In the season of romance, with Valentine’s Day near, what could be more appropriate than marriage? It may not be love, but in corporate marriage, you get merger. As we noted in “No Tailwind For Airlines,” it’s game on for serious corporate marriage with the carriers. Delta (NYSE: DAL) and Northwest (NYSE: NWA) are said to be in merger talks right now, a possible union which would create the largest airline company in the country. Delta currently has a market cap of $4.8B, while Northwest’s market cap is $4.3B. This merger talk has further pushed, or at least possibly accelerated, United (NASDAQ: UAUA) and Continental (NYSE: CAL) to fall into each other’s arms. American Airlines (NYSE: AMR), with a market cap of $3.8B, would appear to be left out of the potential consolidation picture.
To further complicate things, Delta has also been talking with United about a possible merger, so it has been clear that in this merger triangle, or perhaps quadrangle, given that it’s a party of four in this merger dance, Delta is determined to partner with somebody, and it looks as though the others will follow suit. Consolidation is the buzzword in the industry, given the sharp rise in jet fuel costs and the prospects of further trimming operating costs in other ways dim.
Delta Air Lines, based in Atlanta, has emphasized that while it is seeking a partner, it will be the partner in charge, retaining and adding control over another carrier. Minneapolis-based Northwest would provide a strong Pacific route presence to go with Delta’s plentiful Atlantic routes. United, based in Chicago, has reportedly long been advocating a combination with Continental, headquartered in Houston, which is seen as having complementary routes, in this case United having more Pacific routes and Continental more of its business on the Atlantic side.
Though the airlines were de-regulated more than twenty years ago, competing in the de-regulated market has been difficult for carriers. Delta and Northwest both emerged from bankruptcy only last year, as historically costs and competition have produced a dampening effect on potential profitability. World events, such as the September 11, 2001 terrorist attacks on the World Trade Centers towers further showed the airline industry to be hyper-sensitive to world political factors. While some analysts would say nine-eleven caused the airlines’ spiral downward, it would be more accurate to say instead it pointed out the fragility of their business. There is still some overhang with this; the other main political factor is some potential domestic opposition to consolidation from US legislators, though ultimately that is not expected to thwart the mergers.
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