The 800lb albatross in the room

October 30, 2008

The logic behind Delta’s purchase of Northwest was based on the price of oil staying above $100 a barrel. This is what the parties sold to unions, shareholders, creditors and politicians when making the case for the deal; the airline industry was going to have to overhaul everything about its business to manage costs.

New high-efficiency jets were going to be rolling off Boeing’s assembly lines, and airlines would have to find billions of dollars to buy them. Yes, prices for carry-on luggage would keep rising, and free in-flight peanuts could become a thing of the past. Worries about an economic malaise derailing vacation plans and choking corporate travel budgets would grow to full-blown fear of the worst recession in generations by the time the Delta-Northwest deal was struck.

The new, larger Delta will be an international powerhouse with unparalleled scheduling and pricing strength with service to 375 cities worldwide, experts said. The company estimates $2 billion in cost savings and revenue enhancements annually from the merger.

With savings like that, it’s a whole lot easier to forget the high-oil-price argument. The deal is expected to reignite merger plans throughout the industry, as the logic shifts to competitiveness rather than cost. Oh sure, there may still be a recession to deal with, but cutbacks in capacity are already offsetting some of that. Airline investors are so beaten down that they’ll probably be willing partners — and heck, perhaps airlines can use their costly fuel hedging strategies to convince the Fed to lend a hand. There’s a place in the handout line right behind GM.

Deals of the day:

* Top miner BHP Billiton’s chief executive ruled out adding a cash sweetener to its all-share $69 billion offer for rival Rio Tinto, saying financial turmoil hitting commodity markets was no reason to change.

* Newcrest Mining, Australia’s largest gold producer, sees ample acquisition opportunities ahead and its low debt levels mean it has the firepower to take advantage of them, it said.

* The head of Mazda Motor > said he did not expect any change in the Japanese automaker’s relationship with Ford Motor, amid reports that the struggling U.S. automaker would sell part of its controlling stake.

* British billing and support systems company Intec Telecom Systems said it ended talks about a potential offer for the company, given current market volatility and the fact that it had not received a suitable offer.

* An Italian investor group planning to buy Alitalia was in a stand-off with unions, after failing to agree on new work contracts at late-night talks, unions said.

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