Why Delta is Interested in Buying American

When the news broke that Delta was sniffing around the possibility of making a bid for American while it sits in bankruptcy, there were a lot of people shaking their heads, thinking that the mere thought was ridiculous. I couldn’t disagree more. Delta could and should have a real interest here.

Delta is Crazy Like a Fox

What we’re seeing is Delta being really smart, and really aggressive. That’s fun to watch from an airline that used to just be a sleepy old Southerner. The first thing people say about this is . . . there’s no way it would pass anti-trust review. But is that true? I’m not an expert in anti-trust law, but I have no doubt that Delta has been actively working with its lawyers to see what would work and what wouldn’t. If Delta is truly expressing an interest, then it’s done its homework to make sure that it would even be a possibility under the law.

I think the key here is that I imagine Delta isn’t entirely interested in walking away with all of American. Remember when I first wrote about how US Airways should buy American, I suggested that maybe US Airways wouldn’t have much interest in LA or New York? Well, guess who would be interested? That’s right, Delta.

In LA, the market is highly fragmented. I can’t imagine any sort of anti-trust concern if Delta took over American’s operation there. It might even benefit LA by finally building up a stronger single carrier. Sure, the Asian oneworld partners would have a fit, but that’s not Delta’s problem, or the US government’s.

In New York, it might be a tougher sell, but it’s not really that much of a stretch. At JFK, JetBlue carries around 40 percent of the passengers already. So Delta and American combined wouldn’t be a monopoly by any measure. LaGuardia would probably be more of a concern, but the DOT could require some more slots to be auctioned off to low cost carriers and fix that problem right up. I’m sure Delta would be happy to comply if it means eliminating a full service competitor and sprinkling the slots around to other low cost guys.

Of course, this is just one possible scenario, Delta might want Miami as well here, or some other pieces. The point is that the default assumption that the big three airlines can’t combine isn’t true. There are creative ways that they could try to come together with other entities to make a proposal that could work. With American in bankruptcy, it’s really anybody’s game to win, except American’s.

Sure, American could stay as a standalone entity, but the oddsmakers (analysts) aren’t giving that a good chance of happening. When you go into bankruptcy, you lose absolute control of your company. That doesn’t mean that you can’t get out unscathed, but it means that others are going to take a real shot.

Do I think it would be better if Delta bought American? Nah. I mean, I think it’s good to have three large airlines in three separate airlines that can compete with each other. That doesn’t mean, however, that I’m against bits and pieces being moved around to make each remaining airline stronger. But would American be able to survive if Delta took New York and LA?

I don’t see why it couldn’t work if US Airways took the rest. Were I the surviving American in this case, I’d look to buy Alaska Airlines immediately to solidify at least one strong position on the west coast and take that partnership away from Delta. Not sure if that could happen or not, but the point is that there are opportunities for three large airlines to survive even if Delta “buys” American in some fashion.

Will it happen? I have no clue, but Delta would be stupid not to be sniffing around. (And in case you were wondering, United would be stupid TO be sniffing around because it’s hands are very full right now.)

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70 Comments on "Why Delta is Interested in Buying American"

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dan
Member

I agree that this could possibly pass muster with (US) anti-trust review, especially if Delta is just interested in pieces here. Though I wonder if/how the European Commission would get involved in such a deal since they did have to approve JVs in the past.

Rohit Rao
Guest

I’d think that US would take over AA’s part of the JV… After all, it’s better for them than being unaligned the way they are now, and DL/UA are probably happier with their respective JVs than switching to a new one..

Paul
Guest
The big loser in all this could be the DFW job market. I do believe someone will end up with American and the HQ would be moved to that carriers HQ location. Luckily the DFW job market has held up quite well during the recession so it will recover. The airport itself would’nt suffer long as I am sure the new carrier would keep somewhat of a HUB operation and new carriers would swiftly move in to fill any voids. Passengers themselves may actually benefit from this as AA along with AE carry about 75% – 80% of all traffic… Read more »
A
Guest

This wouldn’t be the first time a local job market was hit with an airline takeover. AA gutted St. Louis so one could say what goes around comes around. DL did no favors to MSP when they took out NW. That said, DFW is a huge market. The place exists because of the O/D traffic and flights will stay no matter what happens to AA.

