As US majors make another push towards consolidation, Delta Air Lines is emerging as a main playmaker on both the domestic and international scene
Delta Air Lines chairman Leo Mullin had said he would not move on US consolidation unless compelled. And so he was, when US Airways signed up its codeshare and marketing alliance with United Airlines in July. As these two tottering airlines moved to ally themselves in a coalition of the weak but willing, they had apparently set off a chain reaction which has brought the strong and able into the game. And for the moment it is Delta which is leading the play.
Mullin has unveiled plans for a grand tripartite alliance with Northwest and Continental Airlines. Mullin insists that he would not have sought out such a massive alliance unless US Airways made a move to weaken Delta on the East Coast. But US Airways did just that with a plan to link up with United Airlines.
Delta's proposal would clearly create a giant. The three majors combined would represent about 32.5% of domestic US seat capacity, while the pairing of United and US Airways would hold around 23%. Both would leapfrog American Airlines, which even combined with TWA, represents 19% of the US domestic seat miles.
International dimension
Other international benefits could flow from a link-up if Northwest and its long-term European partner KLM, along with Continental, were to be ushered into the SkyTeam alliance with Air France and Delta. Air France is already holding wide-ranging talks with KLM, including possible alliance membership.
Mullin insists that he is deadly serious about the domestic alliances, although some in the industry believe his real motives may be to block rival moves. The game has been played out before over the years, with politically unpalatable spoiler deals floated as a warning to Congress.
The man who sought out the United alliance, US Airways president David Siegel, appears undaunted, jokingly referring to Mullin as "Dr Evil". Siegel was clearly in good humour in his quips to the International Aviation Club of Washington recently, adding that the Delta alliance represented an "axis of evil".
Briefly turning serious, Siegel said "Delta's strategy is built on one basic element: US Airways' failure." A Delta spokeswoman said the carrier is not trying to put US Airways out of business. Mullin and Siegel have only met "for a few minutes and I kind of hoped he would call me Mr Nice Guy," says Mullin.
Jamie Baker, JP Morgan airline analyst, sees "tremendous obstacles" to both alliance plans. He notes that the United/US Airways alliance faces regulatory scrutiny that will be at least as intense as it was last year when their plans for outright merger were thrown out.
Although no equity stakes are contemplated in either of the two proposals, there are competition issues to address. Baker says that high concentration levels in certain markets such as Delta's Cincinnati hub and Continental's Cleveland base would "essentially cannibalise the Ohio Valley".
Similarly, Continental's dominance at Newark would join with Delta's strength at New York's other two airports. Overall the three carriers would have market share of nearly 47% for the New York City area, including a one-third share at the close-in LaGuardia. The three would also have a market share of about 36% at Boston and 32% at Reagan Washington National.
Opponents add that when the combined shares of United and US Airways are calculated in parallel to those of the Delta alliance, it raises the spectre of the duopoly of two sets of alliances. For example, the two groupings would hold 85%of the market in the Washington area, including the US Airways strength at Reagan and United's dominant position at Dulles. At Boston, where US Airways is strong, the two alliances would have a 77% lock on capacity.
Opponents, ranging from American Airlines to independents such as AirTran Airways, want the two alliance plans considered alongside each other, making them de facto a single case. Bert Foer, director of the American Antitrust Institute, insists the regulators look at the cumulative impact of a plan "that will determine the future of air transportation".
That would put consolidation on trial. So far, the regulators are uncertain how they will go about it and have already said they will extend their review. Foer notes that the Justice Department has come out in strong opposition to a capacity-reducing pact proposed by the two troubled intra-island carriers of Hawaii, even though both Aloha and Hawaiian Airlines are in serious financial trouble.
Although American says that it has the strength to stand on its own, a New York-based consultant to the carrier says that the Delta plan poses a great threat to his client: "Delta has this huge East-West as well as North-South strength that challenges American's ability to be the omni-directional carrier anywhere between Chicago and Denver."
Like others, he questions if the Department of Transportation (DoT) would approve the plan as it stands. "There is growing scepticism that it could get through," he says, adding that the three-way alliance plan looks more like a way to force the DoT to reject the United/US Airways plan by placing the two into the same regulatory arena.
As Baker, the JP Morgan analyst puts it, if the US Airways/United pairing is rejected, "the next combination, of Continental, Delta and Northwest, is similarly unlikely" to win approval.
More important are the international implications of the tripartite plan. According to the New York consultant: "We may find ourselves with an international realignment that could well proceed independently of any domestic US consolidation, with the two major domestic codesharings pared down or outright rejected while their related overseas link-ups are the ones that are actually consummated."
Uncertain future
Delta officials were uncertain about what would happen internationally, saying only that the integration of SkyTeam partners with Continental, Northwest and KLM would be considered over time.
Such a tie-up would immediately transform SkyTeam's position on the North Atlantic. At present it holds a 17% share of seat capacity between Europe and North America, trailing in third place behind Star and oneworld with 25% or more (see table). However, the new partners would propel it to a clear lead with over 30% of the market.
The filings show that they contemplate a joint venture for the North Atlantic while other regions would be managed under a highly co-ordinated but separate marketing structure.
At the latest SkyTeam meeting in Atlanta in September, Delta president Fred Reid suggested that co-operation could gradually emerge. "I see tactical opportunities between Air France, Continental and Northwest and between us and KLM," he says, but adding: "I don't see them joining SkyTeam imminently. I think for the foreseeable future we will not see antitrust immunity given to all the carriers."
The options that are opening up also raise questions of whether SkyTeam can maintain its commitment to keeping its current manageable size, on which Reid says its entire concept of governance is based. "We want SkyTeam to grow strategically, but we do not have aspirations to be a United Nations of the sky," he says. "We are not so large that we cannot sit down together at the same table. Our governance model is simple, with no unwieldy policies or voting rules. Instead we make decisions by consensus, and we do the work ourselves, rather than through a separate alliance staff."
Whatever form SkyTeam will assume, its moves to gain the bulk of Star or oneworld have pushed consolidation in the USA to the next stage at a time when the reality may not yet be ready for it.
Source: Airline Business
