, perhaps, Air France/KLM is a single entity. Operationally, it's more of an alliance. A similar arrangement by DL/NW or UA/CO might ease the complex integration issues.

Not the least of which will be the assimilation of employee groups. This is where things really get hairy. Seniority lists will need to be combined; pay scales and benefits restructured; collective-bargaining agreements rewritten. Mergers are notoriously unkind to labor, and job cuts are a distinct possibility, but I'm uncertain who stands to lose more: ground staff, mechanics, flight attendants, pilots. Each of these groups suffered mightily during the past six years, when tens of thousands lost their jobs and collective-bargaining agreements were gutted. Many remain out of work, including about 3,000 pilots still on furlough, but on the whole things have settled down. As for me personally, I returned from a five-year layoff only last March. I am now flying internationally, and after 16 years in this pitiless business I've actually opened a savings account. Quite honestly, things could not be better. Now this. Should I expect to lose my job again?

"The day when airlines could arrange mergers and expect their workers to just live with the consequences are long gone," says a spokesman for the Air Line Pilots Association. "Employees and their unions are demanding that their concerns be addressed before any merger is consummated. The executives who cook up these deals reward themselves with massive bonuses and platinum parachutes. So it's only fair that workers should have the right to ask, 'What's in it for us?' and protect themselves against becoming 'collateral damage.' Unions have learned how to take their battles directly to Wall Street. Any airline that ignores the effects of a proposed merger on its workers does so at its own peril."

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For consumers, on the other hand, one potential windfall might be a reduction in flight delays. Ideally, carrier consolidation means fewer flights using larger aircraft. This will vary market to market, but on the whole things should get better. On the downside, you can probably expect higher fares in some markets, especially those dominated by a single airline and lacking a strong discount carrier presence. You'll be hearing plenty on this topic from anti-merger activists, but bear in mind that in spite of moonshot spikes in oil prices over the past few years, airfares remain at or near historical lows.

On the whole, the mergers are likely to fortify the U.S. airline industry for the future. At what cost this comes to their workers, and to passengers, time will tell. In the long term, I see it as beneficial for all involved parties: The stockholders will get better pricing power and a return to profitability, which in turn will mean increased stability and better conditions for workers. Passengers will see fewer delays, while fares should remain reasonable. In the short term, unfortunately, it might be traumatic.

A brief look at previous U.S. mergers:

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Pan Am and National. Pan Am was the global icon, but National had sorely needed domestic coverage. Their union was approved in 1980. I own a souvenir timetable book from that year celebrating the merger (remember when U.S. airlines used to print timetables?). The cover features a graphic of the carriers' logos superimposed -- Pan Am's blue globe and National's orange sun -- and the words "Pan Am Goes National."

Northwest and Republic. In 1986, Minneapolis-based Northwest Orient purchased Republic Airlines for $884 million. The "Orient" tag was dropped, and the present-day Northwest Airlines was born. Republic was itself an amalgamation of three domestic airlines -- North Central, Southern Airways and Hughes Airwest. What was formerly a diverse group of independents representing almost every point on the compass was now aligned only in one direction: Northwest.

American and TWA. There's a fine line, sometimes, between a merger and an outright takeover. In any case, American Airlines purchased the bankrupt TWA in 2001. The results weren't pretty, with 30-year TWA veterans thrown out of work. Several hundred ex-TWA pilots remain on furlough.

US Airways and America West. Regulators signed off on this one in late 2005. Although both airlines' pilots were represented by the same union (ALPA), a contentious battle resulted. A controversial arbitrator's ruling gave integration preference to the pilots of America West. As a result, many longtime US Airways pilots languish at the bottom of the combined seniority list, or have been furloughed. The history of US Airways is nothing so much as a legacy of mergers. America West, Allegheny, Piedmont, Mohawk and PSA are all part of its lineage.

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Do you have questions for Salon's aviation expert? Contact Patrick Smith through his Web site and look for answers in a future column.


Patrick Smith

Patrick Smith is an airline pilot.

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