MeanMeosh
Guest
DFW (the metro area and the aiport) will do just fine regardless of what happens with AA. While losing a corporate headquarters will hurt, it’s not like AA is the only big employer in town (and just look down the road, Houston is losing CO, and it’s barely a blip on the radar screen as far as the local economy goes). And being the 4th largest metro area in the country, there’s plenty of local demand to fill someone’s planes, whether it’s AA or someone else. Dismantling a hub at DFW is a much tougher proposition than doing so at… Read more »
David SF eastbay
Member

DL could just be interested in the Latin America market since it is strong over the Atlantic and Pacific. Wasn’t it taking PanAm’s Atlantic operation how it got started growing in the international market place? So it got PA’s Atlantic, NW’s Pacific and now it would want AA’s Latin routes to become strong in all directions.

eponymous coward
Guest
Why on earth would Alaska be remotely interested in hooking up with a dismembered AA with several of their best markets (NYC, LAX, maybe MIA) taken away? What’s the play? Alaska’s strength is on the West Coast, and minus LAX AA is not generating any feed for AS, outside of midcon feed: ORD-SEA/ANC, and DFW-SEA, and AS’s growth markets right now are West Coast-Hawaii (and some West Coast-Mexico), which don’t get ANY synergy from places like ORD or DFW. Without LAX AA is pretty much a dead letter on the West Coast (and to be honest, I don’t think they… Read more »
eponymous_coward
Guest

Oh, and the airline that probably covets AS the most? DL. They run a very nice focus city out of SEA: PEK, KIX, HNL, soon CDG, to go along with hub service (SLC, NRT, AMS, ATL, JFK, DTW, MSP). Give them AS’s network and they have a very nice ability to cover the North Pacific out of SEA/PDX, plus decent AS feed to complement what they have at LAX, plus actual ability to compete with UA going to Hawaii and up and down the coast domestically.

Susan N
Guest

For the last time, AS and DL are not going to take over each other or merge. They are fine the way they are.
But if American is falling apart anyways, there’s no reason either of them can’t pick up the pieces.

eponymous_coward
Guest

… except the fact that AS really has no synergy with a midcon remnant of AA. Very little of AS’s traffic goes east to ORD and DFW, compared to what goes up and down the coast and to Hawaii.

And coveting AS isn’t the same as being able to buy them.

VXFan
Guest
As an attorney who is familiar with anti trust law, the basic test in deciding whether companies have significant market power which would justify government interventionto is called the “small but significant and non transitory increase in price” test. This is used to define the relevant market and determine if that market is worth monopolising if only one single supplier serviced the market and could profitably increase its price without its consumers turning away and choosing other goods and services from other suppliers. The main thrust of the test observes whether a small increase in price (5-10%) would provoke a… Read more »
jboekhoud
Member

Interesting.

To what extent would the bankruptcy element affect this? Since AA going bust or merging both result in the net loss of one carrier on any given route, could it not be argued by AA’s lawyers that the final effect on competition is the same whether the government approves the merger or not?

DesertGhost
Guest
One other possibility: Delta may be trying to create a legacy airline duopoly. Much of the conventional wisdom had the ultimate creation of three legacy carriers plus Southwest. Delta might be trying to make that two. There’s been much talk (writing?) on airline blogs about how US Airways adds “nothing” to American; no Asia, no New York, etc. The fact that it adds an instant 50% increase in passengers and market share seems to elude some people, but I digress. US Airways and American’s lack of an Asian presence is a detriment to the potentially combined entity. The relatively small… Read more »
Joe L
Guest

We cannot assume that Southwest will remain unaligned with regards to the major airline alliances. It seems to me that Southwest could provide plenty of US domestic feed to OneWorld should the opportunity present itself.

eponymous_coward
Guest

There is just no way Southwest is going to get sucked into Oneworld and lounges, elite status benefits, interlining, codesharing etc. that they’d have to comply with to be part of an alliance- aside from the problem that, um, how exactly do you get BA feed involving Southwest flights to Love Field. or Houston Hobby, or Midway?

