Deborah Yedlin: Northwest, Delta Airlines deal headed for turbulence?
- April 18, 2008 8:05 AM |
- By Michael Hlinka
Money Talks is a collection of daily columns from The Business Network, which airs weekday mornings on CBC Radio One at 5:45 a.m. ET (6:15 a.m. ET in N.L.).
By Deborah Yedlin, business columnist, Calgary Herald
(Listen to the original audio)
This week's blockbuster airline deal involving the merger of Northwest and Delta Airlines might just signal the beginning of a long overdue overhaul of the U.S. Airline industry.
The two airlines - beset with high fuel costs, unwieldly labour contracts, old planes, competition from domestic low-cost carriers, and foreign players with new planes - are merging as a matter of survival. The intent, as always, is to capture the synergies, capture a bigger share of the market and hopefully, the pricing power that goes along with it.
But investors didn't buy it this week - nor should they.
This is a deal that will take years to yield the promised benefits - if indeed it ever does.
Let's take the fleet as one example.
The types of planes are incompatible - Delta tends to have Boeing airplanes, while Northwest has been buying Airbus models. There was a reason WestJet stayed with one type of aircraft from one supplier - it saves on maintenance costs. It also means crew familiarity with the aircraft isn't an issue, which results in a flexible workforce. But in the case of Delta and Northwest, the synergies from that side of the business will be non-existent.
Here's another problem: Both companies, like almost every other airline in the U.S., have shied away from upgrading their aircraft. They prefer instead to fly the old, fully depreciated planes in order to maximize whatever profits they can eke out.
The end result is that Northwest has about 90 DC-9 aircraft with an average age of 40 years, while Delta has 118 MD-88 with an average age of 18 years. Both aircraft aren't exactly fuel efficient, and when oil is trading at $115 a barrel it doesn't take too many brain cells to determine that the strategy to keep flying the older birds has backfired.
At the same time, more than 7,000 orders have been placed for new, fuel efficient aircraft by airlines around the world. Even if the U.S. players wanted to update their fleets, the order books of Boeing and Airbus are full through 2012.
It's also interesting that there is growing evidence that the hub-and-spoke structure pioneered by American Airlines is showing weakness. In an environment of ever-rising fuel costs, the small jets - 50 seats or less - can't make money. Despite statements that smaller communities won't face a drop in service, unless fuel prices fall it will be tough for the airline to continue serving the smaller centres with small planes that made money when oil was $30 a barrel.
Industry analysts have been saying for some time that the U.S. industry needs to consolidate. But that's a tough one to buy into, when it seems every flight south of the border is regularly crammed to the overhead bins.
The reality is this merger is being done as a matter of survival, not because it makes good business sense. And deals like that are doomed before they get off the ground.
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