Airfares could rise if Delta-Northwest deal spawns more mergers, expert says (4/18/2008)

Airfares could rise if Delta-Northwest deal spawns more mergers

A proposed merger of Delta and Northwest airlines likely won't drive up the cost of flying, but that could change if the deal sparks a flurry of consolidation among U.S. air carriers, a University of Illinois business professor says.

Finance professor Heitor Almeida says Delta and Northwest largely serve different regions, so a merger would not yield a dramatic reduction in routes that would increase demand for remaining seats and, in turn, ticket prices.

Fares could even dip if Delta and Northwest achieve efficiencies in booking and other operations that were touted by company officials Monday when the airlines struck a deal that would create the world's biggest air carrier, he said.

But Almeida says it could be a different story if the proposed merger spawns more consolidations by airlines with overlapping territories, such as a rumored marriage of United Airlines and Continental Airlines.

"If more consolidation follows that brings less competition and fewer routes, then it's possible that prices will go up beyond what is being driven by high oil prices," said Almeida, who teaches classes on mergers.

He predicts federal regulators will approve the Delta-Northwest merger, but says a possible snowball effect will be debated as regulators mull the proposed deal.

"One concern will be that this might spur other mergers that could have worse impacts on the consumer," Almeida said. "They may think if they let this one go through we might have problems saying 'no' to other mergers. It will set the bar."

More mergers are possible in an industry beleaguered by high oil prices and stiff competition that have contributed to a recent spate of airline bankruptcies, Almeida said.

"Oil prices are one factor, but the industry hasn't been doing great for a while," he said. "Part of the problem is there is too much competition. It does make sense for this industry to consolidate a little bit."

He also says the upcoming presidential election may have had a hand in the timing of the proposed Delta-Northwest merger, which would create an airline with more than $35 billion in annual revenues, topping current industry leader American Airlines.

"The simple point is that if Democrats get elected, then regulators are more likely to stop the merger," he said. "It's easier with a Republican administration, so that might be speeding up the timing."

Note: This story has been adapted from a news release issued by the University of Illinois

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