United CEO Scott Kirby Pitched Delta On A Merger — One Airline Would Control 35% Of The U.S. Market

United Airlines pitched a merger to Delta Air Lines according to new reporting in the Wall Street Journal. United CEO Scott Kirby called his counterpart at Delta Ed Bastian. Delta did “preliminary due diligence” on a tie-up, but the conversations didn’t bear fruit. This comes alongside United having pitched the idea of taking over American Airlines in an Oval Office meeting with the President. American’s board rejected the offer, and by explaining that it was dead on arrival because the deal would be too anticompetitive basically killed prospects by providing admissions for any potential antitrust case against it. There’s No Business Case For This Deal Combining Delta and United would make the largest U.S. and world airline by a wide margin. But it wouldn’t solve a problem that either has, or make better use of either’s assets than each one makes of them on their own. In fact, any deal would be subractive – they would have to give up some of their best assets to appease regulators and the courts (if this were even possible). At least with American there was a plausible argument that the Dallas-based carrier has financially underperformed and United management might make those assets perform better. In the case of Delta, There’s no case that the Atlanta-based carrier is an undervalued asset. It is generally more profitable and valued by investors than United. There’s no case that the Atlanta-based carrier is poorly-run, so combining it with United gives better management (and therefore profitable results) to those assets. There’s no case that United or Delta on their own are too undersized to be viable, so a combination is necessary for them to succeed. Instead, and bolstered by Kirby’s apparently agnosticism towards merging with either Delta or American, it’s pure hubris – a desire to get bigger rather than earn outsized return on capital for shareholders. The Antitrust Hurdles Would Be Unimaginable The idea of a Delta-United merger is a complete antitrust non-starter, and that’s even assuming getting an antitrust pass from the Trump administration (both United and Delta donated $1 million to President Trump’s inauguration, and Kirby even publicly supported the President’s tariffs which were harmful to United’s international-heavy business, and publicly blasted Democrats for obstruction in the fall government shutdown. Each state attorney general has their own independent cause of action (except, arguably, Delaware – Wilmington is served only by Avelo – and perhaps New Hampshire which has United but not Delta service). Myriad counteries get a bite at the antitrust apple as well. Delta has 18% of the domestic U.S. market, United has 17%. Together they’re nearly 35%. By scheduled seats they’d reach 37% (because United and Delta operate longer flights on average than Southwest). United and Delta each control about 24% of the New York market, and together would have 48.6%. Twenty New York – Europe city pairs have both United and Delta service. United is 16% of LAX and Delta is 19%, together representing 35%. Delta and United together own more than one-third of Republic Airways Holdings, the primary competitor to SkyWest in the regional market, and both contract with SkyWest – which would itself lose significant bargaining leverage. United has a 40% stake in CommuteAir and Delta owns Endeavor Air outright. Perhaps now we know why United was so adamant about getting its flight attendants to agree to its ownership of a commuter carrier (without staffing them with United’s union flight attendants) in their recently-approved contract. Foreign Governments Won’t Stand For It The Delta-Air France-KLM-Virgin Atlantic joint venture together has a 25% seat share in the North Atlantic. The United-Air Canada-Lufthansa Group joint venture has a 28% share. United and Delta on their own would be 24%. Add United to Delta’s joint venture and that’s 37%. Add Delta to United’s joint venture and that’s 40%. There’s no world in which European regulators ascent to this. In South America the two overlap on New York – São Paulo. Via different hubs, the two networks compete to São Paulo, Buenos Aires, Rio, Bogotá, Lima and Santiago. Delta’s joint venture with LATAM substantially broadens this, creating antitrust problems across South America (before Delta partnered with LATAM, American faced huge antitrust resistance to a joint venture with them – adding United into the mix likely kills the joint venture, and might not review even without it). Japanese and Australian regulators are likely to have issues with the tie-up, and it could jeopardize Delta’s joint venture with Korean Air and United’s with ANA and Air New Zealand. United and Air Canada dominate the transborder Canada market. Delta and Aeromexico – already facing legal challenge from DOT – are the dominant force between the U.S. and Mexico. The two airlines would have to give up crown jewel partnerships but even then might not satisfy regulators in any given market. It’s unclear the U.K. would approve the combination even if Delta divested Virgin Atlantic. They might not be able to retain their full portfolio of Haneda slots, if United tried to retain its ANA relationship. There’s already virtually no competition with Korean and Delta between North America and Seoul. The little competition that exists is mostly from United. Ownership Stakes In Foreign Airlines Further Complicate Matters Things get even more complicated when you look at ownership stakes. Delta has a 49% stake in Virgin Atlantic, 19% stake in Aeromexico, 15% of Korean Air, 13% of WestJet, 11% of LATAM, 3% of Air France and 2% of China Eastern. United owns 9% of Azul, and stakes in Avianca and Gol via Abra Group and they’re a minority investor in JSX. A Merger Would Erode Delta’s Key Competitive Advantage A United merger would almost certainly mean unionization across Delta. Today, only pilots and flight dispatchers are unionized. Flight attendants, airport agents and reservationists who provide customer service are non-union. Mechanics, whom Delta has turned into an independent profit center are non-union. These represent competitive advantages for the business which any merger with a similar-sized carrier would almost certainly erode. The Two Airlines Haven’t Partnered Since 2003 Delta and United did actually used to be partners. I used to credit my Delta Air Lines flights to Mileage Plus! The two had a frequent flyer partnership that ran 1998 – 2003, and they intended codesharing which was killed by Delta pilots. The deal ended as United aligned with US Airways and Delta with Northwest and Continental. They were both much smaller then. Delta and Northwest hadn’t merged. United and Continental hadn’t merged. There were several more players in the domestic market. This casts Scott Kirby’s efforts to take over American Airlines in new light. It isn’t about taking American, an underperforming asset, and making the two great together. It’s about buying whatever larger airline he can – less as an investment and more just to be the biggest by a wide margin. And since his Delta entreaties apparently came last year, American may even have been his second choice. Topics on this page