NYCDelta
Senior
This from FORBES.COM this morning. Now before anyone says "See! Delta can't make it on their own!", please note the area in BOLD type:
Delta's Still In Play
Mark Tatge 02.01.07, 6:00 AM ET
CHICAGO - US Airways Group CEO Doug Parker dropped his hostile $9.8 billion bid to buy Delta Air Lines Wednesday.
The problem is, Parker was a little ahead of his time. Delta's creditors wouldn't cooperate.
But you heard it here first: Delta will be bought or merged with another airline once it emerges from bankruptcy, fueling the fires of industry consolidation.
Why? Delta simply can't make it on its own, despite assertions by Delta's CEO Gerald Grinstein that the carrier is better off a standalone.
Even with the lower cost structure that bankruptcy will afford the airline, the carrier's route structure is much too parochial.
Parker knows this, which is why he went after the airline. Remember Parker is the guy who did something everybody said couldn’t be done--he smooshed together America West (nyse: LCC - news - people ) and US Airways.
The name of the game in the airline industry is scale, getting clout nationally and internationally.
Without scale, there won't be enough passenger growth to support five or six large airlines. Right now, everyone is playing a costly market share game. That's not good for profits.
It could take three to five years for this scenario to play itself. There will be only a few survivors. All will have national and international route systems.
The three closest players that have a model resembling this strategy are: Southwest Airlines (nyse: LUV - news - people ), American and United (nasdaq: UAUA - news - people ).
But even those carriers are undergoing changes.
United CEO Glenn Tilton has expressed interest in merging with a competitor. Southwest has no international routes to speak of. The airline wants to pick the bones of its competitors. And American, well, who knows. They might just end up getting bought if rules prohibiting foreign ownership are relaxed.
These changes have been nearly 25 years coming. Delta, much like American and United, is a holdover from the days of when the airline industry was regulated in the 1970s. A strict system of government controlled prices and routes existed before deregulation.
What has emerged since deregulation is an oligopoly with limited price competition. Most of the major carriers control pricing within certain regions (think American in Dallas-Fort Worth, Delta in Salt Lake City and Northwest in Minneapolis). This is because certain airlines controlled most of the gates in those cities.
Delta's monopoly was the southeastern U.S., with its giant Atlanta hub. Sure, there were low-fare carriers that surfaced. But they were almost always beaten back by slashing fares and increasing frequency.
The runways are littered with wreckage of carriers like People Express, Braniff and Eastern. Only Southwest, which dates back to the 1970s, has survived.
This beat-'em-by-slashing-prices strategy is currently being replayed by American Airlines (nyse: AMR - news - people ) on its lucrative New York-to-Chicago routes. JetBlue (nasdaq: JBLU - news - people ) announced service to Chicago's O'Hare from New York's JFK, and American frequent fliers who once paid $350 to $599 round-trip can now fly roundtrip to LaGuardia for $128.
But these days are numbered.
Why? The airline industry is a mature business, growing at roughly the rate of GDP. Future growth is going to come internationally, not domestically. And that means everybody is going to have to get a lot bigger.
Parker gets this. So do Tilton and a number of other airline chief executives. The question is how long it is going to take creditors to realize the same thing and stop lending money to bankrupt airlines.
Delta's Still In Play
Mark Tatge 02.01.07, 6:00 AM ET
CHICAGO - US Airways Group CEO Doug Parker dropped his hostile $9.8 billion bid to buy Delta Air Lines Wednesday.
The problem is, Parker was a little ahead of his time. Delta's creditors wouldn't cooperate.
But you heard it here first: Delta will be bought or merged with another airline once it emerges from bankruptcy, fueling the fires of industry consolidation.
Why? Delta simply can't make it on its own, despite assertions by Delta's CEO Gerald Grinstein that the carrier is better off a standalone.
Even with the lower cost structure that bankruptcy will afford the airline, the carrier's route structure is much too parochial.
Parker knows this, which is why he went after the airline. Remember Parker is the guy who did something everybody said couldn’t be done--he smooshed together America West (nyse: LCC - news - people ) and US Airways.
The name of the game in the airline industry is scale, getting clout nationally and internationally.
Without scale, there won't be enough passenger growth to support five or six large airlines. Right now, everyone is playing a costly market share game. That's not good for profits.
It could take three to five years for this scenario to play itself. There will be only a few survivors. All will have national and international route systems.
The three closest players that have a model resembling this strategy are: Southwest Airlines (nyse: LUV - news - people ), American and United (nasdaq: UAUA - news - people ).
But even those carriers are undergoing changes.
United CEO Glenn Tilton has expressed interest in merging with a competitor. Southwest has no international routes to speak of. The airline wants to pick the bones of its competitors. And American, well, who knows. They might just end up getting bought if rules prohibiting foreign ownership are relaxed.
These changes have been nearly 25 years coming. Delta, much like American and United, is a holdover from the days of when the airline industry was regulated in the 1970s. A strict system of government controlled prices and routes existed before deregulation.
What has emerged since deregulation is an oligopoly with limited price competition. Most of the major carriers control pricing within certain regions (think American in Dallas-Fort Worth, Delta in Salt Lake City and Northwest in Minneapolis). This is because certain airlines controlled most of the gates in those cities.
Delta's monopoly was the southeastern U.S., with its giant Atlanta hub. Sure, there were low-fare carriers that surfaced. But they were almost always beaten back by slashing fares and increasing frequency.
The runways are littered with wreckage of carriers like People Express, Braniff and Eastern. Only Southwest, which dates back to the 1970s, has survived.
This beat-'em-by-slashing-prices strategy is currently being replayed by American Airlines (nyse: AMR - news - people ) on its lucrative New York-to-Chicago routes. JetBlue (nasdaq: JBLU - news - people ) announced service to Chicago's O'Hare from New York's JFK, and American frequent fliers who once paid $350 to $599 round-trip can now fly roundtrip to LaGuardia for $128.
But these days are numbered.
Why? The airline industry is a mature business, growing at roughly the rate of GDP. Future growth is going to come internationally, not domestically. And that means everybody is going to have to get a lot bigger.
Parker gets this. So do Tilton and a number of other airline chief executives. The question is how long it is going to take creditors to realize the same thing and stop lending money to bankrupt airlines.
