Sun Country Parent Files for Chapter 11

Sun Country Airlines parent company Petters Group filed for Chapter 11 bankruptcy protection amidst an ongoing investigation of fraud by former group chairman Tom Petters. While the airline expects to continue normal operations, at least for now, I have serious concerns about the health of the carrier. Recently, the company (complying with the federal WARN act) announced that it may lay off all of its employees if it is unable to improve its cash flow, and to do this, it may have to trim employee salaries by as much as 50%. These drastic measures signal a carrier in serious trouble.

While Sun Country is a pretty small potato in most of the country, it's an important carrier in Minneapolis, its base of operations, where the carrier not only operates a variety of services to leisure destinations, but also important business destinations such as Seattle, New York, and Los Angeles. There is no reason to believe that Sun Country will manage to survive the next six months. The airline simply has too many things going against it, and unfortunately, Sun Country is unable to command a price premium in most of the markets it serves, as it targets leisure travelers, making profitability ever more allusive. If Sun Country folds, expect Northwest to move quickly to shore up its position as the top dog at MSP, perhaps adding flights to some of the destinations Sun Country currently serves. But more importantly, Sun Country's departure would create an LCC vacuum at the airport, since it would only have minimal coverage by LCCs (mostly on Frontier and AirTran which don't offer many point-to-point flights). Perhaps Southwest will use its impending arrival at MSP in March to offer service on some of the routes Sun Country is abandoning, particularly to Los Angeles, Phoenix, Las Vegas, and Orlando. That would give Southwest a stronger competitive position at the airport, make the carrier attractive to business travelers, and provide Minneapolis flyers a more stable LCC that is unlikely to go bankrupt anytime soon.

Southwest to Serve Minneapolis-St. Paul from March 2009

Southwest Airlines announced its first new destination in more than a year, Minneapolis, from which the airline will begin service to Chicago Midway starting in March 2009. The airline is keeping expectations low, saying that the carrier will begin a "modest" operation at MSP with service only to Midway. This is not in keeping with previous Southwest destination openings, which typically see routes to several cities and at least 10 daily flights. Even a smaller market like Fort Myers, FL received 9-10 daily flights when Southwest first began service to the city. But how the times have changed. Southwest is likely making this a more conservative opening because of the uncertainty over flight demand. Even though Southwest is adopting a bold strategy to attract business customers, who are looking for nonstop flights to a variety of cities, Southwest simply cannot risk too much of Northwest's wrath in this tight market by making a stronger move. Eventually, Southwest will likely add service from MSP to some or all of the following markets, depending on the Chicago route's performance, Detroit, Cleveland, Baltimore, Los Angeles, Phoenix, and Las Vegas, but for now, the company needs to test the waters.

The route to Chicago is a very good test of Southwest's efficacy to attract business travelers with relatively little risk. Northwest, American, and United all operate in the market, and all charge exorbitant fares. AirTran tried to take on these carriers a year or two ago with discount fares, but was forced to withdraw due to lack of demand. Southwest, because of its brand loyalty and reputation in the Chicago market, will likely be more successful than AirTran. Moreover, the carrier is taking a limited risk by flying to a market where the carrier has a strong base of operations, and one which is only a short distance from MSP, allowing Southwest to generate higher yields using less fuel. While Southwest's Minneapolis operations may not become the size of Chicago's (with over 200 daily flights), this is an important announcement in Southwest's push to make itself a more viable option for business travelers by filling in the holes in its network. This could be a signal that Southwest may be getting ready to serve other major markets it does not yet have a presence in, including Atlanta, Cincinnati, Memphis, and most importantly, New York (Regardless of the claims to the contrary, Southwest's Islip operations are not very effective at serving business travelers headed to NYC). Hopefully Southwest will add these destinations in the future in keeping with a more conservative outlook. With $100+ barrel oil, airlines simply cannot add routes willy-nilly, and with today's limited announcement, Southwest's management seems to recognize the necessity to tread carefully.

Airline Bulletin is Back; Two (Re)emerging issues in the Airline Business

I have returned from Ecuador (and will try to post a few pictures within the next few days). In the coming days and weeks, I hope to shine a wee bit of light on some of the controversial issues in the airline industry. Upcoming posts may include Why Widespread Panicking is a Bad Idea, Why Most Airline Managers are Idiots, and Why Most Airline Managers are Idiots (Part II). Poor business decisions helped get the industry into this mess, but that doesn't mean ingenuity and the right decisions can get us out of it.

But to begin, I want to examine a couple of key issues that may emerge in the public debate over the next few months. The fuel issue has obviously dominated the press headlines lately, and justifiably so. However, the severity of the fuel crisis will spur ancillary difficulties for carriers, and the nation, as carriers run out of fuel savings, and begin to turn to the government for help.

Subsidies
If airlines continue to hemorrhage cash at current rates, many will run out of cash later this year or sometime next year. As a result, one of the most important issues facing the nation with regard to airlines, is not necessarily how to curb rising oil prices, but how to save the vital airline network that binds our nation together. After 9/11, the airline industry was provided with a government cash infusion to help stave off more trouble, as well as loans to specific carriers to help them survive. Once again, the government may have to intervene, and as cash reserves run lower and lower at many of the nation's top airlines, this issue will become increasingly pressing to politicians, not to mention presidential candidates. Even though corporate subsidies are increasingly unpopular, especially in the wake of the unjustifiable tax breaks that continue to be given to big oil companies, even while reaping record profits, another subsidy infusion may be necessary to the nation's airlines. However, what might be better than a cash infusion, is instead a fuel subsidy that helps limit the exposure airlines have to volatile oil market prices. This could be done by setting a ceiling on prices that carriers pay, and having the government cover the remainder, or by offering a government fuel subsidy per passenger mile. This is far from a perfect solution, as it could disadvantage carriers like Southwest who are less exposed to the volatile oil market, but it would help protect the industry as a whole from its number one enemy at the moment.

Re-regulation
Another issue stemming from high fuel costs is the possibility of some sort of re-regulation. One of the things the airline industry has struggled with since deregulation, unlike many other industries, is the constant struggle of price wars. The airline industry has seen a plethora of new entrants in the past 25 years, and most of them use low fares to draw away customers from the large, network carriers. While competition has its advantages, most notably when Southwest starts service from a new city and lowers fares, it can have very adverse effects when a new entrant enters and relentlessly offers loss-leading fares as a way to drum up new business. Skybus was a prime example of this, using it's lowest fare classes as loss-leaders to help fill planes. Some observers have suggested re-regulation as a way to prevent carriers from offering fares that are simply too low.

