Trouble in the air

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world ordered around 7,000 new, fuel-efficient aircraft in recent years, those fragile balance sheets meant that American airlines sat on their hands. Delta has 117 McDonnell Douglas MD-88s with an average age of 18 years; Northwest soldiers on with more than 90 DC-9s with an average age nudging 40 years. These planes are up to 40% thirstier than their more modern counterparts, a crippling burden given the price of fuel. They are also more difficult to maintain—as last week’s grounding of American Airlines’ similarly elderly MD-80s highlighted.

Delta and Northwest have little scope to cut front-line staff or replace their ageing fleets any time soon—production lines at Boeing and Airbus are fully booked until 2012. But they think they can secure cost reductions of about $1 billion a year by centralising their back-office operations and cutting management jobs. They also hope to boost revenue by combining route networks and strengthening their appeal to lucrative corporate customers.

Other American network carriers are watching closely. A similar tie-up between United and Continental, the second- and fourth-biggest, is under discussion, and American, the largest carrier, waits menacingly on the sidelines. Northwest’s attempt to merge with Continental was blocked in 1998, but regulatory approval is more likely this time, given the lack of route overlap between Delta and Northwest. The prospect of a union-friendly Democrat in the White House next year is a further spur to getting deals done quickly.

The assumption in the industry is that consolidation will result in stronger airlines. That is probably true, but difficulties remain. As long as the barriers to new entrants remain absurdly low, intense-even suicidal-competition will persist at home. On international routes, “open skies” liberalisation is an opportunity, but the superior financial clout and modern planes of the big European network carriers, such as Air France-KLM and Lufthansa, are a threat. For hard-pressed airline managers with the urge to merge, relief is more likely to be fleeting than permanent.