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Beware of the Fallacy of the Larger Route Map

OK, I lied.  I have a few more notes on the merger.  Today I wanted to mention what I call the Fallacy of the Larger Route Map.  One of the key benefits that Delta is mentioning in the merger talk is that there is little overlap in the Delta and Northwest route maps.  This would suggest untold growth as the new airline would have a huge footprint in the world.

This is a fallacy.  First off, airline mergers don’t fail because of the route map.  Routes are important, obviously.  But I cannot think of a single merger that succeeded (did any of them succeed?) or failed because of route-related issues.  Non-overlapping routes are always mentioned when a merger is announced, but, as the Wall Street Journal points out today, routes and entire hubs are frequently shed following a merger (see AA/Reno Air; US Airways/PSA; United’s purchase of Pan Am’s Latin routes).

Plus, and this is especially true with two airlines in the same alliance, I’m not sure exactly how much new revenue they’re going to be capturing.  If you wanted to fly from Minot to Bucharest, a NW/DL combination was your best option before the merger.  And it’s the same option now.  No new demand is generated.  Theoretically you could take some capacity out of the market, but how much?  You need the capacity to feed the slew of hubs the combined carrier now has and swears it isn’t shuttering.

No, the Larger Route Map is a canard.  Mergers fail because of labor issues, because of operational issues, because of reservation systems, because of cultures.  And when it’s two huge airlines these issues aren’t minimized – they’re brought to the forefront.  This won’t be a success because they’re capturing Minot-to-Bucharest traffic; this will be a success because (by some miracle) they are able to make NW’s pilots happy, and because they can get the employees to play nice, and because they can keep flights taking off on time, and because they can somehow combine the reservations systems, and because the massive merger undertaking doesn’t cause a collapse during thunderstorm season.  And, you see what I’m getting it.  Beware the Route Map…

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  1. Aside from hubs, route maps are fairly fluid anyway, aren’t they? I’ve noticed that a lot of 2 – 3 hour routes that carriers used to fly are being moved to tiny jets flown by affiliates (New York to Kansas City, for example, not just New York to Buffalo). Then the carriers move their small jets that used to serve those markets to 4 – 5 hour routes. Then they move their bigger jets that used to service those routes to international routes where they can sell the first class seats instead of giving them away to their frequent fliers.

  2. Actually, a really good point, Avi. Much of their domestic capacity is run by regional affiliates (even if they have a stake in the regional carriers.) Only goes to show the incredible complexity of all of this. As I saw someone say in one of the articles about the merger – this is like two drunks trying to hold each other up.

  3. You left out the number 1 reason mergers fail: costs are higher than revenues!

    Like you, I’m very concerned that there’s little revenue synergy here — I guess it’s supposed to be those famous “Corporate Accounts” who will now flock to Delta because they’re bigger. Count me as skeptical — especially since, as you say, Delta already “flies” these routes as code shares (perhaps some corporate deals are restricted to Delta-metal only?)

    Meanwhile, Delta is willing to make all sorts of payouts to make people (mostly employees) happy. Does that seem like a good idea in the current environment?

    I’d also note that Delta has no reservations about making ridiculous pie-in-the-sky projections to Wall St. to justify their actions. They made preposterous valuation estimates to fend off US Airways’ acquisition. Rejecting that deal cost their creditors about $7 billion, and counting. Would YOU trust them now?

  4. There’s an ad in today’s NY Times (i’m sure it’s running elsewhere) with Delta touting its now-huge route map as a major benefit for travelers. I hope people see through the ridiculousness for the reasons IAH-PHX and I have pointed out — through the SkyTeam alliance, all of these routes were possible before the merger. Ugh.

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