Robert Crandall, former CEO of American Airlines, has suggested the idea of a minimum fare threshold on routes, that would help prevent destructive fare wars. Other avenues of re-regulation have the potential to benefit carriers, such as limiting the number of carriers on very high-traffic routes, but in exchange for those carriers operating less popular routes to help appease the demands of airports and the business community. But a full re-regulation of the airline industry is less likely. As Northwest Airlines CEO Doug Steenland said at a recent Merrill Lynch conference "Anybody who looked at re-regulation seriously, I think, has concluded that the genie is out of the bottle, and I don't think it can go back in."

As airlines struggle more and more against the tide of rising oil prices, especially in the fall and winter as the busy summer travel season dies down, more and more discussion will take place about increased government involvement in the industry, either through subsidies or through re-regulation. Aviation is a crucial linkage in our nation's fabric, and the government will do what it takes to preserve it, regardless of which party is in power.

What Delta and Northwest Need to Change in Order to Thrive

Recently, Delta and Northwest got back to merger negotiations, after having broken off talks due to difficulties concerning the combination of seniority lists if a merger were to take place. The Wall Street Journal reported today that a deal could be announced within a couple days. With airlines suffering from record fuel costs, as well as ongoing maintenance issues, a merger is appearing more attractive to airline executives. Unfortunately, the savings they desire may be elusive. The easiest way to combine carriers would be a holding company combination, where management activities, as well as some airport operations, would be combined, but pilots and flight attendants would operate under separate contracts and probably on separate fleets, at least in the near term. A combination is fine because it allows Delta and Northwest to resolve the two issues that are most important, controlling and adjusting capacity to the realities of $100 a barrel oil, as well as improving the company's customer service.

One of the reasons many managers were looking to merge legacy carriers was in order to consolidate domestic capacity. But a merger wouldn't necessarily allow Delta and Northwest to consolidate a significant amount of capacity in terms of seats. Both Delta and Northwest are in the process of removing capacity from their fleets and there isn't a tremendous amount of overlap on their domestic routes. Internationally, both carriers are expanding, and capacity would increase. However, a combination would allow the carriers to better manage their existing capacity, consolidate some flights, as well as reevaluate service to small markets, that with $100+ oil, may not be profitable. With a combination and a restructuring of the combined carrier's route network, the company could have the opportunity to rearrange its agreements with regional jet contractors, such as Mesa or SkyWest, in order to help the companies reduce costs and capacity to unprofitable markets. Even though the number of seats reduced in the carrier's overall system would be small by the trimming of some regional routes, it could save the carrier a great deal of money.

As the US Airways/America West merger has demonstrated, forcing two sides to a labor agreement that neither particularly likes is a bad recipe for employee morale and customer service. The pilots have still not satisfactorily resolved their longstanding disagreements over seniority agreements. Therefore, instead of a complete merger, a combination of the operations side of the business while keeping Delta and Northwest as essentially separate carriers under one parent company might be a preferable arrangement. Unfortunately, this wouldn't lead to as many cost savings as managers would desire, since larger labor groups, such as pilots, would be covered under separate contracts. But what is critical in this deal, even more than cost savings, is that management cannot force the pilots unions to accept an agreement that one side sees as unfair. Airlines will have to deal with large groups of employees for the indefinite future, and they need to do their best to keep them happy. What legacy carriers especially cannot forget is that with the flying experience becoming increasingly unbearable for travelers in the US, airlines need to ensure that their employees deliver top-notch service. And one of the best ways they can do that is by making them feel valued and treating them with the respect they deserve. This is partly why Southwest is known for its service. Even though the company has more leeway than other carriers in its hiring, because it can select from a broader range of candidates, the airline successfully retains and motivates their employees by keeping them in a work environment that lets their voices be heard. If Delta and Northwest cannot improve their customer service, they will seriously threaten their future viability as businesses.

A carrier modeled under the Air France/KLM combo where the carriers operate separately under a holding company that controls scheduling and pricing for both carriers, would allow Delta and Northwest to adjust their route network to make it more efficient as well as adjust pricing to make the carrier more profitable. Unfortunately, restructuring flights will not do enough for the combined carrier. What airlines in the United States are suffering from is a media deluge of negative publicity. Customers are growing more antagonistic towards the airlines. The recent airline quality survey that came out last week was a typical example of this. Nationwide coverage of increased delays, increased rates of lost bags, and so forth, didn't do much to help the airlines. And Congress has caught onto the act, with front-page hearings criticizing airline executives about safety. To put it bluntly, consumers in this country hate airlines. And with rising prices, customers are getting increasingly irritated with putting up with substandard service that they feel they don't deserve given the exorbitant cost of their ticket.

As a result, the merged carrier needs to re-brand itself, with the Delta name, as a carrier that genuinely cares about service. What we don't know in this market with rising prices is whether there will be sustained demand for leisure travel. Business travel (specifically unmanaged business travel), while perhaps decreasing slightly in demand, is going to be a more important target market for the carrier in the coming years. Moreover, Delta has a very strong presence in large business markets, including Boston, New York, and Washington DC, and by making sure that it offers industry-leading service, comparable with carriers abroad, will help the carrier maintain yields and market share in this turbulent market. Business travelers will otherwise look to LCCs such as Southwest and JetBlue, which are pulling out all the stops by offering business travelers more amenities, better service, higher punctuality, and lower fares. With air travel becoming increasingly burdensome for business travelers, airlines that make the experience as pleasant as possible will be those that will see growth in market share and profits.

This company, if it is positioning itself for a future of more competition, especially from overseas, as well as from LCCs on key domestic routes, and a future of high oil prices, needs to discipline itself on capacity and service. The carrier will likely get Delta and Northwest's route networks integrated into a larger whole, and the company will find way to combine operational redundancies to reduce some costs. But, this carrier will not make money if it has too much excess capacity in the market, as well as too little capacity in growing markets. Moreover, it will not make money if it has poor service, because as has been shown in Europe and Asia, customers, and especially business travelers, are willing to pay more for good service if airlines actually deliver it. Now to get good service, management needs to, for lack of a better term, "be nice" to its employees, especially its pilots and flight attendants. That means these labor issues need to get resolved, or at least get to a point where they won't boil over after a combination. If the combined company can focus on these two areas, capacity and service, not only will it be the largest carrier in the world, it will be one of the best positioned for an uncertain future.

