Airline industry in for shake-up (source: Business Times Singapore)
Apr 17, 2008, 2:11 am
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Airline industry in for shake-up (source: Business Times Singapore)
Delta-Northwest merger could alter mindset over such tie-ups
SOME 400 routes in almost 70 countries, nearly 800 aircraft, 80,000 employees and US$35 billion of annual revenue. The US$3.1 billion merger of Delta Airlines and Northwest Airlines will create a behemoth.
The new airline will control a fifth of the US domestic market and pose serious competition to international carriers in Europe and Asia. Indeed, it is already poised to tilt the balance by teaming up with incumbent industry leader Air France-KLM in the Skyteam alliance.
Air France-KLM yesterday welcomed the Delta-Northwest merger, saying it will strengthen the 'coherence' of their partnerships in the transatlantic market.
The merger, announced this week, comes despite resistance from pilots and other unions. But it was inevitable for several reasons - not least, rising operating costs and competition.
The price of jet kerosene has soared about 70 per cent in the past year and now accounts for 40 per cent of operating costs. At the same time, cut-throat competition on similar routes and in the same markets has forced down ticket prices and yields.
And if these factors were not enough, the precarious state of the US economy, battered by the sub-prime debacle, threatens to put downward pressure on travel demand, particularly the high-yielding premium seat segment.
Prospect of serious slowdown
Not surprisingly, analysts reckon the Delta-Northwest merger could be a precursor to more such marriages. Industry insiders are now watching to see if United Airlines and Continental Airlines can go down the aisle together.
All this comes amid the prospect of a serious slowdown for the airline industry.
Last month, the International Air Transport Association - which represents virtually all network carriers worldwide - downgraded its 2008 industry profit forecast to US$4.5 billion. It was the third time it had slashed its profit outlook since September last year, when it forecast an industry profit of US$7.6 billion.
As Iata boss Giovanni Bisignani often points out, this is an industry that delivers a return on investment of barely 5 per cent at the best of times. And one would expect an industry operating under such challenging conditions to consolidate to rationalise costs, build synergies and boost asset efficiency.
But for all the attention generated, the Delta-Northwest merger is nothing more than a domestic phenomenon.
Alas, cross-border consolidation is a rarity in an industry that functions under outdated ownership regimes and illogical sentimentality, where the livery on a plane often evokes strong nationalistic sentiment.
The recent failed attempt by Air France-KLM to take over Alitalia is a case in point. Even where cross-border investments are allowed, governments often restrict foreign airlines to no more than a quarter stake in a domestic carrier.
Air France-KLM's warning shot
Nevertheless, the Delta-Northwest deal could shake things up in an industry that is still dancing to a 60-year-old tune.
And Air France-KLM has already sounded the first warning shot.
In its statement yesterday, the European giant expressed confidence in quickly building 'a global partnership between Delta, Northwest, KLM and Air France in the form of a joint venture offering a network with extremely attractive multiple hubs'.
'This merger between Delta and Northwest facilitates the implementation of this transatlantic joint venture combining the Air France-KLM group and the new Delta group encompassing Northwest,' Air France-KLM said.
SOME 400 routes in almost 70 countries, nearly 800 aircraft, 80,000 employees and US$35 billion of annual revenue. The US$3.1 billion merger of Delta Airlines and Northwest Airlines will create a behemoth.
The new airline will control a fifth of the US domestic market and pose serious competition to international carriers in Europe and Asia. Indeed, it is already poised to tilt the balance by teaming up with incumbent industry leader Air France-KLM in the Skyteam alliance.
Air France-KLM yesterday welcomed the Delta-Northwest merger, saying it will strengthen the 'coherence' of their partnerships in the transatlantic market.
The merger, announced this week, comes despite resistance from pilots and other unions. But it was inevitable for several reasons - not least, rising operating costs and competition.
The price of jet kerosene has soared about 70 per cent in the past year and now accounts for 40 per cent of operating costs. At the same time, cut-throat competition on similar routes and in the same markets has forced down ticket prices and yields.
And if these factors were not enough, the precarious state of the US economy, battered by the sub-prime debacle, threatens to put downward pressure on travel demand, particularly the high-yielding premium seat segment.
Prospect of serious slowdown
Not surprisingly, analysts reckon the Delta-Northwest merger could be a precursor to more such marriages. Industry insiders are now watching to see if United Airlines and Continental Airlines can go down the aisle together.
All this comes amid the prospect of a serious slowdown for the airline industry.
Last month, the International Air Transport Association - which represents virtually all network carriers worldwide - downgraded its 2008 industry profit forecast to US$4.5 billion. It was the third time it had slashed its profit outlook since September last year, when it forecast an industry profit of US$7.6 billion.
As Iata boss Giovanni Bisignani often points out, this is an industry that delivers a return on investment of barely 5 per cent at the best of times. And one would expect an industry operating under such challenging conditions to consolidate to rationalise costs, build synergies and boost asset efficiency.
But for all the attention generated, the Delta-Northwest merger is nothing more than a domestic phenomenon.
Alas, cross-border consolidation is a rarity in an industry that functions under outdated ownership regimes and illogical sentimentality, where the livery on a plane often evokes strong nationalistic sentiment.
The recent failed attempt by Air France-KLM to take over Alitalia is a case in point. Even where cross-border investments are allowed, governments often restrict foreign airlines to no more than a quarter stake in a domestic carrier.
Air France-KLM's warning shot
Nevertheless, the Delta-Northwest deal could shake things up in an industry that is still dancing to a 60-year-old tune.
And Air France-KLM has already sounded the first warning shot.
In its statement yesterday, the European giant expressed confidence in quickly building 'a global partnership between Delta, Northwest, KLM and Air France in the form of a joint venture offering a network with extremely attractive multiple hubs'.
'This merger between Delta and Northwest facilitates the implementation of this transatlantic joint venture combining the Air France-KLM group and the new Delta group encompassing Northwest,' Air France-KLM said.
