A lot of noise has been made recently about the coming consolidation of the airline industry and the doomsday effect such mergers would have. In my typical style, if I can't add much more than a rehash of current events, I'll remain sidelined, which I have done until now. With ongoing news reports that the fate of airline mergers is moving in the direction I predicted, it's time to speak out.
By now, most consumers understand the disadvantages of widespread consolidation among the remaining legacy airlines (American Airlines, United Air, Continental Airlines, Delta Air Lines, Northwest Airlines and U.S. Airways). Along with this understanding, many would-be airline patrons are masked in the darkness of the unknown. The many questions left unanswered at this time include: What will happen to the advance fare I purchased, my frequent-flyer points, service to and from my destinations, the loyalty I built over time?
My educated guess: Simply nothing.
The reality, in my opinion, is that despite the major airlines' best efforts to come together in a blessed union, it's not going to happen. Basically, there are too many competing interests in this game that will railroad any efforts toward larger airlines.
The highly discussed merger between Delta and Northwest has more than a few sticky points. The primary nuisance for executives bargaining for position between Atlanta and Eagan, Minn., headquarters for Delta Air lines and Northwest respectfully, is the much beleaguered issue of seniority. Seniority, to airline employees, is paramount to getting the best routes, flying the best planes, having prime vacation days and higher pay and generally enjoying better perks and benefits.
The blending of two airlines requires piecing together a large puzzle. Historically, the most difficult pieces to fit together have been seniority, especially among the ranks of pilots. For example, Northwest is still figuring out how to blend pilot groups from their merger with Republic Airlines back in 1986--22 years ago. Likewise, U.S. Airways and America West are still working on a joint seniority plan three years after their much-touted boondoggled merger.
One issue impacting the discussions between Delta and Northwest is that Northwest's pilots tend to be older than their Delta counterparts. Many senior Delta pilots bailed out before their 2005 bankruptcy filing. Senior Northwest pilots did not do the same prior to their filing, primarily due to the difference in how their pension plan was structured. This leaves many Delta pilots in a vulnerable position, possibly losing rank and going back to flying older, slower, smaller planes--all translating into smaller paychecks. This might be one reason why Northwest pilots remain hopeful that a merger will transpire. The same goes for flight attendants. One Delta flight attendant told me that her 12 years of service will become meaningless if a merger goes through. This means no more prized international routes, and longer days with less pay.
Although airline employee groups might intellectually understand the economics of airline mergers, emotionally they can't take the toll of another shrinking paycheck. The years since Sept. 11, 2001, have been tough on airline employees who have made concession after concession to keep their airlines alive. I think this time around it's going to be a hard sell to tell employees to take a de facto pay cut through seniority reduction or other methods.
Besides the challenges of blending together employees, the merger puzzle requires a delicate process of operationally bringing two airlines together. Here again, history does not promise much guidance for airlines. Since the airlines were deregulated in 1978, dozens of mergers have taken place with iconic names such as Pan Am and TWA. Most analysts consider these mergers to have been unsuccessful, with many of the acquiring airlines divesting acquired routes and being crippled by strikes and other forms of labor strife. The recent merger of U.S. Airways and America West remains an episode many executives and customers wish they could rewind.
Everything from employee moral to customer service to frequent-flyer programs have suffered as a result of blending these relatively minor airlines. Bringing together the mammoths of Delta and Northwest, resulting in the largest U.S. airline, or the other rumored merger of United and Continental, will be a significant undertaking--one I'm not sure the airlines are up to.
Of concern to travelers will be airfares, frequent-flyer points and their inherent loyalty with an airline, which is very similar to the seniority issue among employees. Despite prognostications of higher airfares, probably much won't change. Over the past 30 years, airfares in real terms have decreased, and in spite of high oil prices, airlines don't have much pricing power. The minute they try to raise prices, a competitor will come in and lower them. Frequent-flyer points and programs will be little changed by a merger between Northwest, Continental and Delta, as the three have almost identical programs. Any mergers outside these programs could lead to the confusion U.S. Airways and America West fliers are still experiencing after their 2005 merger.
Perhaps the biggest losers among any merger are the die-hard loyalists--the elite frequent flyer who has sacrificed to maintain allegiance to one airline. Elite fliers can suffer much the same way that employees will suffer from reduced seniority. The newly merged airline will transport a larger pool of elite fliers with reduced capacity, meaning that the real prize of elite membership--first-class upgrades--will become harder to get. Essentially, any airline merger will downgrade elite membership with over-capacity, upsetting the already tenuous relationship between elite frequent flyer and loyalty programs. This could led to a loss of loyalty that airlines can ill-afford.
In the off chance that an airline merger gets through employee groups and customer ire, a bigger and more powerful player has to sign off--the U.S. government. Maybe a few years ago congressional approval for a larger-scale airline merger would have passed. But in today's environment, I say no way.
The largely Democratic House and Senate will fight hard and examine any anti-trust issues and the possibility of fare increases. Furthermore, the issue of lost jobs, which the airlines vehemently state would be avoided, will face close scrutiny. Likewise, the loss of local and regional routing is a major concern to lawmakers from rural districts.
The shining light for consumers is the difficulties a relatively simple merger, between Sirius Satellite and XM Radio, has had in recent months. If this merger--which has had widespread support--can't gain approval, is a merger of airlines ever likely to see the light of day? The prospects for all parties to a merger getting together in agreement are not good--and this is good news for consumers.
Instead of growing bigger and taking on more problems, airlines should pay attention to the mistake of Doug Parker's U.S. Airways-America West merger and focus on delivering top-notch customer service. If they deliver on that proposition, the rest will take care of itself.
Also available on Forbes.com