Filed under: Consumer experience, Competitive strategy, Delta Air Lines (DAL)
With Delta Air Lines and Northwest Airlines said-to-be-close to announcing a merger, according to Reuters, analysts and business executives will closely-evaluate the proposed deal’s details, parsing it to see if it is capable of creating something the land of the free hasn’t experienced in quite some time: a profitable major airline.
Turning aside (for the moment) points that argue that with the added cost of public subsidies of aviation and aerospace research, it’s hard to envision a U.S. airline as ever being truly ‘profitable,’ independent stock analyst C. Leonard Bauer told BloggingStocks Monday the merged Delta / Northwest could create an assertive airline capable of racking-up revenue, even as it spurs aviation innovation and change.
The Delta / Northwest deal is a game-changer in that it would create a global player on this side of the Atlantic that can compete with Air France / KLM, Lufthansa, British Airways, and Singapore Airlines,” Bauer said. “The new airline will generate huge economies of scale, have a $30 billion annual revenue base, and a lower operating cost structure that will enable it to increase service to Europe, Latin America, and especially Asia, a critical growth market.” Bauer added that he does not have a rating on nor own shares in any airline.
Further, while Bauer underscored the attractiveness of the comprehensive, U.S. city coverage to European travelers, the new airline’s “larger aviation muscle” to expand service into Asia, and to a lesser extent, into Latin America would give it an capability to expand and stay committed to its international business plan, despite sector headwinds - - a decided operational advantage. “That ability to persevere where others can’t will help Delta / Northwest increase market share in these regions,” he said.
Delta (NYSE: DAL) rose 40 cents to $10.41, while Northwest (NYSE: NWA) gained 5 cents to $11.01 in Monday afternoon trading. Bauer added that he does not have a rating on nor own shares in either company.
Surprise benefit: improved U.S. service
For the past decade, the air travel experience in the United States has been, for the typical traveler, a test of patience skills, to put it diplomatically. Now one might assume that with fewer U.S. carriers, the flight experience might deteriorate further. Not so, says Bauer: he sees the overall U.S. flying experience and customer service levels improving. The reason? The need to attract international travelers in Asia, Europe, and Latin America.
“The international market is critical to success and it’s a very competitive market. To attract Europe and Asia-based travelers the new Delta / Northwest will improve the flying experience and roll-out new services, and they’ll expand these to domestic flights as the quarters pass,” Bauer said. “The net result for U.S. travelers will be superior service.” The changes, Bauer added, won’t occur overnight, “but they will occur because they are intrinsic to attracting international customers, the key to rising revenue.”
Global travel era
Moreover, the U.S. airline sector, in Bauer’s interpretation, is in the beginning of its second major transformation, which he believes will involve 2 or 3 U.S. airline mergers to create carriers with the resources and planes to serve “the new mass market of this decade, the global mass market.”
However, due to its complexity and large risk, Bauer does not suggest that typical investors attempt deal arbitrage - - i.e. try to profit from the Delta / Northwest deal short-term via a speculative trade.
A superior investment strategy, Bauer stated, would involve waiting for the possible merged company to finish its initial consolidation period of about 2-3 months, then buy a position in stages (dollar-cost-average) over a six-week or two-month period. Bauer likes the inherent value in a potential Delta / Northwest entity, and believes it will be followed by another attractive airline merger, possibly involving Continental (NYSE: CAL) with United Air Lines (Nasdaq: UAUA).
Any potential U.S. airline merger would be subject to federal anti-trust and national security reviews, Bauer added. Bauer anticipates the U.S. Department of Justice to approve the Delta / Northwest merger, should it occur, after a customary review.
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