Susan N
Guest

And there’s also the no flying internationally thing as well.

Joe L
Guest
Southwest’s costs are soon to become highest in the domestic industry – I don’t know whether they would need first class or lounges, but Southwest is about to run out of room to grow in the US. As for an airport to use as an international gateway, don’t forget that they are huge at BWI, and are about to get bigger in ATL. The Wright Amendment expires in 2014, at which point Southwest is free to fly wherever it wants from Love Field. Besides, it doesn’t seem to me like The likes of BA would be opposed to running flights… Read more »
Sanjeev M
Guest
Replace Southwest with JetBlue and you have a point. JetBlue and its presence in NYC and BOS will be influential. Where JetBlue falls into all this alliance/merger talk is the most interesting for me. I can also see Frontier doing something on this end. Apart from American most USA carriers are making a profit. From a consumer point of view, I love the fragmentation in LA, BOS, and DC. One carrier doesn’t need to have 70% (or even 40%) of the flights in a huge market like that. While DL picking apart AA should be theoretically fine for anti-trust, I… Read more »
Terry Trippler
Guest
Delts ia having enough trouble taking care of what they have. Let’s not forget that they are about to get hit hard in Atlanta when Southwest takes AirTran. This will not be a normal “Southwest comes to town with service to a few markets situation we so often see”. Southwest is coming to Atlanta as a major player with the AirTran routes. Delta has never had to really compete with Southwest, Southwest never had much presence in Cincinnati, None in Atlanta, small in MSP, very little in DTW. SLC was the only Delta hub with decent competition from Southwest. The… Read more »
Sanjeev M
Guest

Sure. But AirTran in many ways was a more brutal competitor with even lower costs than Southwest. The AirTran effect already happened. There’s not much more Southwest can do.

Business class, assigned seating, etc is going away.

Maybe DL’s grand plan to use AA’s assets to increase exposure outside of Atlanta…

Eric the Italian Guy
Guest
Interesting thesis….I think the wild card in all of this drama is IAG. So far, they have been pretty mute on the fate of AMR and Oneworld but I would not read their silence as complicity. I agree with Dan Webb above….they have allot of pull with the EC due to size and could potentially muddy things up on the right side of the pond. As for AS (love typing that) they are content with the status quo: as their stock price, market cap and forward P/E ratios reflect. Barring a complete collapse of demand brought on by full devaluation… Read more »
Consumer Mike
Guest
I believe that should Delta really pursue and purchase all or part of AA it would be a disaster for Consumers. Way less competition in several markets, the end of the best Loyalty Program and one would be stuck with one of the worse customer sensitive or customer service companies in the air. Even loosing a chunk of AA to Delta, in my opinion, could sink AA as what happened to TWA. Bottom line, I feel that Consumers left with the remains of a competitive air industry might want to bite the bullet and take the train, bus or drive… Read more »
jboekhoud
Member

Not that cutting back air service while improving rail etc. is such a bad thing, of course!

Consumer Mike
Guest

I agree. Especially when you take into account the traffic in/out of airports, the extra need to arrive early for the strip searches, baggage check-in, etc. It could be a more pleasant travel experience in the end. In winter, the chances of delays in travel are also minimized.

Naturally, traveling by train, bus or car only if the time and distance make sense for the Consumer.

jboekhoud
Member

And they only make sense until the first nutjob bombs Amtrak. Then the entire TSA circus comes to your local train station as well. They’ve already targetted trains in Europe, of course.

Terry Trippler
Guest

The AirTran effect already happened but not the Southwest effect. What more can Southwest do? Their sheer size give them virtually unlimited possibilities – they board more passengers than Delta.

People like Air Tran but cities and airports “beg” Soutwest to service their airport. Atlanta is now going to get the chance to fly Southwest.

