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Delta-Northwest Merger is Harbinger of Mega-Airline Future

Posted on: Wednesday, 16 April 2008, 06:00 CDT

Most airline industry observers don't expect federal regulators under the Bush administration to quash a merger of mega-carriers Delta Air Lines and Northwest Airlines.

But how will a Delta-Northwest combination play in Milwaukee?

Northwest owns a 47 percent passive interest in Midwest Airlines, the Milwaukee-based carrier that also has a significant presence in Kansas City. Earlier this year, Midwest was acquired by a private equity group that partnered with Minneapolis-based Northwest in a $451 million deal.

Midwest and Northwest together control nearly 70 percent of the market at Milwaukee's Mitchell International Airport. A Delta purchase of Northwest would give those three carriers about 75 percent of airport's market share, said Michael Waxman, antitrust expert and professor at the Marquette University Law School.

"I don't think they're going to make a decision on this deal based on the Milwaukee market," he said. "But it'll be interesting to see if that kind of dominance in Milwaukee is questioned by the Justice Department. The combined airline could be forced to give up gates to other low-cost carriers, such as AirTran (Airways)."

Delta and Northwest announced a $3.1 billion stock deal Monday evening that would create the world's biggest airline, pending shareholder and regulatory approval. The domestic route structures of the two legacy carriers generally don't overlap, and analysts like that Delta is prominent in Europe and Northwest in Asia.

Analysts say the proposed merger has implications for airlines throughout the industry from the largest to the smallest.

Reports surfaced Tuesday that United Airlines and Continental Airlines were set to revive merger talks to compete against a combined Delta-Northwest. Continental's top executives sent a memo to all employees, saying the company would do whatever is necessary to survive and to succeed in a changing competitive landscape.

AMR Corp., parent company of American Airlines, made no immediate comment regarding the Delta-Northwest announcement. However, executives of American, currently the biggest U.S. carrier, most likely will face questions about the deal from analysts during its conference call today to discuss first-quarter earnings. Analysts have forecast a $300 million quarterly loss for AMR.

The implications for Midwest are not clear.

Midwest was pursued by AirTran for nearly a year before Midwest's board agreed last year to be bought by TPG Capital to remain an independent carrier. The deal was completed in January.

But Midwest's staying independent also meant allowing Northwest, its bigger rival to the north, to hold a big minority stake -- albeit as a passive investor. TPG executives also indicated that Northwest in the future could have the option to buy the remaining 53 percent interest in Midwest.

As of now, Midwest's ownership structure will remain the same.

Monday's announcement "doesn't really change the situation with Northwest's stake in us," said Michael Brophy, a Midwest spokesman. "If anything, there could be opportunities for us given our code share with Northwest. But beyond that, a lot of this gets into speculation of what might happen in the future. Things can change pretty quickly, particularly in the airline industry."

Northwest said it does not believe its stake in Midwest will become an issue.

"We don't anticipate that our passive interest will have any effect on the Northwest-Delta transaction's regulatory review process," Northwest spokeswoman Tammy Lee said.

AirTran also downplayed any potential involvement in the Delta-Northwest process as it affects Midwest.

"It's too early to speculate on those kinds of scenarios," said Tad Hutcheson, an AirTran spokesman. "We're trying to focus on our airline, fly through the crisis of $110-a-barrel oil, and come out stronger than before."

AirTran's main hub is in Atlanta as Delta's low-cost competitor. In addition, the carrier currently has 22 flights to 12 cities out of Milwaukee, Midwest's principal hub. Hutcheson said there are gates available at Mitchell International if AirTran wanted to expand.

Analysts reached Tuesday generally agreed, saying they doubt regulators would show concern regarding Northwest's stake in Midwest.

"Look, this is a Republican administration," said Scott Hamilton, managing director of Leeham Co., an airline consultant. "Republicans have never seen a merger they didn't like. They couldn't (care less) about Midwest."

Midwest has 28 flights daily out of Kansas City International Airport and currently is the airport's second-busiest carrier. Midwest's regional service also has six departures daily from Kansas City.

Hamilton said AirTran would not be interested in pursuing Midwest again in the current environment of record fuel prices and an airline industry amassing huge losses.

"I was skeptical of Midwest's business plan back then, and it still doesn't make sense to me," he said. "Despite a promise to keep service, they reduced their flights in Kansas City. AirTran isn't going back to acquire Midwest."

Midwest by early May will eliminate four flights from KCI to three Florida cities. The airline said that it remained committed to Kansas City as a principal operating base and that the reduction was a response to a worsening economy and higher fuel prices.

A combined Delta-Northwest would have fewer KCI flights than Midwest but would carry more passengers. Delta and its regional carriers offer nonstop Kansas City departures to Atlanta, Salt Lake City and Cincinnati. Northwest and its regional affiliates fly from KCI to Minneapolis, Detroit, Memphis and Indianapolis.

Hamilton said big mergers in the airline industry rarely work as planned, pointing to the US Airways-America West combination that is still not completed three years after the merger announcement.

"Anytime you have fewer competitors, it's going to be bad for consumers in terms of prices," he said. "And that's setting aside all the inevitable service issues that mergers of this size create."

The Delta-Northwest merger will be painful, but the airline industry's consolidation is necessary, another analyst said.

"Consumers have been living in a fantasy land, paying low fares for a long time now," said Richard Aboulafia, vice president of analysis for the Teal Group, an aviation consulting firm.

"We have too many big hub-and-spoke carriers with a lot of capacity that has to be cut. We may get down to three legacy carriers by the time the consolidation is done, and that would be two more than most countries."

Source: The Kansas City Star

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