Delta Merger Talk Produces More Questions Than Answers

On November 15, US Airways chief Doug Parker announced his airline’s intention to purchase Delta for $8 billion. Aside from the price of the transaction, details of the proposed merger are sketchy. Parker estimates that 10 percent of the consolidated airlines’ routes would be shed. He was also careful to mention that the two frequent flyer programs would be combined and no miles would be lost.

For consumers, especially current US Airways and Delta flyers, many questions are left unanswered. The topic on everyone’s minds is how a potential merger would affect the loyal members of both airlines.

So many unanswered questions

The first question, of course, is whether the merger is likely to take place at all. Before it does, the support of Delta’s creditors, the bankruptcy court, and the Justice Department must be secured. And there’s an outside chance that another airline will make a better offer and edge US Airways out of the picture.

I’ve heard estimates from knowledgeable industry analysts ranging from 60-40 to 40-60 that the merger will be consummated. So there’s basically an equal chance that the merger will go through or that all these questions are in vain.

If the merger does go forward, several more questions arise. Operationally, what would happen to the two airlines’ hubs? It’s hard to imagine, for example, that both US Airways’ Charlotte and Delta’s Atlanta hubs would make sense if the two carriers combined route networks. My best guess is that Atlanta’s status would be preserved, and Charlotte would be downgraded to a “focus city.”

Similar questions arise regarding the future of the East Coast shuttle services operated by both airlines. Presumably one would have to be sold off to address anti-trust concerns. Which will get the heave-ho? I have no good guess.

Another key question concerns the new carrier’s alliance affiliation. US Airways is a member of the Star Alliance; Delta is a founding member of SkyTeam. I’m betting the new airline would choose to cast its lot with SkyTeam, where it would extend its special status as a founder as well as its clout as the world’s largest airline (which a combination of Delta and US Airways would be). If the new airline remains with the Star group, it would play second fiddle to United, a founding partner and that alliance’s unofficial leader.

Then there’s the question of ticket prices. Conventional wisdom suggests that prices increase when competition decreases. In some markets, where US Airways and Delta are the two primary contenders, a merger would lead to higher prices in the short term, but in most markets there’s enough competition to keep any single carrier from exercising monopoly power to squeeze consumers.

The affect on frequent flyers

Looking at the prospects for frequent flyer program participants, there’s good and bad news. On the plus side, combining the route networks of US Airways and Delta will give members of a consolidated program access to more flights on which to earn and redeem miles.

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On the negative side, as I’ve suggested [%1628072 | | in my blog %], it’s almost inevitable that award availability would be further compromised by combining Delta’s SkyMiles and US Airways’ Dividend Miles into a single program. In this scenario, combining accounts from the two programs would push the balances of some dual program members over the threshold for award redemption. As a result, the number of useable miles would increase faster than the number of available award seats.

When the dust settles…

In the short term, if the recent merger between America West and US Airways is any indication, travelers can expect glitches galore. Among other stumbles, the two carriers have had problems integrating both their mileage programs and their reservations systems. A US Airways-Delta tie-up would face similar challenges. It could be a bumpy ride.

Longer term, once the dust has settled, it’s likely Delta customers will find themselves on the losing end of the deal. That’s because their flying experience will change more dramatically than current US Airways members’.

It’s worth remembering in any discussions of the current US Airways that, by whatever name, we’re really talking more about America West. Because America West initiated the merger with US Airways, the great majority of the top managers who survived the merger were carryovers from America West. This makes sense: America West had reinvented itself as a successful low-cost carrier, while US Airways had been badly managed for years and was on the verge of extinction.

The same will be true if US Airways is successful in acquiring Delta. While the combined carriers would operate under the Delta name, the new carrier’s corporate DNA would owe more to America West, by way of US Airways, than it would to Delta—again, because the management team would come more from the executive suites of US Airways.

US Airways is already a low-cost carrier, with prices and service levels appropriate to that business model. With the addition of Delta, US Airways customers will have a more extensive network to choose from. They’ll benefit from more destinations, more airport lounges, and more mileage-earning opportunities. While frequent flyer awards may be in shorter supply, the overall effect would be a net positive.

But Delta is only now in the process of transforming itself, through bankruptcy, from an old-line, full-service airline into a lean-and-mean operator. Whether it’s acquired by US Airways or not, the future Delta will be more austere than its current incarnation. It’ll have a grumpier workforce, lower levels of service, and a less generous mileage program.

If US Airways has its way, the pace of Delta’s reinvention would be accelerated and the end result will be a more thorough transformation than Delta’s management ever would have initiated. That change will likely be more than Delta’s customers can readily embrace.