The Northwest-Delta combination could spur on a major round of consolidation in the US market

Delta Air Line's decision to merge with Northwest Airlines could pave the way for other mega mergers, such as United-Continental, and massive consolidation in the US market.

Analysts including Kevin Crissey of UBS think United and Continental are already far along in merger talks and Continental chief executive Larry Kellner (right) did little to dispel this when speaking to analysts right after the carrier reported an $80 million first quarter loss. Kellner says Continental will reconsider its often-repeated belief that it should stand alone "to make sure we remain a strong, long-term competitor".

He adds Continental could even pull out of the SkyTeam Alliance: "We will also review our continued partnership in the alliance with Northwest, Delta, and SkyTeam, as we evaluate what course of action would be in ­Continental's best interest."

Northwest had the right of first refusal on any potential sale of Continental but gave this up in order to pursue a merger with Delta. With Northwest's "golden share" in Continental redeemed, there is nothing now stopping Continental from merging with Star Alliance member United.

Kellner
 © Mark J Burns
United was less committed than Continental in its response to the Delta-Northwest merger but was clear in its thrust. United head Glenn Tilton says: "Consolidation is but one of the changes necessary to achieve sustained profitability, and we have been fully supportive. As the industry evolves, we will take the actions we need to strengthen our global competitiveness and we will participate in consolidation when and if it is the right choice."

A Continental-United combination would create the largest airline in terms of revenue, traffic and market share. Combined revenue would be $34.3 billion, putting it about 4% ahead of Air France-KLM and about 8% ahead of Delta-Northwest.

In the US ­domestic market, a combined Continental-United would have a 21.6% market share, outpacing Delta-Northwest's 19.9% (see chart). In the US international market, ­Continental-United would also top Delta-Northwest, with a 17.2% share versus a 14% share.

The biggest US carrier, or at least the biggest until Delta and Northwest combine, American Airlines, was nonplussed in its response to the unveiling of the Delta-Northwest plan. American chief executive Gerard Arpey says: "We believe we will remain competitive irrespective of any consolidation that occurs. The real challenge is being profitable and I think we are not unique in our struggle to meet that challenge. Consolidation may be one of the factors that lead to a more profitable industry but it is just one factor. Having said all that, we may or may not participate in consolidation."

American, which acquired rival TWA back in 2001, reported a $328 million loss for the first quarter as fuel prices surged by 48%. Analysts have suggested a possible combination between oneworld member American and Alaska Airlines, which is not a member of any alliance but has previously said it wants to stay independent.

 

Source: Airline Business

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