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Legacy Airlines Making Cuts To Deal With Record Fuel Prices

As evidenced by yesterday's Delta announcement that the carrier will trim 2,000 jobs and reduce its domestic flying, many airlines are feeling pressure to shrink in the face of high fuel prices. Moreover United and Northwest have issued warnings that legacy carriers may need to shrink in order to survive by trimming routes that simply aren't profitable with such high fuel prices, especially those on higher-cost regional jet aircraft. Carriers are starting to feel the pinch. The question is, will these cuts be enough?

Perhaps the greater uncertainty that carriers face is not what the price of crude oil will be tomorrow, but rather what demand will be for air travel, particularly from business travelers, in the coming months and years, given a slowing economy. While the rise in oil prices hasn't helped the economy, most of the reasons for the recent economic slowdown are independent of oil prices, and so airlines are feeling a double-whammy from the economic slowdown and the recent rise in oil prices. What airlines have been able to count on in recent years is that demand is still strong, both from business and leisure travelers. But with a slowing economy, many businesses may try to reduce travel expenditures. Many travelers who work for small businesses or others who have unmanaged travel accounts provide lucrative yields to carriers. But their employers could be hit hardest by an economic downturn, and may have less of an ability to keep funding pricey travel. This would challenge airlines, especially because business travelers have a greater ability than leisure travelers to deal with the fare increases that airlines have had to impose due to rising fuel prices. As a result, many legacy carriers, are looking to expand abroad, where they feel demand will pick up more in the near future. Whether this is true or not is unclear, but there are two key drawbacks that carriers need to be aware of with regard to this expansion.

The first is that many of these long-haul flights, while offering higher yields, also have higher fuel bills to go along with them. Many of the new destinations that carriers are adding, in East Asia for instance, have 12+ hour flight times, which burn a tremendous amount of fuel. Moreover, many legacy carriers are operating these routes with older 767-variant aircraft, which are less fuel-efficient than the newer 777s. And with only 2 US carriers placing orders thus far for the fuel-efficient 787 aircraft, it may be awhile before US carriers can significantly reduce their international fuel needs. While legacy carriers can afford these fuel bills for the time being, because the yields are higher, many of these routes could be cut too. Many legacy carriers are expanding to new markets, markets that have little nonstop service to the US. Adding service to a market that has little nonstop service to the US offers greater risks and rewards than would a flight on an already-established route. With the heavy demand on fuel resources that international flights require, many carriers may not allocate a sufficient amount of time to let their new flights gain enough demand to a point where they can be profitable, because the initial losses will simply too severe due to high fuel costs. Any route takes time to gain demand and become profitable, but in this environment, airlines may be more risk-adverse. This may have good short-term implications for airline balance sheets, but if the new international markets airlines tout really do warrant service to the US, then other carriers, foreign carriers, may make the leap to start service and get a valuable head start on US carriers in terms of gaining market share.

The second drawback is this expansion of service by foreign carriers in US markets. In many cases, these foreign carriers have higher product and service standards than their US counterparts, especially in first and business class, allowing them to gain additional high-yield passengers, even if they start service on a route after a US carrier starts service. Moreover, foreign carriers often offer nonstop service where US carriers offer hub-and-spoke connections (though this works both ways, depending on the routes, since passengers can connect in the US on American carriers or abroad if flying on foreign carriers). Many passengers would prefer to spend five hours in Frankfurt than five hours in Chicago. US carriers have tried in recent years to upgrade their cabins to compete with foreign carriers, but sadly, they have fallen behind in many areas, and this could impact their ability to make international routes as profitable as they desire.

Legacy carriers have done nearly all they can to reduce costs. There are no major cost cuts they can make, and any further cost cuts will either shrink the size of the carriers, or trim operations that shouldn't be trimmed for the long-term benefit of the company. What will need to happen now is that these carriers will need to look into the future and see how they can best position themselves towards these new realities. As much as legacies would like to believe that fuel prices will dramatically decrease, oil over $80 is a new reality that carriers need to adapt to. This means that carriers need to rethink their expansion as well as their new aircraft purchases and timing. Expect increased pressure from airlines around the world on aircraft manufacturers to create an aircraft that can deliver dramatic fuel efficiency gains. Moreover, airlines may exert continuing pressure on government to offer better solutions to energy policy. This isn't a problem we can drill our way out of, but rather one where established alternative energy solutions need to be implemented (such as electric vehicles) so oil can be used for industries where serious alternatives do not yet exist (such as aviation). By reducing the pressure on oil prices from automobile drivers and other oil users, airlines will see lower crude prices. But that will only come when airlines and other large companies lobby for a comprehensive national energy policy that takes renewables seriously. If the airline industry is to thrive, oil prices will have to come down, and the only way to do this is to reduce demand. Ultimately, this is where the solution lies.

Potential 2008 Merger: American and Continental

This is a merger deal that has been mentioned less often than a potential United/Continental deal, and it's in part because quite frankly, the match between them wouldn't contain as many synergies as the latter deal, due primarily to too much overlap in terms of both carriers' route networks, though there would be important fleet synergies that could offer cost savings. Of any two legacy carriers, American and Continental are most similar in terms of route structure. Both have very large hubs in Texas, as well as sizable operations in the Midwest (American having hubs at St. Louis and Chicago O'Hare and Continental having one in nearby Cleveland). Furthermore, both carriers have strong operations in the NYC metropolitan area, with a wide array of international flights, and neither carrier has a very diverse set of operations in the US west of Texas.

Moreover, while Continental has used its Newark hub to expand to destinations in Europe and Africa, a very large proportion of both carriers' international capacity is concentrated in Latin America, especially between hubs in the Southern US and Latin America. For many smaller destinations in Mexico and Central America, many of which are served by regional jets, a merger by American and Continental would leave very little additional service from US carriers, potentially raising prices for consumers. That would be beneficial from a competitive standpoint, but it could threaten the viability of the merger.

In an American/Continental merger, Cleveland has a very high probability of being sacked as a hub. The same is true in a United/Continental scenario. Cleveland simply doesn't have the yields and the origin and destination traffic levels to sustain the levels of service Continental has there right now. Continental's operation there could be downgraded to a focus city, with regional service being trimmed or eliminated altogether, and service maintained mainly to hubs and large business centers. This could open up the opportunity for Southwest to gain market share in Cleveland, where it already has a presence, by offering competing nonstop service to woo business travelers. Southwest could help lower fares for area travelers, but a reduction in Continental service will almost certainly mean a loss in the number of destinations served from the airport, forcing many travelers to make connections to reach many smaller markets. Moreover, any international flights Continental flies from Cleveland would very likely be eliminated in a merger. As a result of consolidation in Cleveland, most of that hub's traffic would get diverted to American's O'Hare hub. It's unclear how this deal might affect American's operations in St. Louis. Because Continental has no hub within several hundred miles of St. Louis, my guess is that it's operations will likely remain relatively intact, though St. Louis could feel the effects of a further reduction in regional jet usage if fuel prices continue to remain at such high levels, since regional jet flights are increasingly unprofitable due to high fuel costs. Many of American's flights at St. Louis are operated by regional jet contractors.

