Delta-Northwest: merger on?

A Delta-Northwest merger is close at hand, according to a Financial Times report. Delta will, apparently, be the surviving carrier and brand, Delta CEO Richard Anderson will remain in the top job, and Northwest CEO Douglas Steenland will join a merged management team.

With these developments in mind, let’s look at the antitrust implications of this merger. (I laid out the basics in a recent post.) The first concern of the Justice Department is whether a merger significantly increases concentration in a particular market or city-pair. Northwest already operates fortress hubs, and Delta has a few itself. Competition will be limited between hubs in a unified carrier: Minneapolis-JFK, Atlanta-Detroit, Minneapolis-LAX, Seattle-JFK, and the like. For example, a combined Delta-Northwest would control 94 percent of market share between Cincinnati and Orlando, according to the most recent Consumer Air Fare Report. But even so, the Justice Department will consider the presence or possibility of competition. The busiest destination from Memphis (a Northwest hub), for example, is Atlanta. The combined Delta-Northwest would only control 69 percent of this market. Competitor AirTran offers a vigorous schedule of services to Atlanta. The biggest concern might be small-market-to-small-market service—say, Jackson, Miss., to Traverse City, Mich. There are also a few towns in the South and Midwest, but not many, where airline service is offered only by Delta and Northwest and would see a single airline. Tupelo, Miss., and Muscle Shoals, Ala., are examples.

Would a combined Delta-Northwest stifle competition at their newly combined hubs? Perhaps, but analysts expect that smaller hubs like Memphis and Cincinnati will be dialed back, allowing some room for new entrants. At the combined airline’s other hubs and focus cities, budget airline competition is already present.

What about regional market concentration? (See the map below.) Northwest is dominant in the upper Midwest, but Delta does not overlap its strengths. If the feds did not object to Northwest becoming a major investor in Midwest Airlines, based in Milwaukee (see purple dot on the map), then I doubt it will object to a merger on regional concentration grounds. And as for international services, Northwest’s array of Asian destinations from its Tokyo hub and from Detroit match nicely with Delta’s extensive transatlantic network anchored by Atlanta and JFK and its growing Latin American network centered around Atlanta and Los Angeles.

One big question for the Justice Department will be whether a big merger is the only way to make the efficiency gains a merger is supposed to provide. I don’t see this merger providing those gains. Capacity under Delta-Northwest is not likely to shrink, given the relative complementary of the two airlines’ regions and routes. Furthermore, mergers are so difficult to pull off managerially that efficiency gains might never materialize. Neither party is about to go bankrupt and exit the market, making that antitrust consideration unnecessary. But the Justice Department will need to consider any merger proposal in light of the fact that other airlines (United and Continental are one possibility, which I’ll look at later in this space) plan to merge if two do. Potential and planned mergers will complicate the regulatory picture but may make it easier for Delta and Northwest to merge, should they so choose.

Advertisements