There are a number of people on aviation chat forums who for years have failed to appreciate where I believe DL is going and the turn of this thread is no exception. 30 years into deregulation, DL has been the most aggressive force in driving the US airline industry to the point that the framers of deregulation envisioned – fewer but larger airlines with more choices for consumers. For years, the US airline industry has been highly fragmented with no true nationwide/global US players… the DL/NW merger made DL the first airline to come close to that reality. UA recognized it needed to do something or it would get left behind and we now have two US based nationwide/global airlines. Add in the WN/FL merger and you now have a third competitor with the potential to provide a true nationwide network. Airlines like telecommunications and other service related businesses – including financial services – are network businesses that gain their competitive advantage through size. The US airline industry has been divided between so many players for so long that few people have any concept of what the airline industry could or should look like when compared with other service industries. When you add in that the DL/NW and UA/CO mergers have shown that profitability is increasing for the largest airlines and service levels are also increasing, the argument that big is bad is being harder and harder to make.
AA and US both for separate reasons have not differentiated themselves from the network airline industry and neither now come close to offering the global/national networks that DL and UA have – and will continue to refine.
DL is in the best position in the industry as a result of being the first mover in the most recent round of consolidation and for finishing the NW merger while UA and WN are still digesting theirs. Ultimately, DL, UA, and WN are all very well positioned to control their destiny and with each one having a market capitalization in excess of $7 billion, they are also companies that Wall Street believes know what they are doing…. DL’s $1B premium in market cap to UA and WN is attributable to DL’s strategic aggressiveness and network stability.
While DL was in BK – if not before – it clearly developed a vision for the future of the industry and then has spent the last 5 years since emerging to create what it believes is DL’s part of that future. After considering a merger with CO which would have beefed up DL’s presence in NY, Europe, and Latin America, DL considered a merger with UA which would have addressed all of DL’s then remaining strategic needs – a large presence in Asia, LHR, Latin America, and a domestic network covering every region of the US. For various reasons, DL decided a merger with NW made the most sense at the time, even if it left some of DL’s key strategic necessities unfulfilled – which now stand at a larger west coast presence, LHR, and Latin America. DL has built its presence in Asia quite nicely and while still #3 to LHR, is a solid #2 or #1 (depending on the season), and historically southern DL is now the #1 airline in the Midwest, building on NW’s dual hub Midwest strategy.
The UA/CO merger pushed UA to #1 but still leaves them w/ a very weak position in the SE – which is one of the largest regions of the US travel market – and they are noticeably absent from the key MIA-Latin America market. Further, UA, while strong in its hubs, is actually smaller than AA or DL in many midsize cities, esp. on the east coast. Flush with cash and with the likelihood of a smooth merger in front, UA will address its strategic needs as well.
Both DL and UA are keen to doing what is necessary to protect the strategic advantages they have gained – and address their remaining deficiencies.
Given that DL has a finished megamerger under its belt, has the financial resources to accomplish what it needs, and has the strategic guts to make things happen, DL is in the driver’s seat in the next round of consolidation. While a simple AS merger would give DL the north-south capacity it needs on the west coast, it does nothing to help with Latin America or LHR – provides providing only a more stable gateway from which to develop the west coast to Asia.
Acquiring AA does in fact meet the largest and most significant strategic needs and would make DL the largest carrier in most west coast markets with a much higher focus on key nationwide business markets than what AS could do, Either DL or UA will gain a position in MIA-Latin America – either by creating a 2nd carrier alongside AA with the help of alliance partners or by acquiring AA. No matter how you slice it, there will not be 3 carriers in MIA-Latin America so, if AA survives, either DL or UA is left out of the picture…. If AA is acquired, then there still is the potential that UA could start enough of presence in MIA to Latin America on its own and thru alliances.
Domestically, the market can easily be served by DL, UA, and WN – there are few examples of industries that require more than 3 nationwide players…. WN’s strategy is clearly adapting from being a low fare, low cost airline to one that offers more domestic breadth via more focus cities but with higher fares. WN has no choice but to raise fares in order to cover its costs and return to profitability. WN will become a viable alternative to DL and UA on a nationwide basis – and with the appropriate access to key airports they will get there.
As smaller regional jets are removed from the US industry, there will be a lot less flights on larger aircraft to fewer hubs – not unlike what WN does now. DL and UA – as potential surviving network carriers may serve more cities but with less frequency.
Not every city will be split evenly between DL, UA, and WN but the overall domestic market will be 80-90% controlled by those 3 airlines – and it really won’t matter if DL and UA have to divest slots at NYC and DCA or gates elsewhere in order to provide something of a balanced field – because WN will no longer need to be the low price leader when it is one of 3 major airlines – and WN’s current costs dictate that it is not in a position financially to be as aggressive on fares as it once was. WN will clearly expand into narrowbody domestic markets which means they can be present in a large chunk of the western hemisphere with the possible exception of deep S. America. It isn’t out of the question they could add widebody international flying or use narrowbodies in some longhaul markets but strategically the industry could be well balanced even if WN remains a narrowbody, western hemisphere carrier.
AS and B6 and whatever else is left become niche carriers that can exist by doing a good job – as they do now – of serving key market segments – and they could also partner with each other or foreign airlines (as they are doing now) in order to provide meaningful competition within the US market.
Internationally, the US is the only nation that currently has more than 2 large int’l carriers in a market segment. Even if you consider the EU as one market, AF/KL, BA, and LH and their respective groups have more than enough service to the US to be able to compete in the US, even among a consolidated industry. WN can and probably will become a codeshare partner to international carriers and can provide the feed that international carriers w/o a foreign partner need to distribute traffic within the US. Just about every major market will have at least one foreign and one or two US carriers (DL and/or UA) so that 3 competitors will still exist even in int’l markets. Antitrust immunity and joint ventures might no longer be needed when carriers have one-third or larger share of the market in any specific region.
So where does that leave AA and US? Both will be too small to compete on a nationwide and global scope – without the financial strength to set their destinies against larger carriers that can do so.
It is entirely possible that DL’s overtures to US are to force UA into acquiring US to allow DL to acquire AA and consolidate the industry as I have noted above. Then you have three large domestic airlines, a couple of smaller niche airlines, and the US long haul international market will be consolidated between DL and UA with a foreign carrier or two present in every key market.
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It will be very interesting to watch the next round of strategic moves in the industry but I can assure you that DL will be doing what it believes it needs to do to develop and protect its long term future and will act as a catalyst in the further evolution of the industry.
As for the personnel aspects of all this, after the hell that deregulation has been to airline employees, many might be surprised to see that pricing power and a consolidated industry will result in higher wages although for a lot fewer people than were in the industry 30 years ago.
Those who have doubts that what I believe will take place might want to note those doubts and then look back in a few years to see how things played out.
I have a feeling that by the 35th anniversary of deregulation in the US in late 2013, we will be looking at a picture of the US industry that is a lot closer to what I have laid out here than a lot of people might want to believe.