Of course the real wild card in any American/Continental consolidation is what would happen to the two carriers' Texas hubs, which are very close. It's likely that both hubs will probably remain intact in a form similar to the present, because American and Continental simply have too much to lose by giving up their position in either market, the yields are too good, and the market share is too significant. However, what could get shifted around are the routings of some international flights. Depending on which city has less competition, or has better yields for a given international route, certain international flights could get shuffled between Dallas and Houston. Moreover, flights between Dallas and Houston could be consolidated with larger aircraft and more frequent service, giving a combined American/Continental leverage against Southwest by lowering ASM costs and potentially boosting market share.

American Airlines has a very simplified fleet structure for an airline of its size. After 9/11, the company reduced the number of aircraft types in its fleet from 14 to 6, and this has produced tremendous operational efficiencies for the carrier. Continental, which has a range of 737, 757, and 767 variants, will complicate American's fleet. However, these aircraft, even those variants which would be new to American's fleet, would bring efficiencies in maintenance and training. But what's even more important, is that increasingly, US carriers have resorted to regional jets and smaller aircraft to fill the roles larger aircraft used to play, in order to increase load factors and revenues per available seat mile. Because of its relatively uniform domestic fleet, American cannot easily tailor capacity to certain markets at certain times. The company has a large capacity gap between its MD-80s, which seat over 140 passengers, and some of the 70-seat regional jets its American Eagle subsidiary operates. Continental, while not an ideal carrier to help fill this capacity gap, helps give American some flexibility. Continental operates a large amount of smaller 737s, including some that seat around 120 passengers, and Continental recently started contracting to use 78-seat turboprops on certain routes out of its Newark hub, that have allowed the carrier to better time capacity to meet the needs of business travelers, as well as reduce unit costs. With a more diverse fleet of 737s, the combined carrier will be better able to time capacity to certain times of the day in certain markets, giving it leverage over Southwest which only operates 122- or 137-seat planes.

Like a potential merger with United, a merger with American would help Continental realize its international potential. Continental is constrained due to its lack of 777 planes, but American has 47 which will help the combined carrier add new lucrative long-haul international routes in the coming years. With the exception of American's A300s, which are very useful aircraft for carrying large amounts of cargo on Caribbean routes, both carriers' long haul fleets are Boeing 767s and 777s, allowing the combined carrier to reap additional cost savings.

Strategically, the argument can be made either for or against a merger. On the one hand, because American and Continental are such similar carriers, with similar fleets and route networks, relative to other legacy carriers, then a merged carrier would not be a diversified one, but instead one with many more eggs in fewer baskets, than a Delta/United merger. Strategically, this could work out, but it will focus the carrier on hub-and-spoke domestic routes, international travel in certain regions, and certain products and service standards, all of these being much less varied than those of other carriers. If the carrier is focused on the right markets with the right levels of capacity and the right product, then it will have a tremendous advantage over the competition. It's a gamble, and one that I think will not pay off well for the combined carrier in the long-term because the market is changing too quickly to have a narrower strategy. A diversified carrier, like a combined Delta/United, has strength in virtually every location US carriers serve, as well as the ability to attract key groups of corporate flyers and leisure travelers. A combined American/Continental might be very, very strong in Texas and elsewhere, but its service frequencies to key business markets such as San Francisco, Los Angeles, Boston, and Washington DC might pale in comparison to a Delta/United combo, making the carrier less attractive for high-yield business flyers.

This merger is less likely to be approved by lawyers at the Department of Justice than a United/Continental deal. American and Continental would simply have too much market power in Texas, especially between Dallas and Houston which is one of the busiest air travel routes in the country. Moreover, American and Continental are the only two carriers for many smaller communities in Texas, Oklahoma, and the surrounding states. If these two carriers merged, higher fares and less frequent service would likely result for communities that have struggled to maintain precious flights. The last major regulatory conflict concerns whether the DOJ would examine how American/Continental consolidation would affect fares to certain international destinations, that the two carriers dominate from the US, particularly in Latin America. These are all hurdles that can be overcome, but they may be tougher ones to climb than what a combined United/Continental would have to face.

While some of the recent difficulties in securing the Delta/Northwest merger have made an American/Continental deal even less likely, it's still a scenario that should be considered. Even if legacies aren't able to spark consolidation this year, this deal may be one to watch for in future years.

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Potential 2008 Merger: United and Continental

If a Delta/Northwest deal goes through, which is looking increasingly likely, then United and Continental may be poised to join forces to create a formidable competitor. The combined carrier would be the combination of two carriers that have been very successful at maintaining relatively high service standards (for US carriers), even during the service downturn that customers have seen in the past several years, and as a result, each has maintained a solid base of business travelers.

What a combination would do is give this carrier dominance in certain international regions particularly in the Pacific Rim and the Middle East. As an increasing amount of business traffic is being directed to these two regions, the combined carrier would have a distinct competitive advantage over even a combined Delta/Northwest in providing high-quality, frequent service to these, and other, parts of the world.

A merger would likely do little to greatly realign the route networks of either Continental or United, with one notable exception. United has five very large hubs, all generating a significant amount of a high-yield origin and destination traffic and all a sufficient distance away from any of Continental's, that none of them are likely to see any major service reductions. But, Continental's Cleveland hub could see a gradual draw down in service, with the elimination of much of its regional service (or a reshuffling of that regional service to Chicago or Washington). Cleveland for Continental is similar to Cincinnati for Delta. Both are hubs that generate a fair amount of origin and destination traffic, and this traffic generates solid yields. But, the sizes of the hubs are dwarfed by others in the respective carrier's route network, and it's simply inefficient to maintain them should Continental and/or Delta merge.

In addition to some flight reductions at Cleveland, some eventual realignments and shifts in international service could occur. For instance, some international flights could get moved from Washington Dulles to Continental's Newark hub or vice versa depending on traffic patterns to facilitate easier connections from West Coast flights to lucrative international flights. It's also possible that some services to the Pacific could be realigned. For instance, Continental has a small hub in Guam, allowing the carrier to serve Micronesia. But, that hub can only be accessed from Honolulu in the US, whereas a much more convenient connection location for customers might be San Francisco or Los Angeles, because there are much more frequent and convenient connection opportunities for customers.   

