As Skies Get Friendlier, Delta Seen as Likely to Look to Airline Merger

Mid-size carriers idling in the wake of the blockbuster merger proposals by American Airlines and United Airlines might look for a partnership that boosts global reach as much as it builds domestic service, industry experts say.

All eyes are on Delta Air Lines, the biggest domestic carrier not part of two merger proposals that would make the world’s two largest airlines, UAL Corp.’s United and AMR Corp.’s American, even bigger and more dominant in the $67-billion U.S. market.

Many industry observers continue to believe the No. 3 carrier could involve itself in some kind of merger with Continental Airlines or Northwest Airlines, if the American and United proposals are approved by antitrust lawyers at the U.S. Justice Department.

“You cannot have two dominant carriers,” said aviation consultant Barbara Beyer of Avmark Inc. of Arlington, Va. “Basically, they would eat this country alive. Delta’s first requirement is to find another domestic partner.”

But the move by airlines in recent years to form alliances with overseas carriers signals that a purely domestic approach might not be a sole solution as an industry fast consolidating tries to meet demands of energized domestic and global markets.

Absent Congress lifting a law that limits overseas investment in U.S. airlines to 25% of a carrier’s voting stock, the most attractive prospect for Delta for improving international business, argue some, appears to be a U.S. carrier with strong overseas service and alliances.

“That would be Northwest,” said one consultant who preferred not to be named. “I think Delta would both be courting Northwest and Continental, but you have to give the plus to Northwest.”

The Minneapolis-based carrier has a Pacific division that industry watchers say rivals United’s, whereas Delta has virtually no presence in Asia and limited alliances elsewhere.

Delta signaled that it could be a willing partner for the right match, but a spokesman declined to talk about specific options or whether it felt pressure to boost its oversees profile.

There has been discussion over the years about removing or at least increasing the foreign ownership ceiling to 49% to stimulate investment and new competition.

Most experts surveyed believed the corporate disadvantages of minority ownership and opposition from U.S. labor unions would prevent change.

But one former Transportation Department official said the economic realities of globalization and an incoming Bush administration--with fewer ties to organized labor than the Clinton administration--might turn the tables eventually.

In the meantime, alliances that require very limited financial commitment have become a popular way for airlines to expand their reach.

These deals usually involve marketing and scheduling agreements, access to airport facilities and perks, such as frequent flier mileage.

One of the best and oldest is between Northwest and Dutch carrier KLM. Continental does business in Europe and in Latin America.

United is a member of the global Star Alliance, which is considered to be the premier arrangement of its kind. American is in the One World alliance.

International carriers aligned with United and American are expected to benefit with new access to U.S. markets, if their merger plans get past regulators.

American wants to buy financially ailing TWA as well as some assets of US Airways and United. The deal was structured to beef up American and help United complete its planned merger with US Airways. The two giants would command about half the domestic service.

With that reality pressuring Delta, Continental and US Airways have a choice to make.

“The real question is what do they do domestically?” asked Michael Boyd, president of the Boyd Group of Evergreen, Colo. “I don’t ascribe to the belief that you have to have a global alliance to stay alive.”

But Patrick Murphy of aviation consulting group Gerchick-Murphy Associates in Washington said too much is being made of U.S. market share in the wake of the merger proposals.

“Some of the emphasis has been overly focused on the domestic market,” Murphy said. “The airline industry is a global network today.”