Delta/NWA/AF/KLM/Alitalia Megacarrier Insights....

Howard Hughes

Well-known member
Feb 7, 2007
Comments from another board which I tend to agree with.

AF and DL: Creating the First Global Megacarrier

There has clearly been a lot of talk about mergers in the anticipation that the long-awaited consolidation of the US airline industry may finally be upon us as DL makes the first in moving to merge with NW. There is a lot of history that is going into what is happening today. The positive outcomes of a merger like DL-NW are also being neglected with talk of what will be cut or closed.

While other European megacarriers are scouting their prospects in an Open Skies environment, AF has moved quickly to assemble a megacarrier on the European continent by committing billions of Euros in acquisitions. AF’s determination to become a global powerhouse should be obvious by its determination and success so far in being selected to acquire Alitalia. It isn’t a coincidence that DL is already the largest non EU foreign airline in Italy, making AF’s ability to turn AZ around much easier.

Delta has been no less determined to become a global carrier, desiring to leave behind its roots in the South to become a megacarrier on the world stage. While its early years after the Pan Am transatlantic acquisition were rocky, DL managed to maintain a position as the largest US carrier to Europe based on its large continental Europe operation and to build a fairly significant Latin American presence on its own. DL recognized it still needed to make JFK work and they also needed to develop a presence in East Asia where their early efforts from PDX and LAX were interrupted by the economic downturn of 2001 and 9/11. DL’s subsequent bankruptcy delayed but did not interrupt its intentions to grow again. DL has never lost sight of its desire to become a global megacarrier, though.

It seemed evident from the beginning of the Skyteam alliance that the CO-DL-NW three way relationship was not sustainable. Three very different cultures and types of products would be hard to integrate under ideal situations but the competitive nature of the US airline makes it necessary for CO, DL, and NW to be archcompetitors as well as partners, making it harder for AF to get what it wants. The clear ideal is for there to be a one to one relationship between European and US alliance partners.

Consolidation today is as much about building a global airline as it is about being to manage the domestic business in such a way so that US airlines can win. US airlines have trailed their global competitors in profitability for most of the post-deregulation period even though the US is the world’s largest economy and the largest air travel market in the world. US airlines need to be able to compete effectively in the global aviation market which is upon us or revenues will be shifted away from US to foreign airlines.

DL-NW is necessary in order for AF to cement its place in the US market but also so that DL can be positioned to compete effectively in the global aviation market.

The US airline industry is not financially prepared to invest what is necessary to compete in the global marketplace. The four carriers that filed for BK this decade have sustainable balance sheets now but would not remain viable if they took on the levels of debt necessary to invest in their businesses to the levels that are needed. For the first time in at least a decade, the network carriers are now posting financial results that are superior to what the LFCs are posting. The entire US industry needs financial stabilization and part of the formula has got to include reducing the number of competitors in the marketplace. It is way beyond sustainable for the US to have six network carriers, several more nationwide LFCs, and several more smaller network and LFCs. There is no other industry that is as fragmented as the airline industry and yet which has failed to consolidate. Consolidation is a necessary tool to allow businesses to effective compete. Maintaining dozens of airlines in the US might be attractive for the consumer but it is not sustainable for the industry. Further, the architects of deregulation predicted consolidation would be necessary and would have taken place decades ago. The last major round of consolidation in the US airline industry occurred nearly 20 years ago.

DL needs AF in order to complete its aspirations of being a leading global carrier and AF needs DL in order to gain a permanent foothold in the US market. While it is to be expected that relationships between other foreign and US airlines will strengthen, DL and AF seem to be most willing to build the global megacarrier that will be necessary to compete in today’s global marketplace. While AF and DL will maintain separate identities, the level of cooperation will be so close and the financial ties so deep that the carriers will be as close to one as they can be while remaining separate companies. The fact that AF is willing to cement its relationship with an equity stake in the new DL validates its intention to be the driving force behind the global megacarrier.

So what does AF/DL need to do to better compete as a global megacarrier? For years, US carriers have been satisfied to serve far fewer global destinations than their European counterparts, including funneling traffic to/from their European partner hubs. In Europe, DL has already seen the value it can add to a European partner by flying to dozens of destinations beyond the partner’s hubs. CO’s value to Star will be equally as significant. However, there will continue to be opportunities to develop relationships, esp. to/from former French colonies and French strongholds. It is even possible that AF might be the operating carrier on routes between the US and countries which are hostile to the US but which can sustain nonstop service to the US. Coordination and corporation in Latin America will allow DL to grow with AF’s support (since many Latin airports do not have the infrastructure necessary to support widebody flights.

The greatest opportunities exist across the Pacific and it is there that DL will rework and build upon NW’s Pacific operation to transform it from a hub to hub based to a hub and spoke network. DL’s 777LR and NW’s 787 orders (both of which will arrive before any other competitor’s orders) provide a powerful opportunity for DL to penetrate deeper into Asia from its (combined DL/NW) interior as well as coastal hubs. The 757 and 767 provide considerable potential to open new markets across both the Atlantic and Pacific. DL’s LAX facility will become much busier using the equity that NW has in Asia to develop new routes along with NW’s extensive intra-Asia route authority. The long awaited replacement of DL’s JFK facility will now open. AF, as a stockholder, will tap into its vast resources to build a combined DL/NW into a superpower from which AF will derive a share of the profits.

For years there have been those in the US who have called for a complete lifting of foreign ownership limits in order to allow capital to flow into the US industry. I am certain that the US airline industry has argued that it needed the opportunity to restructure itself before allowing foreign capital to flow in. Without restructuring, foreign airlines would simply be buying into an unstable and unsustainable US airline industry. If foreign investment flowed into the US industry without consolidation taking place, overcapacity and intense competition would continue, destroying foreign investment just as domestic investment in the US airline industry has been destroyed.

The formula for a turnaround of the US airline industry lies in blending all of the ingredients proposed as solutions for the US industry: foreign investment, consolidation in the domestic market, creation of US carriers with true global coverage, and investment in the US airline product such that it can be competitive in the global marketplace. AF and DL understand this vision and are moving to create a global aviation superpower built on these principles. I can only hope that AF/DL is the first of several enhanced relationships such that US airlines regain a leadership position in the global aviation marketplace.
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