If American Airlines is acquired by Delta or another company in tandem with its bankruptcy filing — mirroring similar moves by its rivals — it could end a big consolidation wave that already has pruned the industry to a few massive carriers.
Speculation was ignited last week that Delta Air Lines or other players could be circling the struggling Fort Worth-based carrier, which in late November became the last big legacy carrier to seek bankruptcy-court protection from creditors while it reorganizes.
Delta, US Airways and private equity firm TPG Group are each considering separate bids for American Airlines, The Wall Street Journal reported Thursday.
Delta and US Airways declined to comment on the report, but such acquisitions have become almost a routine part of big airlines’ Chapter 11 re-launches over the past several years.
The recent wave has been a continuation of the stop-and-start consolidation that has re-shaped the airline industry since it was de-regulated in 1978. Roughly 160 airlines have failed or been absorbed in mergers since then, said Richard Gritta, a University of Portland finance professor.
But a tie-up between Delta and American would be anything but routine, creating the world’s largest airline, with roughly a third of the U.S. market and extensive route networks to Europe, Latin America and Asia.
Experts said such a deal would draw close scrutiny from federal antitrust regulators worried about reduced competition that could translate into service cutbacks and higher fees and fares.
“I would say the concentration in this industry is getting dangerously high,” Gritta said, noting that a Delta-American merger would leave only two major legacy carriers — Delta and United — controlling roughly 55 to 60 percent of the nation’s air passenger traffic.
Discount carrier Southwest Airlines would be in third place, with about 20 percent of domestic traffic, but wouldn’t offer much competition on overseas routes or in many key business markets.
“If I were [the Justice Department’s antitrust regulators] I would shoot it down,” Gritta said, predicting significant increases in fares or fees in many markets if such a merger was approved.
Even so, he and other industry-watchers say Delta may have a fair chance of winning the government’s approval.
Since 2005, as one after another of the major airlines landed in bankruptcy court, regulators have approved a wave of giant mergers that left American Airlines — once the nation’s largest carrier — stranded and losing money.
“It’s kind of like musical chairs,” Gritta said. “The music stopped and there was American standing there with no one left to dance with.”
America West kicked off the current wave when it acquired US Airways and took its name after the latter carrier emerged from bankruptcy in 2005.
Then, Delta became the world’s largest carrier in 2008 when it and Northwest combined after their twin bankruptcy cases, only to lose the title in 2010 after a restructured United merged with Continental.
The wave of bankruptcies and mergers allowed the once-struggling airlines to become profitable after shedding costly aircraft and leases, labor costs and unprofitable routes and airports, say industry experts.
It has also given the survivors increased power to raise prices either through fare increases or new or bigger surcharges and fees.
“They charge you for bags. They charge you for windows ... and on and on,” Gritta said. “What’s next?”
Most likely, more price increases if a Delta-American deal becomes reality, said Bob Mann, a Port Washington, N.Y.-based airline consultant.
“More consolidation is better” from the airlines’ perspective, Mann said. “It’s clearly a different result for consumers, except in the sense that consumers would have a more durable industry to purchase from with higher prices.”
Mann said he was surprised by news reports that Delta had concluded it could win approval of the deal if it made concessions.
But without such a deal, “if American were to become smaller after a bankruptcy, it certainly raises questions as to its continuing viability,” he added. “It’s not competitive with Delta’s or United’s network as it stands pre-bankruptcy, let alone as a smaller carrier.”
Roger King, an airline analyst at CreditSights, said he never would have expected that Delta might go after American because the carriers are so big.
But with concessions, “they could pull this off,” he added, because regulators will likely look at the merger’s effects route-by-route, rather than overall market share.
“If [Delta] did it, it would make them far and away the best airline in terms of route structure,” said King. Besides Delta’s massive hub in Atlanta, the combined carriers would have large hubs scattered across the United States from Los Angeles and Dallas to New York, and from Chicago, Minneapolis and Detroit to Miami.
The deal would also beef up Delta’s trans-Atlantic routes, where it is the largest player and American is also a big player, by adding more coveted access to London’s Heathrow airport, which is favored by lucrative business customers.
The combination would also extend Delta’s reach by complementing its Asian routes with American’s network of Latin American routes.
However, such a big airline could pose risks reminiscent of those that were exposed by massive financial institutions during the near meltdown of Wall Street in 2008 and 2009, suggested George Hamlin, president of Hamlin Transportation Consulting in Fairfax, Va.
“If you are of the view that it’s a good policy to have airlines that are ‘too big to fail’ then this is for you,” Hamlin said.
After gobbling up American, Delta would be “so big and the economy would be so dependent on them,” he said, that the government would probably have to bail the carrier out if it ran into financial trouble.
“From a policy standpoint, this is going to require a really hard look,” he said.
Recent airline mergers
The airline industry has been consolidating to fewer and fewer players since the industry was deregulated in 1978. But that trend accelerated in recent years, after a wave of bankruptcies by its biggest carriers ended in mergers. The latest target: American Airlines, which Delta might be interested in pursuing. A combined Delta-American would capture an estimated 35 percent of the U.S. market.
Post-merger U.S. market share
Emergence from bankruptcy
US Airways-America West
US Airways, 2005
United, 2006; Continental, 1993
Source: Bloomberg; Roger King at CreditSights
About the Author