=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/c/a/2006/12/02/BUGTFMNRS6= 1.DTL --------------------------------------------------------------------- Saturday, December 2, 2006 (SF Chronicle) Hidden costs/US Airways' bid for Delta could prove expensive for travelers David Armstrong, Chronicle Staff Writer Upstart US Airways may win its $8 billion hostile takeover bid for much-larger Delta Air Lines, but in that case consumers could lose, airline experts say -- especially if a Delta-US Airways hookup triggers a wave of subsequent airline mergers by lowering the barriers to mergers for rivals who feel they have to get bigger to catch up. The most likely consequences for air travelers would be higher fares, wi= th fewer choices of flights a possibility, along with probable job losses at newly merged airlines, analysts say. Neither Delta, which operates chiefly in the Eastern United States and on transatlantic routes to Europe, nor US Airways, which flies mainly on the East Coast, are major carriers in the Bay Area market. But Bay Area fliers would be strongly affected if a major airline -- say, United Airlines, which dominates San Francisco International Airport -- were to acquire another significant carrier or be acquired. The proposed US Airways-Delta combination would create one of the world's largest airlines, theoretically allowing it to thrive in the fast-growing global aviation market. The bid by US Airways for bankrupt Delta, the nation's No. 3 carrier, is far from a done deal. Delta's board rejected earlier overtures from US Airways, and Delta's powerful pilots union is against a merger. Any proposed merger would also have to be approved by the Department of Justice, which could veto it on antitrust grounds. But with US Airways' management scheduled to present its offer to Delta's major creditors, things could move quickly in coming days. Boeing Co. and the federal Pension Benefits Guaranty Corp. are among Delta's biggest creditors. "They are the real people with power in a bankruptcy situation," observed David Stempler, president of the Air Travelers Association. "If the creditors really want this to happen, it will." Mergers a growth strategy US Airways, the nation's No. 7 carrier by passenger traffic, is already the result of one recent merger. The original US Airways, based in Arlington, Va., merged last year, just after exiting Chapter 11, with the smaller Phoenix low-cost carrier America West. That merger followed an aggressive chase by America West's chief executive officer, Doug Parker, now CEO of the remade US Airways. Pulling off another merger may please Parker, but it could rankle consumers, especially late-booking, high-paying business travelers, experts say. Parker has said US Airways will reduce capacity -- cut the number of flights -- by 10 percent should its merger with Delta go forward. "Business travelers would pay higher ticket prices as capacity is removed," concluded the Business Travel Coalition, a national organization of corporate travel planners, in a Nov. 15 analysis of the proposed merger. "Some markets would likely see significant jumps in business travel prices," the analysis concludes. "The merger justification put forward by US Airways that the marketplace is fragmented, with no single airline commanding more than 20 percent national market share, is irrelevant." What matters to the average traveler, the coalition maintains, is who controls how much of the market in airports the traveler usually uses: To choose a hypothetical example, San Francisco to Chicago, which is flown by both United and American Airlines. Were that route to be dominated by a single carrier, fares could soar. Indeed, history shows higher fares are inevitable should Delta-US Airways or other airline mergers go through -- the result of decreased competition, said Chris McGinnis, editor of the Ticket, a travel newsletter in Delta's hometown of Atlanta. "In Atlanta, until 1991, there were Delta and Eastern," McGinnis said. "Fares were high, but there was some sense of competition there." But when Eastern Airlines folded its wings in 1991 and Delta bought some of its routes, Delta gained a near-monopoly, he said, and fares out of Atlanta went sky-high, especially to the West Coast. Interest at United United's chief executive officer, Glenn Tilton, has made no secret of his interest in merging with or acquiring another airline, saying government restrictions on mergers -- including cross-border tie-ups -- should be lifted. In a speech to the American Chamber of Commerce in Japan on June 1, Tilt= on said, "To promote market stability, we at United think carriers should be able to invest in each other and to consolidate where the market so dictates. "In our belief, ending artificial restrictions on cross-border consolidation has allowed other multinational industries -- including energy, banking, communications, information technology, media, automobile and pharmaceutical companies -- to achieve new efficiencies of scope and scale," Tilton said. "It is time, in our view, to let market forces govern the international airline industry, allowing the same freedom and flexibility to compete as other truly global multinational industries," he argued. That is a popular view among airline executives, both inside and outside the United States, who feel that the accelerating globalization of business has made international airline mergers inevitable and desirable. Executives point to the apparently successful recent merger of Air France and the Dutch carrier KLM as an example of how it can be done. United, the chief operating airline subsidiary of UAL Corp., emerged from Chapter 11 bankruptcy protection in February after more than three years of reorganization that saw the airline slash its workforce, mothball some planes, jettison many of its pension obligations, wring wage and benefit concessions from employees, and shift aircraft from highly competitive domestic routes to lucrative transpacific international routes. In the second and third quarters of this year, the Chicago carrier turned a profit after years of losing money following the Sept. 11, 2001, terrorist attacks and the 2001-03 recession. United is now widely seen as a leaner, more nimble company, leading to industry speculation that it could be an attractive takeover target or be looking to expand by making acquisitions of its own. Several urges to merge Earlier this year, UAL's Tilton telephoned Delta CEO Gerald Grinstein to see if Delta was interested in talking merger with United, but he was turned away, according to a report in Business Week's Dec. 4 issue. In 2000, two years before Tilton was hired as UAL's CEO, United tried to merge with none other than US Airways, but the deal never went through. More recently, industry analysts have speculated that United may be interested in merging with Northwest Airlines, which is also in bankruptcy, but neither Northwest nor United have spoken publicly about this scenario. Until mergers become easier to do, the airline industry will be flying in turbulent skies, the director-general of the International Air Transport Association, Giovanni Bisignani, asserted in an interview with The Chronicle last year. Airlines want changes "We cannot accept the same set of rules we had 60 years ago, when we were flying DC-3s," Bisignani said. "We cannot consolidate, we cannot merge, we cannot fly where we want. That is the reason we are still losing money." Despite the urge to merge among airline industry executives, analysts persist in seeing a downside for the consumer -- especially if a Delta-US Airways deal provoked a cascade of additional mergers. Consumer demand "is growing nicely, and this (merger) would take more capacity out of the marketplace," said W. Bruce Allen, director of the transportation program at the University of Pennsylvania's Wharton School. "If you take capacity out of the market when demand is robust, it's a recipe for raising fares. You're taking away supply when demand is increasing. "Higher load factors are nice for (the airlines) because the marginal co= st of adding additional passengers on planes is so low," Allen said. "Consumers hate it, of course. The wait for bags is worse under those circumstances and the planes are more crowded. You and I liked the old days, when planes were 50 percent full and we could stretch our legs." The two carriers at a glance Delta Air Lines Headquarters: Atlanta Employees: 51,000 Planes: 625 Hub airports: Atlanta, New York (JFK), Cincinnati, Salt Lake City US Airways Headquarters: Tempe, Ariz. Employees: 35,000 Planes: 357 Hub airports: Charlotte, Philadelphia, Phoenix, Pittsburgh, Las Vegas Sources: Airline Web sites, Chronicle research E-mail David Armstrong at davidarmstrong@xxxxxxxxxxxxxxxx --------------= -------------------------------------------------------- Copyright 2006 SF Chronicle