Airlines are Lining up to Buy Assets from a Merged US Airways/Delta

Ever since US Airways made a bid for Delta two weeks ago, several low-cost airlines have come forward and announced that they would be interested in purchasing select assets if the two airlines merge. Southwest, JetBlue, Frontier, and AirTran have all expressed interest in various assets from the new company, including gates, planes, and landing slots at certain airports. New assets would allow these carriers to expand their East Coast operations especially from airports that have been closed to new airlines due to landing restrictions, including New York's LaGuardia and Washington D.C.'s Reagan National. Low-cost airlines that purchase some of the assets will likely have a competitive advantage over others. However, the assets that low-cost airlines will most likely buy will not lower costs but will increase revenue. Many of the assets that would be sold are older aircraft (and typically more expensive to fly), gates at high-rent airports, and other various assets that would likely increase costs because they don't fit as well with the very defined low-cost systems that these airlines operate. But, the revenue gains that would come from the new equipment would offset the additional cost.

The merger would force US Airways and Delta to do several things that may be attractive to low-cost carriers interested in assets. First, the merger plan calls for the new company to reduce the number of seats it flies by 10% overall. This would mean that the combined company would likely shed older, more costly aircraft, particularly narrowbody aircraft that are used by low-cost carriers in the United States. Aircraft like 737-300s or A319/A320s could be attractive to low-cost carriers looking to pick up cheap used aircraft. Low-cost airlines might also be interested in gates at airports that are currently dominated by one airline, such as Cincinnati or Charlotte. These have been traditionally high-cost airports that haven't received many low-cost carriers. Also, US Airways and Delta have a large amount of market share in high-cost airports on the East Coast such as Boston Logan, New York LaGuardia, and Washington D.C. Reagan. While Southwest isn't as interested in those airports, JetBlue, AirTran, and even Frontier could all be looking to purchase gates and landing slots in order to compete with lower fares at those airports. If a merger occurs, there is bound to be some consolidation in terms of the hubs of each carrier, and one example of that is in Charlotte and Atlanta. It doesn't make fiscal sense to have hubs in relatively close geographic areas, and that is very true in this case given that the cities are less than 250 miles apart. The new company could save money by consolidating most of its hub operations into one airport. Atlanta is Delta's largest hub, and it's extremely unlikely that a merger would force Delta to dismantle that hub. Charlotte, on the other hand, is a major hub for US Airways, but secondary to Philadelphia. US Airways may downsize the Charlotte hub by dropping regional flights, but maintaining point-to-point service to major cities across the country in order to maintain market share. Charlotte already has limited service from AirTran and JetBlue, but if US Airways reduces flights to the city, then that could make way for an expansion of service from those two airlines or it could open the door for Southwest to commence service.

Southwest Chairman Herb Kelleher has called Delta CEO Gerald Grinstein and US Airways CEO Scott Kirby to express Southwest's interest in assets from a merged company. Southwest is interested in planes and gates, especially on the East Coast, where Southwest is weakest competitively, and has had trouble expanding. Southwest is very interested in obtaining additional aircraft for their rapidly-expanding fleet. Southwest might be interested in Delta or US Airways 737-300 aircraft, which is an older variant of the 737, but one that makes up nearly half of current Southwest's fleet. Recently, Southwest placed an order for 80 737s and when they asked Boeing to add two aircraft to the order, Boeing turned Southwest down, even though Southwest is arguably Boeing's best customer. Boeing has received a surge of orders recently, and didn't have the production capacity to accommodate Southwest's additional orders. Boeing instead suggested to Southwest that it buy used aircraft that were being dumped by the Ford Motor Company. If Southwest is unable to receive new aircraft in addition to the ones they have already ordered, they will likely want to purchase used aircraft, even if the used aircraft are older 737 variants like those at US Airways and Delta. Southwest might also be interested in gates at certain airports. Charlotte and Cincinnati are two hub cities that could see reductions in service, and if that occurs, Southwest might decide to add service. Southwest currently serves neither city, though is interested in serving both. Because both airports have been fortress hubs with high airport costs that make it very difficult for a low-cost carrier to succeed, Southwest hasn't dared to enter. But if there are service reductions, there will likely be more available gates and the airports may lower fees, at least for a limited amount of time, in order to woo new carriers. Southwest could get a lot out of a merger, but they need to be careful what they buy, and not take on too many assets that don't fit in well with Southwest's low-cost model.

On the other side of the spectrum, AirTran has a different set of interests than Southwest from this merger. AirTran wouldn't likely be looking for aircraft, as US Airways nor Delta has the type of aircraft AirTran uses, 717-200s and 737-700s. But AirTran is looking to add point-to-point service from some of the restricted airports that US Airways and Delta serves in Boston, New York, and Washington D.C., and AirTran is willing to pay for gates and landing slots at Boston Logan, New York LaGuardia, and Washington D.C. Reagan National. AirTran would likely add service to cities up and down the East Coast, especially to Florida where the airline is looking to increase its market share. AirTran's next phase of expansion involves adding point-to-point service from higher-cost airports so AirTran can build a market with business travelers and charge a premium for flights. If AirTran receives additional slots, they must expand from these higher-cost airports methodically. Only then will they be successful against Delta and US Airways, but sadly, AirTran may be forced to retreat in some of these markets like they have in Chicago Midway if there is too much competition.

JetBlue and Frontier could get aircraft from the merger as US Airways operates both A319 and A320 aircraft, but it's unlikely given how the new the aircraft are. US Airways would rather get rid of older 737-300s and -400s than the newer, and cheaper to operate A319s and A320s. JetBlue may be interested in the airport slots like AirTran is, as JetBlue is also interested in expanding point-to-point services from these cities. In this regard, JetBlue's interests are quite similar to AirTran's. One additional benefit David Neeleman sees to a merger is that Delta may reduce operations at JFK, instead consolidating New York City operations at LaGuardia or simply downsizing Delta's New York City focus city, enabling JetBlue to expand further from JFK. Frontier may want to expand to cities like Cincinnati and Charlotte that could use Frontier's low-cost service but are currently dominated by Delta or US Airways. Frontier might also interested in expanding service to Phoenix and Las Vegas. These are both big Frontier destination cities, and if US Airways consolidates capacity in these cities, and reduces available seats by 10%, then Frontier could take advantage of those cuts to expand service. But for both JetBlue and Frontier, service cuts by US Airways and Delta means potential service expansions that allows the respective carriers to strengthen their market share in key cities. The potential merger of US Airways and Delta will enable several low-cost carriers to expand by leasing gates formerly leased by US Airways or Delta and by expanding on routes that US Airways and Delta will cut frequency on. However, looking at the possibility of a merger, Delta is opposing it and currently a merger seems unlikely. But, the environment may change in the new year, and the merger may move ahead, enabling US Airways and Delta to cut costs and low-cost airlines to capitalize and expand in the void left by service cuts.