Moreover, the merger would offer significant benefits in terms of fleet simplification. United has one of the most diverse fleets of any major US carrier, but since its mainline fleet is mostly Boeing planes, while Continental's mainline fleet is all-Boeing, then the combined carrier will yield some significant synergies with maintenance and training costs due to fleet combination.

If the fleets were combined, United may try to reduce the number of older 737 variants in its fleet, but because Continental also has many of these types, they may have to be kept for longer than either airline would like since it would be difficult to eliminate them outright. One of Continental's largest problems in recent years concerning its fleet has been its lack of 777 aircraft to service very long international flights. As a result, Continental has had to delegate its 777s to just a few select routes. United has dozens of 777 long-haul planes, and these could be added to some long-haul routes currently operated on Continental 767s (typically older, smaller planes) to add capacity and lower ASM costs.

Concerning alliances, the biggest thing that could stop this merger is the "golden share" which Northwest holds over Continental that essentially gives Northwest the right to veto any mergers Continental might conduct. But, if Delta and Northwest merge, Continental could purchase its golden share back from Northwest for $100, enabling the carrier to merge as it wishes. However, it's very likely that Continental will have to drop its codesharing agreement with Delta and Northwest if it merges with United, and assuming that United makes the acquisition, Continental will likely become a member of Star Alliance, leaving Delta and Northwest as the remaining two US carriers that are a part of SkyTeam.

Since it appears United will make the acquisition, I suspect the Continental brand could eventually be dropped, and all operations integrated into United. But like with the US Airways/America West merger, the transition period will take awhile, and so customers and employees need to be prepared. United has a team of experienced managers who aren't as ruthless as those who ran US Airways through its transition period, and the cultures at United and Continental are much more similar than at the old US Airways and America West, so there will probably be less resistance from employees to such a deal, provided management treats them fairly. As a result, even though a United/Continental merger is much larger than the US Airways/America West deal, it should be smoother.

This merger could mean good or bad things for business travelers. Both United and Continental have considerable bases of loyal business travelers who will likely continue to fly with the combined carrier. But, as shown a week ago, when United announced a new $25 baggage fee to its non-elite restricted coach flyers (many business travelers, especially those who fly for smaller businesses will travel on restricted coach tickets), one airline is focused on nickel-and-diming passengers while the other is focused on offering inclusive amenities and providing services to its customers. Continental continues to be the only major US carrier to offer free meals, even in coach, on medium-to-long domestic flights, and the company recently announced a new onboard entertainment system to be installed in many of its domestic mainline aircraft. If the two carriers merge, they will need to determine whether to continue down the path many other US carriers are taking, charging customers extra for services that were formerly free, or offering all-inclusive rates. I would argue that the latter option better meets the needs of business travelers, many of whom already pay exorbitant amounts for their tickets, and who make decisions about which carrier to fly based on amenities and service.

Like all legacy carriers, United and Continental are both moving forward with international expansion planes, while curtailing domestic flying. That's a fine, smart thing to do right now at this time when the economy is stuttering. But, if United and Continental become more international carriers and less domestic carriers, then to win over business travelers, they can't simply outdo other US legacy carriers with lousy service standards. They have to compete against foreign carriers, which on the whole, offer superior service and amenities to business travelers than US carriers. As more and more foreign carriers expand in the US, legacies like United and Continental will have a tougher time winning the patronage of business travelers, which is why a renewed emphasis on amenities, loyalty benefits for high-yield travelers, and most of all, customer service, will keep business travelers loyal. Many foreign carriers don't win over customers based on price, they win them over based on the experience, and since US carriers have less low-cost competition in foreign markets, they don't need to worry so much about winning on price but instead on delivering an excellent experience to customers. If a combined United and Continental can do this, then they will become the leading US carrier, and have a significant competitive advantage over American as well as combined Delta/Northwest.

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Possible 2008 Merger: Northwest and US Airways

From a fleet and route perspective, a merger between Northwest and US Airways could be a big winner. But from other perspectives, and more specifically, a labor perspective, it could be a major problem. However, if the merger were successful, it would create a company that would offer forceful competition in key domestic and international markets to a potentially merged Delta/United. For more information on the current merger frenzy that's sweeping the industry, see this post.

One of the largest potential problems that analysts foresaw in the US Airways/America West merger that occurred a couple years ago was that it was the unification of two carriers which had very strong route networks on opposite ends of the country, but there would be no central hub to join the two ends of the barbell, so to speak. Given the fact that the new carrier would not have many larger, more cost-effective aircraft for transporting flyers long distances, it raised the possibility of two-connection travel for many flyers, which, given all the potential problems of delays as well as the extra time it requires, could dissuade many travelers. While this hasn't proved to be as big a problem as I or other industry-watchers suspected, with rising fuel prices, operating transcontinental flights has become rather expensive, especially with A320-size aircraft which have higher available seat mile costs than 757s or 767s. Having a central hub, particularly one that can draw from traffic bases both East and West for international service, will be critical to the success of a national carrier, and that's what Northwest brings to US Airways in a potential merger.

And while the combined carrier would retain probably two central US hubs, if a merger were to occur, Memphis as a hub for Northwest would almost certainly be dumped, though the combined carrier might retain a focus city operation in the city to capitalize on business traffic. However, Northwest's exit from many markets from Memphis could open the door for a low-cost carrier, such as Southwest to enter the market. Or perhaps, if Northwest makes a major withdrawal, Frontier will make another attempt to set up a focus city in Memphis, though the company denies that it is planning any expansions of point-to-point services outside of Denver.

The combined carrier, with six remaining hubs in Philadelphia, Charlotte, Detroit, Minneapolis, Las Vegas, and Phoenix, will likely keep all those cities as hubs. However, to simplify operations, some hubs could focus more on mainline traffic to destinations that can support narrowbody mainline aircraft, while other hubs may focus more on bringing in a variety of connecting traffic, including regional jets and mainline planes (both narrowbody and widebody). By doing this, the airline is still able to maintain strong market positions in all six cities, but it makes the company's operations more efficient by simplifying where regional jets and international aircraft are needed (and thus the related crew scheduling and maintenance functions associated with the different aircraft types).

