Come Fly With Us

So most passengers will probably just shrug, on the principle that things are so bad they can’t get worse. But the frequent travelers who have learned to fight their way through airports, onto uncomfortable planes that might or might not take off with or without their baggage, in fact fear we might be living through the halcyon days of air travel: A majority (54 percent) expect the merger to result in deterioration in service.

History is on the side of the pessimists. In the period immediately following every airline merger, chaos is the order of the day–or year. Pilots find that the control panels on the merged carriers differ; baggage losses mount, as they did when Northwest acquired Republic Airlines in 1986; the merging of reservation systems causes kiosks and websites to malfunction, as U.S. Airways and America West discovered; strikes occur as disgruntled employees find the new pension package inferior to the old one. All of these are in the new Delta’s future (the Northwest brand is to disappear), with a pilots’ strike the largest looming obstacle to a peaceful integration of the two carriers. Dave Stevens of Northwest’s Air Line Pilots Association is telling his members that the deal is not in their interests. In a letter to his fellow pilots, he writes, “No pilot group is going to put up with this. .  .  . This is a recipe for failure.” Delta’s pilots, on the other hand, seem likely to ratify a deal that hands them a 17 percent pay rise over four years, better pensions, equity in the new company, and guaranteed jobs for the next two years.

If indeed the merger is consummated. American Airlines might make a bid for Northwest, especially if United and Continental go through with rumored plans to wed, displacing Delta-Northwest as the world’s largest carrier. Regulatory authorities might kill the deal, in response to pressure from such as Minnesota Democrat James Oberstar, chairman of the House Transportation and Infrastructure Committee, who in advance of his fact-finding hearings pronounced the merger “probably the worst development in aviation” since deregulation. Or antitrust enforcers might reject the deal on the grounds that it would trigger a wave of mergers that would unreasonably increase the market power of the surviving airlines.

Which brings us to two key questions. Will the merger result in efficiencies that strengthen the financial position of Delta, and end periodic trips to the bankruptcy courts? And when the initial trauma is over, will passengers be better off?

Delta and Northwest expect an initial run-up in costs due to “harmonizing wages and benefits”–read, a $400 million annual bribe to employees to get them to go along–and other up-front costs of consolidation. In the longer term, the new Delta expects to be able to wring better terms from some of its suppliers, and to save between $400 million and $600 million by using the combined fleets better to match supply to demand. Throw in an anticipated $400 million in additional revenue from passengers attracted by improved connections, reduced travel times, and the like, and you have about $1 billion in “network synergies.”

Possible, but far from certain. The airline industry is not the only one in which mergers have failed to produce increased savings or revenues. Remember, the single largest cost component is jet fuel, and while a bigger Delta might wring concessions from its caterers, it is not likely to persuade OPEC to lower the price of oil. Nor will labor costs come down if management sticks to its plan to minimize layoffs.

What of increased revenues? The airlines’ press releases are careful to pin their hopes on “more customers,” especially big corporate accounts. Not a word about possible fare increases. Which is understandable, given the congressional and regulatory reviews. Those reviews will focus on whether the formation of the largest airline in the world in terms of traffic, with 75,000 employees worldwide, $35 billion in annual revenue, serving 390 destinations in 67 countries, would have what airlines have been seeking since the protective blanket of regulation was removed, leaving them shivering in the competitive market: pricing power.

From the evidence available, it just doesn’t seem likely that mere size will convey the power to raise fares. Only 12 of the nonstop city pairs that both airlines serve overlap, and the carriers compete with each other for only 3 percent of the seats they fly, according to Doug Steenland, Northwest’s CEO. So there isn’t much competition to eliminate. Think of Northwest as serving the upper Midwest, West, and Asia, and Delta serving the East and Europe. To the extent that the new carrier does have increased pricing power, the fare increases it will be able to impose will be limited by the ability of newcomers to challenge it on most, but not all routes. About one-third of the industry’s capacity is operated by low-cost, low-fare airlines, and these show no sign of reluctance in invading domestic routes if the incumbents get greedy.

Nor will Delta have a free hand on international routes, which Ed Bastian, Delta’s president, predicts will provide “the majority of the growth we are seeing in this combined entity.” Carriers plying Pacific routes are facing increased competition from low-cost, high-service Asian carriers, and the new “Open Skies” deal opens transatlantic routes to increased competition by allowing European and U.S. carriers to invade each other’s markets free of regulatory restrictions. Delta will be free to fly anywhere in Europe from anywhere in the United States, but British Airways, Lufthansa, and other European carriers will be equally free to compete on any Atlantic routes.

Fairness also requires that we consider the possibility that higher fares might not be completely bad for passengers. Some of the Delta-Northwest airplanes are old–not unsafe, but not as comfortable as newer aircraft. Delta has about 120 MD-88s with an average age of 18 years, and Northwest’s 90 DC-9s have an average age of close to 40 years. Replacing these geriatric aircraft will involve buying out long leases and investing something like $20 billion in new aircraft. It is not unreasonable to assume that a financially healthier carrier will phase out the old aircraft a bit more rapidly and “accelerate the upgrading of existing international aircraft with lie-flat seats and personal on-demand entertainment,” as the new Delta claims it will. That might give travelers a price-quality combination not now available to them.

In the end, much will depend on whether we’ll just glide starry-eyed and hear angels cheer when the new Delta gets us up there, where the air is rarefied. We will if the merger produces a financially stable carrier capable of upgrading equipment and service, at fare levels not far from those now prevailing. History suggests this is far from certain, which is why investors dumped shares when the merger was announced. United bought Pan Am’s Latin America routes and proceeded to lose the business to competitors; American could not hold onto the West Coast business it thought it acquired when it bought Reno Air and AirCal; U.S. Airways abandoned the West Coast shortly after it acquired Pacific Southwest’s routes in that part of the country. And anticipated cost savings have often failed to materialize.

This is an industry that has not netted a profit over the more than 100 years since the Wright Brothers proved that man can fly, that has seen periods of boom followed by devastating periods of bust. Both Delta and Northwest only recently emerged from bankruptcy, a condition into which four smaller airlines (Aloha, ATA, Frontier, and Skybus Airline) have descended in recent weeks, and in which most carriers have found themselves at one time or another. This tough environment hasn’t gotten any easier, and there is reason to wonder whether an airline of this size can be managed efficiently by the same crew that has given us the service standards we have today.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).