On the Delta-United merger: There's no "there" there (yet)
11/15/07
While it’s making news at the moment because it’s two airline heavyweights doing the merger negotiations dance, what’s going on between Delta and United at the moment really isn’t, at this point, any big deal. Delta didn’t stumble out of the gate in its first quarter back from bankruptcy — in fact, it did far, far better than most expected — and the current quarter, while not what it would have been in the 80s or 90s, is going well by most standards and should be further bolstered by the standard holiday travel rush. Such merger talk is not uncommon in the airline industry, and the CEO of United has been beating the “we must consolidate to survive!” drum for several years. Back when he was CEO of Northwest, they and Delta held similar exploratory talks; such activity is nothing new whatsoever. In this case, the negotiation itself appears to have been driven by the owners of Pardus Capital Management, a New York-based hedge fund which owns both seven million shares of Delta (2.6%) and 5.6 million shares of United (4.8%). With an eye on, of course, increasing the stock values of both airlines, Pardus suggested the merger, claiming that nearly $600 million could be saved annually by the two if operations were combined.
This doesn’t appear to be any closer to reality than the Northwest merger was several years ago (or the US Airways hostile takeover attempt was last year), and probably won’t go anywhere in the near-term future. Further, the question of legality in the case of such a merger is a very real one, and other airlines like American would likely seek to litigate any potential consolidation among their major competitors.
Regardless of merger talks and passenger loads, the real threat to these major airlines in their attempts to regain solvency in this post-bankruptcy period is the escalating price of fuel, which is suffering, more recently, from the rapidly depreciating value of the dollar with regard to other currencies. As the international oil trade is conducted (and oil is priced) in dollars rather than in any other, currently stronger currency, the declining value of the dollar is inflating the cost of oil further than it would be if the oil market alone, rather than a combination of it and the currency market, were guiding prices.
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