Phoenix, Detroit, and Charlotte will all likely remain hubs where regional jets, narrowbody aircraft, and widebody aircraft have a large presence. Phoenix is a fast-growing business center, and offering regional jet service from the city helps US Airways draw traffic to its expanding array of international flights from the city. As Phoenix grows, the combined carrier will want to offer increased international service, and so it will need a large supporting base of regional and mainline services to support that service. Given Northwest's massive infrastructure investments in Detroit, with its practically new terminal and assorted facilities, that city will need to remain an all-aircraft hub. Moreover, since Detroit is very close to the Northeast, where US Airways currently has a strong presence with regional aircraft, it can take over some of the regional jet flights that currently make their way into Philly. Charlotte will also need to remain an all-aircraft hub for the combined carrier because of its proximity to the South (no other hub in the network, save for Northwest's Memphis, which will likely get eliminated in a merger, can serve many small Southern cities, and only one other hub operated by any carrier in the South (Delta in Atlanta) has the range of regional jet flights that US Airways at Charlotte offers.

While Las Vegas, Minneapolis, and Philadelphia could lose some of their regional jet flights, and a select few mainline flights, the core of these operations will not be affected. None of these cities will lose all their regional jet service, and I doubt any will receive even a sizable cut in mainline service. Minneapolis and Philadelphia generate high yields for their respective hub operators, and airlines focused on increasing revenue will want to keep these with a considerable amount of service. Las Vegas is an important market for volume and market share reasons. Even though yields are lower to and from Vegas, it can absorb a lot of excess capacity in these carriers' fleets, and even though it's not the most profitable way to use that capacity, it does get utilized and make some money.

The carrier, like all of the consolidated legacy carriers, will need to have a large emphasis on international routes. And it's likely that Northwest gateway cities along the West Coast will maintain their service to Tokyo. Moreover, many large markets also have nonstop Northwest service to Amsterdam, which will also likely be maintained. US Airways, meanwhile, will likely continue with expansion plans from its Phoenix hub, even if it merges with Northwest, and will add additional flights to Latin America and Asia. Even though some hub flights could get realigned, most international flights in the two carriers' networks will not get shifted. There will be some small adjustments, but most of the hubs, even if they lose some of their regional service, will likely maintain many of their international flights because they offer convenience to business travelers.

This also speaks to the question of alliances. Northwest is part of the SkyTeam alliance, while US Airways is part of Star Alliance. It appears that if the two carriers merged, they would probably join SkyTeam. The main reason for this is the very close marketing and codeshare alliance between Northwest and KLM, two large SkyTeam members. Through this partnership, Northwest passengers gain terrific connectivity to destinations across Europe through KLM's Amsterdam hub, allowing customers to reach destinations they couldn't easily reach with other carriers. Northwest and KLM have received antitrust exemptions on certain transatlantic routes through their partnership, and both seem eager to continue the deal, which has resulted in higher yields due to less competition. If Northwest were to discontinue its SkyTeam membership, it could be very difficult for Northwest to continue its KLM alliance, and instead KLM could choose to partner with one of Northwest's competitors, such as Delta or Continental, both of which are also part of SkyTeam. Since Air France, which is under the same corporate umbrella as KLM, is a major Delta partner, a Northwest/US Airways deal could threaten these precious alliances, and force Air France/KLM to choose whether to maintain close relationships with either Delta or Northwest. Even if the combined Northwest/US Airways were to remain a member of SkyTeam, it could lose the close affiliation it has with KLM and only have the looser frequent flyer affiliations that SkyTeam affords. But, those affiliations are still important, and probably better than those offered by Star Alliance.

Another advantageous asset for the combined company are US Airways' slots at LaGuardia and Washington National. Having slots at these airports will allow the combined carrier to offer a greater frequency of flights than other carriers to critical business destinations, and better serve high-yield travelers. With higher fares imminent, especially for business travelers, this will bode very well for the carrier.

Fleetwise, the big focus with all mergers, and this one is no exception, is about removing regional jets (particularly 50-seaters and below) from aircraft fleets, as well as older, less fuel-efficient mainline aircraft. Like I've mentioned before, Northwest's DC-9s will probably see some sort of accelerated retirement in a cost-cutting deal, but given the size of Northwest's DC-9 fleet, that clearly won't happen for at least several years. Regional jet flying, from Mesaba, Mesa, and other contractors could be reduced. On the chopping block are some of Northwest's CRJ-200s, as well as some of the contracted flying done for US Airways. Turboprops will probably be kept in most cases, since they're more fuel efficient, though turboprop (and especially 19-seater flying) could be reduced by some regional partners, who often operate these flights at a higher risk than their regional jet contracted flying. The reductions in this kind of service will likely depend on what sorts of hub route realignments take place.

Northwest may continue to take delivery of its 787 planes, even though it means the combined carrier could have unnecessary redundancies. In the depth's of US Airways' financial hell several years ago, the carrier received a $250 million loan from Airbus, in exchange for the company agreeing to purchase new A330 and A350 (the competitor to Boeing's 787) aircraft. When the combined carrier receives delivery of these planes, they could become a burden because the two fleets overlap and will generate extra costs. However, depending on Airbus's delivery timetable for the A350, this could be seen as an advantage. While many US carriers wait several years to receive their 787s from Boeing (even more so given the recent production delay announced by Boeing yesterday), which has tightened its production capacity to minimize cost, a Northwest/US Airways combined company could be receiving aircraft from two streams, increasing its ability to provide international service quickly at a lower cost and get a jump on the competition. While this advantage may be short-lived, it could be significant, depending on when the company receives these aircraft, when its competitors receive their planes, and what happens to oil prices in the coming years.

The one major area of difficulty that this merger has is what will be done about the labor situations at both carriers. Employees at both Northwest and US Airways have just cause to be angry at their management due to past failings, and unfortunately, a merger will lead to additional job cuts. What cannot be done, however, is treat employees in such a manner that hurts them more than what is inevitable. For instance, after the US Airways/America West merger, many US Air pilots were very upset by the way the two seniority systems at the companies were integrated, partly due to the questionable decision of an arbitrator. It left the pilots angry, and a similar incident cannot happen again if this merger occurs. Management at both companies need to ensure that the two sets of employees reach amicable conclusions.

But more importantly, they need to do a better job of showing that job cuts are necessary and will not be for temporary financial gain. Job cuts need to be justified, and management needs to make sure that they recognize the importance of providing solid customer service as well as supporting the bottom line. When US Airways had a major fiasco a couple years ago with an inability to process bags at Philadelphia due to a staff shortage, the airline quickly added several hundred additional staff. Those kinds of things can't happen, especially when customers are so irate at the service they're receiving and employees are worried about job security. Quick spurts of hiring and firing need to be smoothed out to give greater consistency and predictability to customers and employees.

