Delta Takeover Would Likely Mean Higher Prices

Nov. 15, 2006 — -- If US Airways succeeds in its $8 billion takeover bid for Delta Air Lines, it could mean even more bad news for travelers who have watched airline ticket prices climb steadily for the past 18 months. If the deal goes through, ticket prices might fly as high as the planes themselves.

Financial struggles within the airline industry have led Delta, United Airlines and Northwest Airlines to file for bankruptcy protection during the past several years. United has since emerged from bankruptcy, but all three companies have cut flights to slash costs, decreasing the industry's overall carrying capacity and pushing the price of tickets higher.

The price of jet fuel has also more than doubled during the past three years, forcing all airlines to raise prices in the effort to remain profitable.

If US Airways takes over Delta, the combined company would likely eliminate overlapping flights between the two carriers, further diminishing the number of available seats. In announcing US Airways' bid, Doug Parker, chief executive of the Tempe, Ariz.-based airline, said he would anticipate flying with 10 percent fewer planes.

The sky-high fuel prices, coupled with a shrinking number of planes and seats, would have one obvious consequence: even higher ticket prices.

"To the extent that overall industry capacity continues to drop, you could expect prices to go up," said Jim Corridore, airline analyst with Standard & Poor's.

But Corridore also noted that continued financial problems could signal even more dire consequences if either Delta or Northwest were to fold. That scenario would eliminate all their flights immediately, taking a massive chunk out of the industry's carrying capacity.

"It's certainly a lot better to lose just a few flights rather than have Delta or Northwest go under altogether," Corridore said.

Frequent flier programs are not guaranteed or regulated, so theoretically, airlines could discontinue them or refuse to honor miles at any time. But that's unlikely, according to Tim Winship, editor and publisher of FrequentFlier.com, a Web site dedicated to helping frequent flier members get the best value for their miles.

"There's no cause for panic for members of either program. Their miles will be preserved," Winship said. "In fact, two airlines merging translates into a larger route network with more destinations -- that's more opportunities for earning miles and more destinations to use them."

Winship estimated that U.S. airlines make about $3 billion a year selling frequent flier miles to outside partners for marketing promotions. Airlines are typically paid 1 cent to 2 cents for each mile earned through a hotel, car rental or other promotions, and larger carriers have hundreds of partnership deals every year.

"The companies are probably going to bend over backward to maintain the business of those members, because they're very dependent on them for marketing purposes," Winship said.

And it's not as if the airlines are losing money by giving away free flights.

The computer booking systems used to reserve frequent flier tickets are coded to ensure that a free ticket almost never displaces a paying passenger. Passengers redeeming miles almost always take seats that would otherwise be unoccupied, leaving the airlines with only the cost of transporting the person -- estimated at about $15 if the passenger is served a meal, and even less if it's the typical bag of pretzels or peanuts.

The one drawback for current Delta freqent fliers could be a shift in their flying status within the new US Airways program. If the deal goes through, Winship said, members of the Delta program would be wise to check out the terms and conditions of the US Airways program. There could be changes in the number of miles needed to achieve elite status, or the number of miles needed to redeem various domestic and overseas round-trip tickets.

"US Airways is a self-described low-cost carrier, so they might be a little less generous than Delta," he said.