Nick Barnard
Member

Southwest boards more passengers than the Delta Airlines or the Delta Airlines Network (including their regionals)? You have to be careful when using the DOT’s data because it only tracks operating airline, which doesn’t actually cover the marketing airline that actually gets a bulk of the profit (and loss)

mshermes
Member

Southwest is peanuts, no pun intended, to Delta right now. Sure they may have trouble when Southwest goes to ATL, but once DL has finished meat grinding American, Southwest will be next.

Eric
Guest

Has there been a prior instance of a major carrier being split by competitors? The labor issues make me shudder.

And why would anyone buy Alaska? Alaska isn’t really an airline as much as they’re a vehicle for selling frequent flier programs. They add value to their program by partnering across alliance lines. Locking them in to a single alliance would destroy that value.

Consumer Mike
Guest

I disagree with you. The market that Alaska has is similar to the one NorthWest had locked up in the upper mid-west which they milked for decades. No, Alaska is very much an airline that usines good marketing to help the bottom line. Principally servicing the North West of the US and Alaska it has an important place in US air service and would be valuable for any airline to pick up in the future.

Daniel
Guest

Pan Am would be the best example, after Delta bought the Shuttle and JFK-Atlantic routes and Pan Am ceased operations, the Miami operations were split up by United and American. TWA then bought Pan Am Express (to become Trans World Express). United had already bought LHR and Asia routes at the time.

Eric
Guest

Did the Pan Am breakup involve labor as well? I’m really curious how it might work out, if employees get split up based on where they work or if they bid on seniority or what. I’m guessing if Delta and USAir were to split up AA, many labor groups would prefer to end up with Delta.

jboekhoud
Member
Forget IAG. If any oneworld member should be panicking, it’s Qantas. They’ve got a fleet of A380s and 747s to fill that rely on feed from AA at LAX and DFW (plus a little local traffic at JFK). As you’ll recall, the SFO-SYD flight was shifted to DFW specifically because of the AA hub operation. With AA out of the picture, who’s going to fill those planes? DL has its own SYD flight and a TPAC partnership with VA. UA flies itself to OZ, plus codeshares with *A partner NZ via AKL. Ditto AC from YVR. Qantas might be able… Read more »
Daniel
Guest

I think if Delta gets involved in buying AA, US Airways is going to be involved as well. US Airways may want to take over operations at DFW and ORD which may also lead them to join Oneworld where they would have more influence. Heck, US Airways may take over AA’s LGA slots (though I don’t think this would happen).

David
Guest

If AA is carved up,, it would presumably mean Oneworld being effectively written as it would no longer be able to compete when talking to global corporations for sales contracts.

Would the DoJ or the EU really want to see just 2 global airline alliances ?

Consumer Mike
Guest

If the GOP is in office they would probably not raise a finger to protect Consumer concerns. Maintaining competitive markets historically is not one of their priorities.

Nick Barnard
Member

Well, I can see US Airways as moving into Oneworld if AA gets carved up. I can’t see the situation where UA and US both being in Star will last forever. I’m not sure US likes playing second fiddle to UA’s dominance, nor do I think UA likes having a thorn in its side. This also becomes a bigger issue given that CO’s management is now at UA, and I’m not sure what they think about being kinda cozy with US..

(Although, CO got into Star before they merged with UA, so who knows?)

ChuckMO
Guest
The last two large carriers in Chapter 11 that were carved up were Eastern and Pan Am. PA was willingly selling assets off almost to the point it shut down, only Latin America was left and UA picked that up in court. EA was being dismembered by Texas Air, selling off the Shuttle, their own Latin American routes, PHL gates/Canadian route authorities etc. Nobody picked up the ATL operation, they just let EA expire. AA is in FAR better financial shape going into BK than either PA or EA. When UA and US were in their recent bankruptcy stints, there… Read more »
Nick Barnard
Member
Creditors might want to see AA carved up, since they’d get cash through the bankruptcy estate instead of getting new AA stock which may or may not pay off. Remember when US was trying to by DL, they made the bid to the creditor’s committee that was a part of DL’s bankruptcy. I’d argue the “Keep Delta, My Delta” campaign kept the airline from being bought by US. If it wasn’t for that campaign the creditors would’ve been better off with the cash, at least in the short term. (As I remember, US rubbed it in DL’s face that they… Read more »
ChuckMO
Guest
Well as you say, “in the short term”. But most creditors are large financial institutions, as well as Boeing and now Airbus. These entities tend to look further down the road…why get $10 now when you can get $100 if you wait it out? Smaller creditors may want what they can get now, but the majority of AA’s creditors realize that a significantly weakened AA will repay far less than a reorganized, larger company. As you allude, at this point anything is possible, and all bids must be considered, but I still see no large-scale cherry picking of AA. US… Read more »
Bill from DC
Guest

