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Estimated reading time for this article: 4 – 5 minutes

In case you haven’t heard yet, the Wall Street Journal has reported that Delta is considering the option of acquiring American Airlines. American, while in bankruptcy, is a major acquisition target, since it can be bought very cheaply compared to the value of its assets, such as aircraft, slots, hubs, route authorities, and terminal buildings.

I have to say, this acquisition is rather unlikely. Delta and American are the second and fourth largest airlines in the country respectively by domestic market share. If put together, they would control over 1/3 of the US market, including regional partners. That is a lot compared to the Delta of today, which controls less than 20% of the market. This massive increase in size would undoubtedly raise flags with government regulators. While sheer size isn’t an issue per se, combining the airlines would create areas of high market concentration, like New York. Both Delta and American have large operations and JFK and La Guardia Airports in New York. Delta would be forced to divest a significant amount of slots in these areas to new entrants and low fare carriers in order to get the acquisition approved. Since Delta and American are both very big and have significant overlap, the combined airline would probably have to give up so much during a merger that it just wouldn’t be worth it.

The second reason that this acquisition is highly unlikely is alliances. Delta is a member of SkyTeam Alliance, while American is a member of oneworld. Since American is the only North American partner of oneworld, it is extremely important. Without American, oneworld would likely dissolve, since it wouldn’t have coverage in the largest aviation market in the world. For this reason, American’s oneworld partners like British Airways and LAN would fight a Delta acquisition very hard. They would likely attempt to get the acquisition rejected by regulators, and they might even team up with a private equity firm to buy out American. No matter what happens, oneworld and its carriers will fight the move of American to any other alliance with all the power that they have.

Since it’s so unlikely that acquisition will ever occur, you might be wondering why Delta is even considering it. There is no doubt that Delta wants this acquisition to happen. Some reasons why:

• American has hubs in major cities with large amounts of high yielding business traffic.
• American also is the largest American carrier at London Heathrow airport, a major business airport with very high yields.
• American has a very large frequent flyer base that Delta would love to get its hands on.
• American has a lot of profitable corporate contracts that Delta would like to take.
• American has a large Latin American network that would be a valuable addition to any other airline in the US.
• American has a fortress hub in Dallas. Fortress hubs are hubs in which one airline controls a massive amount of the capacity. These hubs are incredibly profitable since airlines enjoy the effect of a monopoly, allowing them to increase prices.

With all these reasons and more, it makes perfect sense that Delta would want to acquire American. Perhaps Delta feels that even with the hurdles that regulators will subject them to, the acquisition will be valuable enough in the end to be worth it. However, I don’t think this is likely.

What is more likely is that Delta is using these rumors to try to force the hands of US Airways and TPG Capital, the other 2 companies interested in purchasing American. Delta wants to find out the intentions of the other two groups, and also increase the prices that they will have to pay if they decide to bid. The latter is a big risk. Increasing the price of American significantly would mean that Delta would have a weaker competitor in the future. However, if they bid too high and the other companies walk away, they will be stuck with an overpriced American Airlines for themselves, a disastrous outcome. This is exactly what happened when AirTran was interested in buying Midwest Airlines back in 2007. TPG Capital, along with Northwest Airlines, tried to inflate the price that AirTran would pay. However, AirTran decided to just walk away from the deal, and TPG ended up with the airline. 2 years after TPG bought Midwest, they sold it to Republic Airlines at a $400 million loss.

Another extremely unlikely possibility is that US Airways and Delta could team up to buy American, and then split up the airline. Each airline could take the parts of American that they need, and they can avoid many of the regulatory issues by allocating parts of the airline based on market concentration. Both US Airways and Delta would face less financial risk by each paying for only part of American Airlines. Delta and US Airways have worked together before on the DCA/LGA slot swap which finally is taking place this year after the US Department of Justice approved it.

Whatever happens to American, it is many months away. However, it is important not to discount any possibility – strange things have happened in aviation before.

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