Networks Report Zero Upside to Delta/Northwest Merger
The big bad scary airline merger – it’s the way the media have portrayed the announced merger between Delta Air Lines and Northwest Airlines.
Each of the three networks gave little or no upside to this merger. The worst offender was ABC’s April 14 “World News with Charles Gibson.”
“It’s an unsettled time in the skies – planes grounded, flights cancelled, spiraling ticket prices,” ABC correspondent Lisa Stark said. “And now, things could get even more complicated. Delta (NYSE:DAL) operates 1,500 flights a day with hubs in Atlanta, Cincinnati, New York and Salt Lake City. Northwest (NYSE:NWA) – some 1,200 flights a day with hubs in Detroit, Minneapolis and Memphis. Put the two together, and passengers could take a hit.”
According to the “World News” report, the “hit” passengers are going to take is that there will be less capacity, which will decrease the supply of available seats and cause the price to increase.
“For consumers, the downside is that the airlines that merge are going to be trying their hardest to take planes out of the mix, to take destinations out of the network,” Richard Aboulafia, an aviation consultant, said to ABC News. “And therefore, they can have fewer choices and higher prices.”
But the market isn’t as simple as that. For example, although both airlines say they won’t close any of their hub cities, ABC still said it was a possibility.
“Some analysts believe the most likely targets would be Cincinnati and Memphis,” Stark said. “If those cities lose their status as hubs, flights could be cut dramatically, causing even more crowded planes and more inconvenience to passengers. When American and TWA merged, American dropped St. Louis as a hub. The number of available seats has fallen by 75 percent.”
But St. Louis’s loss of hub status for American Airlines (NYSE:AMR) wasn’t a bad thing for the airport’s fares.
Hub airports are dominated by one carrier and serve as a transfer point for that carrier. Since the St. Louis airport was no longer serving as a transfer point for American Airlines, there was no longer a need for all the capacity, hence the 75-percent decrease. However, once American decreased its St. Louis presence, it freed space and allowed for Southwest Airlines (NYSE:LUV) to enter the St. Louis market.
That caused St. Louis to experience the “Southwest Effect,” a dramatic decrease in airfares by all airlines at a particular market created by the need to compete with Southwest. Southwest is able to offer lower fares because of its unique “low-cost carrier” business model. Other airports with significantly lower fares because of Southwest’s presence include Baltimore, New Orleans, Raleigh-Durham, N.C., and Nashville, Tenn.
One of the airports Stark said could be “de-hubbed” – Cincinnati – is dominated by Delta Air Lines. Because Delta has a commanding presence in Cincinnati, they are able to control the market. Despite all the capacity in the Cincinnati market, the airport traditionally has the highest airfares for any major in city in the United States, according to USA Today.
The April 14 “CBS Evening News” interviewed Rep. James Oberstar (D-Minn.), chairman of the House Transportation and Infrastructure Committee, who was also opposed to the merger.
“In every merger that we have seen, there’s been a reduction in competition,” Oberstar said. “Fares will go up. Choices will go down. Consumers will bear the brunt of it.”
However, CBS neglected to point out Oberstar, whose home state is the location of one of Northwest’s hubs, has regularly been sympathetic to one of his district’s largest constituencies – the Air Line Pilots Association union, as pointed out by TheStreet.com’s Ted Reed on April 14. The pilots’ union has been very critical of the merger and even opposed it early on.
The April 14 “NBC Nightly News” also disparaged the merger.
“[A]ll of this merger talk could mean higher ticket prices since there would be fewer airlines – bad news for passengers,” NBC correspondent Tom Costello said.
But that concern is based on the notion that merger would allow Delta and Northwest to put a stranglehold on some routes because the two route structures overlap in some markets. However, the only routes where the two directly compete with one another are the routes to each other’s hub cities – for example between Atlanta and Memphis, Detroit and Cincinnati or Minneapolis and Salt Lake City. In the grand scheme, that is very little overlap, as aviation consultant Darryl Jenkins pointed out on CNBC’s April 14 “Squawk on the Street.”
“I think in maybe 12 out of 25,000 markets we’re going to see that happen,” Jenkins said. “There’s very, very little overlap in this and if you look at the top thousand markets, we only have 12 that are overlapping. So, in terms of this merger causing fares to go up, that will not happen.”