IMO US and UA went into bankruptcy protection in much weaker financial positions than AA. And they weren’t even carved up, despite five or six potential suitor airlines instead of only two or three.

Kevin
Guest
Yes, US, UA, NW and DL all went into Bankruptcy in worse financial shape than AA did, but the overall market environment was also MUCH worse for them. The problem that AA has is that all of those carriers (except NW) all just reported a PROFIT for this Q. During the time that US, UA, DL and NW we in bankruptcy the carriers not in bankruptcy were hanging on themselves. So you did not have an environment were many had the access to capital to make a bid. I think when you look at DL & UA today, you absolutely… Read more »
Shaun
Guest
AA should align themselves with the airline who will offer them the most long term. I believe DL will pitch the combined entity as being #1 tatl #1 tpac and #1 latm .This will be very enticing to the creditors committee. #1 ff program by size #1 in just about every metric. what’s the alternative a sub par network with us air and a messy integration at best. Who wants to be #2 or 3 I would want to align myself with the best global network. Combined AA DL will be Pan Am on steroids and give global competitors a… Read more »
mshermes
Member
(If Delta is truly expressing an interest, then it?s done its homework to make sure that it would even be a possibility under the law. ) What this means is Delta and their lawyers are cooking up ways to buy off judges and lawmakers to pass this. Dleta buying American is wrong, wrong, wrong. Delta is a very crooked and shady company. Losing American would be bad for the American employees who are already being shafted enough, and bad for the traveling public because once there is less compitition, prices will go up and service will go down even further.… Read more »
mshermes
Member

since there is no way to go in and edit your comment, sorry for the misspelling! Aslo, insert the word “probably into my second sentence. They probably are trying to buy off people in high places. Greed!
this is a very interesting article, Cranky, and I am glad you brought it up. I work for an airline, and have been able to see some of these things firsthand.

AG
Guest

I for one say the best thing that ever happened to NWA was DAL buying them
NWA management (IE Al C. and Gary Wilson) were corporate raiders and had a management style akin to a tyrant.
I say good riddance to NWA

mshermes
Member
I appreciate your point, AG. And the corporate raiders got their comeuppance. However, the worker bees, i.e. ground crews,pilots and flight crews did not seem too happy. I was in and out of DTW a lot, in 09, and the former Northwest people were angry beyond belief. They took it out on anything with Delta livery on the side. NW was union, Delta was not. I flew NW back in the day and never had a problem, but during and after the merger I was amazed at how DL and DL Connection PAX and employees were treated~rotten. Pretty much any… Read more »
Jason H
Guest
I’m not sure what exactly angered the NW employees. After the union voting was finished they all got pay increases to match that of the DL group. So they aren’t unionize? Big deal. They have a job and a pay raise on top of that. In addition to the profit sharing and all the other incentives that DL gives their employees. Is it perfect? Nope, but no place really is unless you are working for yourself. If NW employees were damaging DL equipment and treating DL employees badly then I think that reflects more on the culture and attitude of… Read more »
David SF eastbay
Member

While I’m not a fan of AA or DL, in the memory of the Late AirCal, the Late RenoAir, and the Late TWA a small part of me would like to see AA taken over and everything about it wiped out like they have done to others. Let them get a taste of their own medicine, the old what goes around comes around.

I know we don’t want to see jobs lost, etc but sometimes it’s just a nice feeling when the ‘bully’ gets beat up for a change.

