Don't think for a minute that the airline industry has reached a comfortable cruising altitude.
Sure, the airlines have stabilized after a bankruptcy epidemic, and the industry is now profitable for the first time since 9/11. But another industry shakeup may be just over the horizon—and this time the airlines are preparing for it.
When Delta Air Lines hired Richard Anderson as CEO earlier this month, it was a surprise move that hinted at the company's planning for a possible consolidation binge among the biggest airlines. The odds-on front-runners for the job were two insiders, including Chief Operating Officer James Whitehurst, who just resigned from Delta. But Anderson has a key credential: He's the former CEO of Northwest Airlines, which like Delta recently emerged from bankruptcy proceedings.
That trumped Whitehurst's in-house knowledge because, if mergermania erupts, Northwest is Delta's most logical target. Like other airlines, Delta is quietly developing elaborate plans for what to do if consolidation sweeps across the industry. Delta probably wouldn't initiate a wave of buyouts or mergers—United has been more aggressive, hiring an investment bank to identify targets and issuing periodic executive pronouncements about the need for consolidation. But one buyout or merger will beget others, lest any of the major carriers becomes a sparrow among condors. And the Anderson selection indicates that to Delta's board, which hired him, consolidation is a "when," not an "if."
Delta is eyeing Northwest because of the way the two airlines' strengths and weaknesses dovetail. Delta's post-bankruptcy strategy is to aggressively expand its overseas footprint, with one of its biggest priorities being a stronger presence in Asia—where Northwest has long been an entrenched carrier. Northwest's Detroit and Minneapolis hubs also pull in midwestern travelers, who would nicely complement Delta's strength in the South and along the East Coast.
A look at various airlines' route maps suggests other likely pairings: United's east-west routes would match nicely with the north-south nature of U.S. Airways's offerings; American could also absorb U.S. Airways or Northwest; Continental could be paired with any other major airline except American, since they both have hubs in Texas.
The coming deals, however, may not be as black and white as one company absorbing another. "Consolidation will take place," outgoing Delta CEO Gerald Grinstein told me earlier this year. "But I don't think it will be the traditional kind that the Street would love to see—one big airline absorbing another. It might be more like one airline buying the Atlantic or Pacific routes from somebody else."
Most airline executives agree that in an industry that has suffered from chronic overcapacity—too many seats in the sky—consolidation makes economic sense. It's not CEO trepidation that's in the way—it's antitrust concerns. The government has a history of squashing airline deals, since fewer carriers means less competition and the airlines have never been shy about hiking fares when they can get away with it.
But with a bit more sympathy toward the carriers since 9/11 and the subsequent industry meltdown, airline executives sense that antitrust concerns might be softening. The question is who will test the waters first. Whitehurst, the outgoing Delta COO, was a stalwart freedom fighter when U.S. Airways tried to buy Delta while it was in bankruptcy. Along with Grinstein and several others, he helped form a defiant front that fought off the Airways bid and convinced creditors it was a bad idea. It's no surprise that Whitehurst, passed over for the top job he coveted, decided to leave Delta. But his departure may also signal that Delta's fierce bid for independence has been supplanted by a new premium on partnering. Especially now that Delta can afford to be the suitor.