Fortunately, if this merger is proposed, it will likely encounter far fewer regulatory hurdles than other potential deals. US Airways and Northwest are both smaller carriers than Delta, making the merger more palatable to regulators. A merger would give the combined carrier a market share not much larger than the current largest carrier, American, instead of a potential Delta/Northwest deal which could make the combined carrier substantially larger than any unmerged competitor. If Congress plans to put up hurdles to merger deals, then a Northwest/US Airways deal may be one of the few deals that can be approved. The merger would offer tremendous benefits particularly for US Airways, which is at risk of losing out in the current merger frenzy, since it's the smallest of the legacy carriers, by linking it to a carrier which can cover the service gaps it has in the Midwest, as well as internationally. Meanwhile, Northwest would get a carrier with a lot of capacity in attractive markets, particularly on the East Coast, as well as additional aircraft to help the company grow. While this deal is less talked-about than a potential Delta/Northwest deal, it would probably be a better matchup for both Northwest and US Airways than a Delta/Northwest deal, but whether it will ever get proposed, given the increasingly advanced state of Delta/Northwest merger talks, is up in the air.

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Potential 2008 Merger: Delta and Northwest

This post is the first in a yet-to-be determined number of part series on potential mergers scenarios that may play out over the next 12-18 months. It's important to note that whatever speculation this post may contain may be nullified by a merger announcement, which could include details of the combined operation that conflict with what is written.

Delta is a great merger partner with any legacy carrier for several reasons. The carrier has a very large fleet of widebody aircraft, perfect for profitable international expansion. The carrier also has a large fleet of regional jets, which, despite their higher unit costs (cost per seat to operate) compared to a larger aircraft such as a 737, are preferred in some smaller markets where fuel prices are forcing airlines to use the capacity at their disposal very efficiently and generate both higher yields and load factors. Moreover, the company has a very large hub in Atlanta, facilitating connections to hundreds of destinations, and smaller hubs in Cincinnati and Salt Lake City, both of which are very profitable because the relative lack of competition in both markets (but especially Cincinnati, which has some of the highest airfares in the country), allowing Delta to charge very high fares. Also, Delta is growing its presence in New York City, a perfect market for business travelers, who typically pay higher fares for seats. Finally, because the company has recently exited bankruptcy, its labor costs are relatively low, helping the company to move back into the black even with higher fuel prices.

Delta and Northwest has been talked about somewhat as a possible merger scenario, and it's one that makes a lot of sense. The company, which has exited bankruptcy but still faces challenges with its labor groups and its aircraft fleet, may be one of the more troubled U.S. carriers. Difficulty in securing pay cuts, as well as management arrogance towards employees have resulted in lowered employee morale, as well as a great deal of outsourcing. Northwest still has a lot outstanding of pension obligations that need to be resolved, and that's creating worry in the financial community. But perhaps Northwest's biggest challenge, like that of most airlines right now is soaring fuel prices. And Northwest is in a worse position in this regard than virtually any other US carrier. Primarily because of its aging narrowbody aircraft fleet, as well as its reliance on regional jets, the company uses more fuel than any other major US airline to move passengers one mile. Northwest has a large fleet of DC-9 aircraft, many of which were made over 30 years ago and are very fuel-inefficient, as well as very costly to maintain. With soaring fuel prices, these aircraft will become an increasing burden on the carrier. Top all this off with some of the industry's worst customer service and low loyalty from business travelers, and you get an airline in serious trouble.

Northwest seems to be preparing for its future by increasing its foothold in the Midwest. The company is trying to acquire a large stake in Midwest Airlines, helping to prevent any serious low-cost competition in the region from eroding yields. Northwest has also ordered new aircraft, 76-seat regional jets, for its regional subsidiary Compass, which will serve cities throughout the Midwest with lower labor costs than Northwest's mainline aircraft. Moreover, the company already has a very strong position in Asia, and in particular China, and plans to increase its Chinese presence in the coming years with additional 787 aircraft. Like Delta, Northwest is well-positioned to take advantage of international growth opportunities in the coming years, but unlike Delta, is not well-prepared to deal with many of the other challenges coming its way.

If a merger between the two carriers occurs, there will be numerous changes in the route structure of the combined carrier. Detroit, Salt Lake City, New York JFK and Atlanta will almost certainly be kept as hubs, and Minneapolis is also likely to stay a hub city, though in potentially a smaller form than it's in now. Cincinnati and Memphis are the two wild cards in all this hub reshuffling. Cincinnati is immensely profitable for Delta, and an important base for their Comair regional jet operation, which the company has not spun off yet (although that's certainly possible in a merger deal, as Delta tries to reduce unit costs by flying fewer small regional jets). It's unlikely that Delta will eliminate many of its nonstop flights to larger markets from Cincinnati, but some routes that are operated with regional jets only could get the ax as the new carrier redirects that traffic to Detroit and Atlanta.

Memphis has a much tougher case to be kept. As a city very close to Atlanta, the largest hub in the route structures of both Delta and Northwest, it's in a very poor geographic location for a hub operation. Moreover, Memphis generates relatively little origin and destination traffic, making most of its regional jet service unsustainable if it were to not have many connection opportunities. I expect that the combined carrier will maintain some limited focus city operations in the city, but unfortunately, it may lose a great deal of air service. With domestic growth still slow or nonexistent, and passenger yields lower than on international routes, the new carrier may be reticent to keep many flights from Memphis since the city can't support much point-to-point service, domestic or international. Flights to New York, Washington D.C., Chicago, Los Angeles, as well as some Florida markets may be the only point-to-point service the combined carrier will keep in the city.

The carrier would likely increase its presence in Asia, and use Northwest's Tokyo hub to launch additional flights. Moreover, the combined carrier will move further into Europe and the Middle East. One advantage the company has is that Northwest's Amsterdam hub has nonstop service to many major US cities, and it can be used as a launchpad for services to Africa, the Middle East, and India, competing with major national carriers like British Airways (assuming that the combined carrier could get traffic rights to new routes from Amsterdam, which is not a given). Atlanta and JFK will be increasingly used as international gateways for Europe and South America, and the combined company may develop its Salt Lake City hub to use as a US gateway to Asia, or use one of Northwest' s focus cities (such as Seattle/Tacoma, Los Angeles, or Honolulu) for this purpose.

