Will mergers make money?

Delta and Northwest airlines have merged and because neither airline had a hub at Cleveland-Hopkins International Airport, it is unlikely that the merger will have any significant short-term benefits for the Cleveland economy.

The recent merging of companies in the airline industry is now bent on raising revenues, which have been in a slump since 2001. The combination of the Delta and Northwest airline companies has resulted in predictions of a financial lift.

The recent merging of companies in the airline industry is now bent on raising revenues, which have been in a slump since 2001. The combination of the Delta and Northwest airline companies has resulted in predictions of a financial lift.

“It’s not an industry that works,” said Mark Cooper, research director for the Consumer Federation of America. “We’re now getting to the point where there are so few carriers left, and they still can’t make money.”

The Airline Deregulation Act passed in 1978 resulted in competition between airlines that lead to the lowering of airfares by more than 50 percent.

The 9/11 attacks hurt the industry even more with its subsequent drastic cuts on sales. Since then, an estimated $29 billion has been lost by major airlines.

As of April 15, Delta and Northwest have made a deal to merge, a move that is expected to rejuvenate profits. The consolidation of the airlines is expected to cut back on the number of available flights and thus increase the demand for available seats.

If the demand were to go up, the ticket prices would follow.

“There’s no doubt in my mind fares are going to go up,” said Rick Seaney from FareCompare.com, which tracks airplane ticket prices. “Consumers are deluding themselves if they think that’s not the case.”

The benefits from the current state of decreased travel fare have gone to consumers. The steadily reduced price of plane tickets make the luxury of air travel more available to the average American.

Those benefits for individual consumers are expected to end if the consolidation achieves the effect intended.

Jack Soper, a professor of economics at John Carroll University, said that the results of Delta and Northwest merging will have little short-term effect on Cleveland because those airlines do not have airport hubs in the city.

“The long-run effect is that they may cause Continental to merge with another airline, such as United or American Airlines. If that were the case, Continental would eventually disappear as a separate airline, and the hub at Cleveland would probably disappear,” said Soper.

Soper speculated that a year or two could be all the time it takes. “The reason for that is that the airlines are trying to speed up their mergers for the presidential election,” he added.

“The expectation is that a Democrat will be in the White House, and that he’ll appoint people to the Federal Aviation Administration,” Soper said. “If Democrats are dominating the FAA board, they are less likely to approve mergers than the current FAA board.”

Soper said that the current FAA board leans more Republican, so it is more likely to allow the mergers to go through than the new appointees in an expected future change.

The workforce cuts to Delta Airlines upon merging are expected to be minimal, according to Richard Anderson, Delta chief executive.

However, that expectation is highly questioned by airline experts as being a claim meant to quell the opposition.     

The issue of whether mergers can really be expected to turn significant profits and cut losses is still up for debate. Anderson said that both of these can be done with the merger. But chief analyst of AirlineForecasts, Vaughn Cordle, predicts that with the current price of oil, the top 12 airline carriers will still lose about $9 billion.

Nevertheless, in the limited span of time before the presidential election, the practice of merging appears to be a wide-spreading reality for the airline industry.
“Consolidation, if done properly, could result in a much healthier industry which would be good for our employees, our customers and the communities we serve,” said Doug Parker, chief executive of U.S. Airways.

“Rest assured if [we choose] to participate in any industry consolidation, we will do so because we believe it is the best interests of our employees and our airline,” he added.