Delta’s Q3 Profits May Not Bode Well for American-US Merger

By Jonathan Spira on 24 October 2013
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American CEO Tom Horton

American CEO Tom Horton

While American Airlines and US Airways point to recent mergers in the industry (including United Airlines’ 2010 merger with Continental, and Delta Air Lines’ 2008 merger with Northwest) as justification for their own planned combination in the face of the Department of Justice lawsuit that seeks to block it, American’s and US Airways’ managers may want to reconsider using Delta as a shining example of how consolidation in the airline industry lowered prices and increased service.

Delta Air Lines reported a record profit of $1.37 billion for the third quarter this week, a 31% year-over-year increase, in addition to an increase in revenue of 5%, and did so without a major increase in its flying.  Indeed, its load factor increased by just 2% in the quarter.

Over the past decade, airlines wishing to merge have argued that creating behemoths in the industry would not have an adverse impact on the consumer.  It appears that this argument may likely be faulty, as Delta’s record earnings seem to result from just that.  Delta, it turns out, was able to raise ticket prices by 5% in the third quarter, as measured by the average fare per mile.

Meanwhile, not only did Delta merge with rival Northwest Airlines, but it also recently acquired 49% of Virgin Atlantic and was granted antitrust immunity on one of the most traveled routes in the world: New York-London.   In the third quarter, Delta said it had increased prices by 10% on this route.

At the same time, Delta announced significant service cutbacks in its flying out of several of its former hubs, something that the airline promised regulators it would not do when it was seeking approval for its merger in 2008.  One cutback came almost simultaneously with the news of Delta’s record-breaking profits: it would reduce flights out of Memphis even more dramatically than previously planned.

In 2000, Delta had roughly 300 daily departures from Memphis, a number that was down to 240 at the time of the Northwest merger, and was at 96 earlier this year.  Back in June, Delta had announced it would dehub Memphis and cut daily departures to 60, but along with record-breaking profits, the airline later announced that Memphis would be reduced to 40 peak day departures.

While air travel in the U.S. has been deregulated since the 1970s, the government continues to maintain an interest in ensuring that smaller communities continue to have access to air travel.  Delta’s moves in reducing service to many communities in recent years seems to highlight the potential harm that could occur, should any of the airline megamergers be allowed to proceed.

When it comes to determining whether two companies should be able to merge, antitrust policy in the U.S. is quite clear: what happened in the past is in the past.  The Department of Justice concerns itself only with the present, and the fact that there have been multiple major airline mergers in the past decade is considered irrelevant.

American and US Airways have argued that the merger is necessary to ensure their survival and allow them to compete with those airlines that have already merged. American, however, reported a third-quarter profit on record revenue and cost savings that it had achieved as part of its court-supervised bankruptcy restructuring, proof enough for many that the airline can make it on its own without a partner.

Today, with Delta’s and American’s earnings reports, one perhaps too profitable and the other profitable enough, it may just be time to say that one more merger is too much.

(Photo: Accura Media Group)

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