Also I don’t like what (was) USAir over the Late PSA.

mshermes
Member

true, I appreciate your view! My family was a Braniff family back in the day, so pretty much they all hate AA, and they, too would love to see the AA bully get beat up on the playground.

AG
Guest

I think that DAL should buy A/A and give them the same deal that TWA got
Right to the bottom

ChuckMO
Guest

The problem with that revenge scenario is that the people responsible are for the most part long gone. The employees had little if anything to do with it and there are still some former TWA (and Ozark Airlines) people working for AA. Maybe the better revenge would be if the new owners of AA (unless it’s another carrier, and heck even if its US) would be to rename the new entity TRANS WORLD AIRLINES.
:)

mshermes
Member

if there was a “like” button, your comment would get a thumbs up!

ChuckMO
Guest

thanks Lynn, some of us appreciate the past, and the future!

DO
Member

If AA was carved up and DFW were de-hubbed…..whats to say that that wouldnt be enough for Southwest to be enticed to move to DFW….have international service which the wright amendment still limits out of Love even after 2014. Perhaps SW can sweeten the pot with a partner to carve up AA ? When DL left DFW the airport wanted SW to move to DFW so bad they offered free rent for a couple of years….imagine what they would offer if AA go downsized at DFW.

Jordy C
Guest
American has never shown any interest in a West Coast operation. The purchased and essentially threw away AirCAL, Reno Air let alone the way they destroyed TWA. Alaska is a unique carrier, offering a quality product, aggressive point to Point route map and a 1 main line aircraft operating model. Its passenger loyalty is usually the best in the US. AMR shouldn’t even dream of trying to mess up AS. They would see load factors drop overnight in any market where there was still a choice. AS would be a better parent than AMR under any circumstances. Leave American at… Read more »
Jason H
Guest
There is a lot of desire to see some revenge or something of that sort taken out on AA, but that just shows how personifying a business doesn’t help. DL is looking at AA because they see a business model that the AA pieces they want could help position them for better profits for their investors and their employees in addition to providing some hedging against another drop in passengers. Who cares what AA did to this or that old airline? You can harbor your grudge all you want, but in the end it is all business and sentimentality does… Read more »
passtravelfool
Member

Don’t forget the strong presence that AA has at Heathrow. A combination of a very strong market share in New York and a big player at Heathrow by Delta would be a very formidable competitor. Also, SWA in ATL isn’t a big concern, DL is far more interested in front end of the airplane businessmen than leisure travelers and will fare fine against SWA in ATL in that regard plus AirTran has already deflated prices in ATL as much as they can be plus DL now has lower unit costs than SWA.

Laster Arte
Guest
Has anyone mentioned the possibilities of LAX, should Delta take American? American has hangars at LAX, Delta has a lonely one (to my knowledge). American is all terminal 4 at LAX, Delta all terminal 5 plus three gates at terminal 6. Note that Alaska is due to move from terminal 3 to terminal 6 at LAX soon enough. If Delta takes over American and keeps the LAX operation from American, reduced flights or not, Delta could have around 31 gates at their disposal (nearly double what is now)…plus Delta would be sharing terminal 6 with their buddy, Alaska. Delta would… Read more »
Doug
Guest
I’m betting Delta walks out of this with Dallas, Latin America and increased presence in NYC/LAX; everything else, they don’t care. As a native to the Dallas area, I’m personally ready to see American go. Tired of the second-rate service and overpriced crackers. I read some comments speculating about the effects this will have on Dallas. Not one bit concerned. There’s 6.5 million people in this area and it will always be a major US gateway. It’s amazing we haven’t seen more competition here before – low cost carriers are beginning to realize this and are moving in while American… Read more »
Chrissy Travels
Guest

I don’t know about the rest of the country, but in Cincinnati, it wouldn’t be a good thing if Delta took over American. They already have the monopoly here which keeps CVG the most expensive airport in the country. Bad news for us!

Sean
Guest

The only two airlines worse than AA are Delta and US Airways.

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