Fleet-wise, the biggest priority at the carrier is to realign its domestic narrowbody fleet. Northwest operates primarily DC-9s as well as Airbus single-aisle aircraft on domestic routes. Delta, on the other hand, operates MD-88s, as well as Boeing single-aisle aircraft on domestic routes. These two fleets unfortunately are not that compatible, and this will require some reworking. I would expect that given the challenges of high fuel costs, the carriers will develop an accelerated retirement plan, covering older aircraft, and in particular, smaller planes such as the DC-9 or MD-80. Both Northwest and Delta have relatively old 757s that aren't as fuel efficient as newer planes of a similar size, but these are needed for transcontinental traffic as well as some international services and won't likely be dumped soon. The carrier may expand its fleet of 76-seat regional jets, in order to add new jets to Northwest's Compass operations for small-to-medium sized markets. I suspect that while separate subfleets of 737s and A319s/A320s will have to be maintained for the time being, the carrier will eventually shift to the 737 fleet, because it is more versatile, and because Delta owns all their 737s (instead of leasing), and it might be challenging to profitably sell over 70 planes on the used market. Moreover, the carrier may add to its long-haul fleet with additional 787 aircraft (Northwest has already placed an order for 18 planes and placed options for 50 more). If the deal goes through, many of those options could be exercised.

The new carrier will likely shed the Northwest brand and adopt the Delta name. Moreover, it will likely introduce some sort of amenity/product realignment to bring consistency across the fleet. Northwest offers some of the fewest amenities of any US carrier, offering on domestic flights no free food or snacks, no in-flight entertainment (even at a price), and no pillows, blankets, or other comfort amenities. Delta, meanwhile, offers very good in-flight entertainment, including audio, video, and games on all transcontinental flights and many others, as well as new seats in coach on many aircraft. Moreover, Delta offers a higher-quality international business class cabin, with better amenities and service. It's likely that the product will be brought up to Delta standards on many of the newer aircraft in the Northwest fleet, including its A319s, A320s, and A330s.

With a merger, the new carrier will face difficulties competing in the marketplace. For one, the carrier will need to attract the loyalty of more business travelers, who currently flock to several of its competitors including American, United, and Continental. This will need to be done by improving the product offered to customers, especially in premium classes on international flights, as well as improving the frequent flyer program to make it more friendlier to business travelers and easier to redeem for free flights. The elite status program of the new carriers' combined frequent flyer program will have to be made more attractive in order to stoke the loyalty of business travelers who may have been reticent to use one or both carriers in the past. Finally, the company will have to completely refocus itself on making customer service its top priority. The new carrier won't be able to attract more travelers, especially in an increasingly competitive market, without doing a much better job at serving premium class customers on the ground, as well as managing delays for all passengers, given their increasing frequency due to our broken air traffic control system. If the airline can stick to the strategy discussed above, however, then it will be very competitive in the future, both domestically and internationally even with the new reality of high fuel prices.

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Lufthansa Adds Seattle-Frankfurt Service

Lufthansa, the German Flag carrier, announced new nonstop service between Seattle/Tacoma and Frankfurt, starting spring 2008. The new service is just one of several new international flights to be added to Seattle, a city that has arguably experienced a shortage of nonstop, international flights. Air France launched service from Seattle this past summer, just in time for the peak summer travel season, and AeroMexico also recently launched service between Seattle and Mexico City. The Lufthansa service announcement also comes at a time when carriers are rapidly expanding their international flights, particularly to European destinations.

The possibility of Lufthansa coming to Seattle had previously been discounted by some, due to the fact that the airline currently operates successful flights from nearby Portland, with convenient connections to Seattle via shuttle flights. While Seattle will likely benefit from the move, it could start pressuring carriers, especially US carriers, to quickly add capacity in the market before the market saturates. While Seattle has experienced a shortage of European flights in the past, the recent additions in nonstop services, as well as an expanded array of connecting flights make it easier than ever for customers to travel to Europe.

With the US/EU Open Skies agreement coming into force next year, it's likely that additional point-to-point nonstop flights will be added between major US cities and points within the EU. That means markets which previously had no service or only one carrier could now find themselves with two or three competing carriers. This benefits cities in the West in particular, which have a harder time than many East Coast cities recruiting European service. Cities that could benefit from expanded European services include Portland (OR), San Jose, San Diego, Phoenix, and Denver, in addition to San Francisco, Los Angeles, both of which already have a considerable number of European flights.

With the US West Coast-EU market still lucrative, US carriers, most notably Northwest and United, may try to cash in before it's too late. London is a market of particular interest. United currently operates successful international service from Seattle (to Tokyo), making it more likely that the company will expand further from Seattle. United also recently announced service between London Heathrow and Denver, United's last remaining hub without nonstop service to London. With Seattle being one of United's largest non-hub markets, and United having operated the Seattle-London Heathrow route in a previous era, it's possible that the route may be reinstated.

Moreover, Northwest Airlines plans on expanding the number of cities with nonstop service to its Amsterdam hub. Northwest recently announced new service from Portland to Amsterdam, and the carrier may add Amsterdam service from other large Western markets. It's unlikely that Northwest will add point-to-point service from any European destinations other than Amsterdam. However, aside from United and Northwest, the US West Coast will see relatively few new European route announcements from other US carriers. American is focusing most of its international resources on expanding into Asia, Delta targeting international expansion from its hubs in Atlanta and New York, Continental is focusing most of its international expansion from Newark and Houston, and US Airways appears to be adding little new European service due in part to the unavailability of long-haul aircraft.

One point I'll respond to briefly is the notion of a new partnership structure between US and EU carriers, specifically the deal between Delta and Air France, which enables Delta to enter London Heathrow and gives customers of the two carriers more schedule options. This alliance will help both carriers maintain pricing power and attract business customers. Air France has been less aggressive in expanding into the United States than British Airways has, making Delta a good partner in enabling the company to generate more US traffic. Meanwhile, Delta desperately wants to enter London Heathrow and expand its European presence, which the deal allows for. Arrangements similar to this one can realistically be expected between American Airlines and British Airways, as well as United and Lufthansa, though it's difficult to place a time frame on when that could occur.

But the larger question, of whether a full-on merger between a US and EU carrier will occur is still up in the air. A well-thought merger would help both carriers tremendously, as it would give the new carrier unparalleled leverage with airports, aircraft manufacturers, and customers through pricing power. However, it's unlikely that a deal could be reached, especially with the thorny anti-trust issues raised as well as the unjust protectionist policies of the US to minimize foreign involvement in the airline industry. If the Open Skies deal succeeds, and passengers see more service and lower fares, then regulators will be more receptive to the notion of a merger, but if airlines are quick to consolidate their pricing power and drive out competition when the new deal is in place, then that behavior will only exacerbate under a merger scenario.