Delta-Northwest Merger Likely to Mean Higher Fares

The union may help the airlines, but it won't make life any easier for passengers.

By Martha Lynn Craver, Associate Editor, The Kiplinger Letter

April 15, 2008

For the traveling public, the proposed Delta-Northwest merger is no cause for celebration.

First of all, expect higher fares, especially on routes where there is no competition from low fare carriers. What's more, the hookup between Northwest and Delta airlines will probably spur other mergers, eventually resulting in only three or four big U.S. airlines. "With fewer large players, there's more likelihood that if one carrier initiates a fare increase, the others will go along," says Philip Baggaley, an analyst with Standard & Poor's. The next likely union is between United and Continental airlines, although American Airlines may make a grab for Continental.

Another problem is that service disruptions are common with such agreements, especially mishandled luggage, late arrivals and reservation snafus. "There are huge challenges in merging two large companies, especially if there are employee morale problems that might manifest themselves at the customer service level," says Tim Winship, editor at large for smartertravel.com.

Another likely result is a reduction in the number of flights on some routes, although officials at both airlines pledged to retain all seven existing hubs and not eliminate jobs.

Frequent fliers will experience a mixed bag from the pact. On the one hand, members of the two carriers' frequent flier programs will have a bigger, deeper route network, with more opportunities to earn miles and redeem them for travel. Northwest's strong presence in the western U.S. with its Asian routes dovetails nicely with Delta's strong network in the eastern U.S. and across the Atlantic. On the other hand, the merger will result in more people with more rewards miles, increasing demand for frequent flier seats, says Winship. "At the same time, the merged carrier will be cutting back its capacity, creating a bottleneck in terms of using frequent flier miles."

Despite some political and labor opposition, the deal will be approved. The Department of Justice has the final say in OKing the proposed merger, and given that there's little overlap in the two carriers' route structure, antitrust concerns should be minimal. Key Democrats in Congress, such as Rep. James Oberstar (MN), chairman of the House Transportation and Infrastructure Committee, will hold hearings and rail against the merger, but such events are unlikely to affect the outcome.

Opposition by Northwest's pilots is the biggest risk to the deal, says Baggaley, and overcoming it is likely to be costly. Northwest pilots will have a good chance to get a big pay raise without waiting until 2011 when their current contract expires. Delta already has reached an agreement with its pilots. Another likely carrot to win over labor is the prospect of organizing Delta employees, since the pilots are the only unionized group at present.

The new airline will be well positioned for global competition. The combined carrier will have a global network stretching from Asia to South America to Europe with an opportunity for revenue that neither had previously, says Darryl Jenkins, a private aviation consultant. "They'll be able to bid on large corporate contracts that eluded them before."

The merger will create the world's largest carrier. It will be headquartered in Atlanta and keep the Delta name.

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