Have you ever heard of Skybus? Aloha? ATA?
What do they have in common? They are all airlines that have declared bankruptcy and ceased operations in the last three weeks. A fourth airline, Champion Air, has announced it will cease operations and the end of May. And a fifth airline, Frontier Airlines out of Denver, recently declared Chapter 11 bankruptcy and will be reorganizing under court supervision while continuing to operate. That’s five airlines all in serious trouble in a short period of time, all of which are in need of some unanticipated savior.
Then on Tuesday, Delta Air Lines and Northwest Airlines announced they were going to merge into a single entity. Even though both airlines achieved significant cost savings through bankruptcies last year, they decided that they needed to combine in order to become stronger, survive, and continue to do business another day.
Most people expect United Airlines and Continental Airlines to follow Delta and Northwest’s lead, leaving the United States with three major legacy carriers, the other being American, instead of the current five.
Why is the industry in so much chaos right now? Oil prices are the main culprit. This week, crude oil prices are more than $113 per barrel. In January 2007, a barrel of oil cost around $55. Fuel is the airline industry’s greatest expense and its price doubling in 16 months has made it extremely hard for the airlines to remain profitable.
Passengers expect reasonable ticket prices, and strong competition in the industry ensures that prices do not rise too high. It is the airline’s bottom line that takes the hit and some smaller airlines are unable to survive when this happens, so they have ceased operations.
If you are not an airline industry junkie like me, you probably don’t really care. But you should — what is going on in the airline industry right now affects you greatly. Ticket prices and the level of service are changing because of the current economic situation. And this will impact you the next time you book a ticket to go home or see a friend.
Want to go to Hawaii? That will cost you a lot more than it did a month ago because two of the three biggest airlines that go to Hawaii no longer exist. Need to go home after exams? Prices for tickets will probably be higher than ever.
Some of the smaller airlines may continue to disappear, while some of the larger airlines will also disappear as they merge with each other. Delta has announced plans to acquire Northwest, sending Northwest into the history books and creating the largest airline in the United States. Then United is expected to take over Continental, creating an even bigger airline than the new Delta.
This scenario is bad for consumers. With fewer airlines there is less competition. This means higher prices. Furthermore, these new mega-carriers would likely reduce capacity in order to increase prices — and thus revenues — even more. Your frequent flyer miles will be safe even if your airline merges, but it will be harder to redeem them since more people will be trying to redeem theirs too on the new mega-carrier.
Since the Delta-Northwest merger is the first of the new wave of mergers to be announced, we can look at it for an example of what is to come. The merger is very good for the city of Atlanta since the airline will continue to be based here. Delta claims it is not only great for Atlanta, but great for everyone — customers, employees and communities.
The airline will be stronger and able to achieve significant cost savings without shutting down any of their combined nine hubs. Customers will have more options to redeem their miles. Employees will get paid more and have better job security. New planes with better seats and entertainment systems will be introduced.
The list of promises goes on and on. Everyone wins, no one loses with the deal — according to Delta.
This just isn’t realistic. In order to cope with rising fuel prices, Delta will have to cut hubs and flights. They are promising everything to everyone in an attempt to pass regulatory review.
But we’ve seen this time and time again with airline mergers. These promises become empty as soon as the next economic challenge rises.
Should the government prevent this merger? I am not so sure, since the airlines are in trouble and may actually need to combine. I just wish they wouldn’t be making promises that they know they cannot and will not keep.
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