A couple of months ago, the planned $US3.6 billion merger between Delta Air Lines and Northwest Airlines, would have been judged on its merits as an industry consolidating move and one to be supported as such.
It’s still that of course, but it now has the very strong whiff of two relatively strong operators seeking a financial embrace in the face of rapidly worsening financial conditions in global aviation, and especially in the US where the recession is tightening its grip on confidence and business and tourism travel.
As well US airlines are now in the grip of official displeasure about false and misleading maintenance records: the industry has just been through two weeks of hell of snap inspections, multi-plane groundings for safety checks and a surge in associated costs.
The urge to merge is getting stronger and it wouldn’t surprise to see Continental, United and American face off over the negotiating table as they explore possible combinations.
The failure of at least four small and medium operators: mostly low cost budget businesses, is concentrating corporate minds in the US.
It’s an all share deal: so no one is prepared to risk scarce cash: the pilots and unions of both operators seem to be on side, and no doubt in the dying days of the Bush Administration, the regulators will be.
But as we have seen with the woes afflicting Virgin Blue in this country of rising fuel costs and unsteady financial markets, it’s getting tough for airlines around the world, no matter the credit rating involved, or strategy.
Low cost, medium cost, full service airlines are all under pressure. The days of the deep discount airline are vanishing: the days of $US100 dollars a barrel oil, the US recession and uneasy economic conditions in Europe, are bringing airlines closer together in the operating models: the main strategy will be survival for the next one to two years if the global economy slows any more.
There was a story in the Financial Times quoting a senior executive of an Indian airline, who forecast that carriers in that country could have losses of $US1 billion this year, double an estimate of only a month ago, because of high fuel prices and slowing economic conditions.
He also suggested there were too many planes and too few passengers and a vigorous price war that was cutting revenues at a time when the industry should be looking to boost profits.
Here in Australia Virgin Blue suggested in its downgrade that capacity in the domestic market would grow faster than passenger numbers, which will impact everybody, Qantas included.
And brokers have downgraded British Airways because of the problems at the new Heathrow Five terminal will hurt costs, and the impact of higher fuel costs.
The Delta-Northwest agreement had been mooted for some weeks, with expectations that it would have been announced Sunday after a meeting of pilots in the US. The news was delayed a day.
Driven by fuel, restless shareholders and a looming slump in demand for air travel, Delta and Northwest returned to the table earlier this month and managed to hammer out an agreement.
In the proposed share swap, investors will receive 1.25 shares of Delta for each Northwest share they own. The deal values Northwest at about $US3.6 billion (or around $A4 billion, or $US13.10 a share, a 17% premium above Monday’s closing price on the New York Stock Exchange.
Qantas shares eased 11c yesterday to $3.51, which values it at around $A6.8 billion, so Northwest isn’t all that big.
The merger though will combine much larger Delta to create a company with annual revenues of over $US35 billion, a mainline fleet of almost 800 planes and 75,000 employees.
The two airlines said the merger would generate more than $US 1 billion revenue and cost savings. Much of that will come from combining back office functions like ticketing and computer reservation systems, airport facilities, fleet servicing and finance costs.
To improve the chances of the merger being approved by US and European competition authorities, Air France-KLM, which is the US carriers’ transatlantic joint-venture partner, will not make an equity investment in the merged airlines: it had offered $US750 million earlier in the year, but that would raise questions in Washington and Brussels.
The combined company will be called Delta and keep its headquarters in Delta’s hometown of Atlanta. Delta and Northwest vowed to maintain both carriers’ existing hubs.
Delta said it reached a new labour contract with its pilots that would provide members with a pay rise and 3.5% of the equity of the combined carrier. The two companies said that non-pilot employees at both carriers will get 4% of the equity.
Delta recently emerged from Chapter 11 bankruptcy and was considered to be well positioned as a result, to by a catalyst in any merger.
Merrill Lynch told Australian clients this week that in the wake of the Virgin Blue downgrade it had downgraded Qantas’s earnings and price forecasts.
"QAN’s operating stats have shown fallen domestic yields since November. Virgin Blue’s profit warning on Friday night confirmed that the problem has accelerated and looks set to continue. Meanwhile fuel prices remain high and we are now seeing tangible signs of weakness in the international market. We have downgraded our earnings and valuation.
"Despite loads of 80%+ for the total Australian domestic market QAN has been reporting negativ
