Efforts last week by a hedge fund with shareholdings in United Airlines and Delta Air Lines to spur merger talks between the two carriers may be good for the hedge fund, but it would be a disaster for the two airlines.
When the news broke on 14 November of the letter from Pardus Capital Management LP urging that Delta begin talks sent shares of both carriers skyrocketing between 15% to more than 20% on heavy volume as day traders tried to capture some upside in the stock. United quickly fell back to its previous share price when Delta’s CEO Richard Anderson denied news reports that it was engaged in merger discussions with United. Delta shares held on to gains of around 15% after topping 20%, probably because Delta also announced that it formed a committee to explore combinations.
What are the choices and issues for Delta? A key element in any merger will be labour. Delta’s workforce is largely non-union, with the powerful pilots’ union and the dink dispatchers’ unions the exceptions. If Delta is the acquirer, the acquired airline’s unions will pitch a fit with the prospect of being decertified. If Delta is the acquired company, labour issues won’t be any less thorny. Anti-trust issues are present in any combination.
Beyond that, some of the other issues:
Delta and United: United has an ageing fleet of Boeing 737s that needs replacement; Delta’s McDonnell Douglas MD-88 fleet is inefficient and also needs replacing. Other fleet types aren’t too far from falling into the “ageing” categories as well. The combined capital expenditure required for this alone will be daunting. United’s other narrow-body fleet is Airbus while Delta’s is Boeing, creating no benefit for cost savings in a consolidation. The route structures in some ways will reunite the old Pan American World Airways; UAL bought Pan Am’s Pacific routes and Delta purchased the Pan Am New York JFK Airport operations and trans-Atlantic routes. It’s conventional wisdom that United didn’t do all the clean-up it could from its bankruptcy, leaving it with costs that are still too high.
Delta and Continental: Except for the MD-88s, the fleets are reasonably compatible but with the concentration in New York and Newark of Delta and Continental, huge anti-trust issues loom in this combination.
Delta and Northwest: Northwest has an Airbus fleet for its single-aisle airplanes and an ancient DC-9 fleet, making the former incompatible with Delta and the latter requiring a big capital investment. NWA’s long-haul fleet is built around the A330, conflicting with Delta’s preference for Boeing twin-aisle airplanes. Only the 757s are common. These route structures are probably the most compatible and least threatening to anti-trust concerns.
Delta and American: Both carriers have big New York hubs at JFK Airport, creating anti-trust issues. American’s MD-82/83s are older than Delta’s, making for a big replacement problem. Combining the nation’s No. 1 carrier (American) with the No. 3 airline has anti-trust written all over it. American’s labour unions are particularly militant right now.
Delta and US Airways: Been there, done that, sort of. Delta rebuffed US Airways’ hostile takeover attempt, but if Delta were the acquirer, it might be a different matter. Fleets are incompatible and the two airlines have too much concentration in the East, requiring spin-offs.
Any way it’s cut, a merger between Delta and any other legacy carrier is more trouble than it’s worth.