In airline-speak, call it the ‘Asheville approach’ to screwing your customers

Jason Sandford

Jason Sandford is a reporter, writer, blogger and photographer interested in all things Asheville.

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The New York Times has an interesting story here looking at the economics of giant airline mergers, what with all the talk recently.
This story has some interesting insight into the thinking behind a big merger. Note the Asheville connection:

What special magic, then, might occur to make two big airlines worth so much more together?

Essentially two theories are at work, each a chestnut of the merger-and-acquisition game, and neither of them a sure thing.

The first is simply to cut costs of the combined companies and hope to hang on to all the customers and revenue. Banks have employed this with some success, since many consumers do not seem to mind when their checking account is sent across the street and their former branch is shuttered.

With airlines, this might be called the Asheville Approach. A year ago, US Airways produced a similar run-up in airline shares by offering to buy Delta for $8 billion — later increased to $10.2 billion and then abandoned after Delta rejected the bid. At the time, US Airways said it planned to reduce combined costs by $1.65 billion a year.

Nearly $1 billion of that cost-cutting was to come from combining route systems and, quite simply, lopping off about 10 percent of the fleet and other flight operations. US Airways used Asheville, in some presentations to investors to illustrate the approach. US Airways and Delta each operated about 10 flights daily from that city, and a merger would have meant canceling 2 of those flights and packing passengers onto the remaining 18.

The Asheville passengers were viewed in this equation as captives. More than 80 percent of them were connecting before reaching their final destination, so there was no difference whether they were routed through US Airways’ hub in Charlotte, N.C., or Delta’s Atlanta hub to get to their destination, according to US Airways’ logic.

In trying to fend off US Airways’ offer, Delta attacked the Asheville Approach. “I don’t believe, in this industry, customers are truly trapped,” Edward H. Bastian, president of Delta, said in a December 2006 interview. “They may be trapped short term. You will get short-term gain smashing two companies together and pulling costs out. But that will not be sustainable.”

Betsy Talton, a Delta spokeswoman, said Mr. Bastian’s remarks were specific to the US Airways proposal. She declined to comment on current negotiations with United and Northwest.

Making flights scarcer has the additional benefit — unless you are a customer — of helping to push up fares, “which they’ve done anyway,” said David N. Edwards Jr., airport director at Asheville.

Indeed, in the year since US Airways did not buy Delta, the two carriers independently cut about two flights a day from their combined schedule, “creating a supply-demand factor that allows them to raise fares,” Mr. Edwards said.

There are two problems with that approach in a merger. One, it is a lot easier to ditch planes and leases on gates at airports when an airline is in bankruptcy and can essentially renege on a host of obligations. That is why US Airways made its bid while Delta was still in bankruptcy.

Now, Delta and any partner would have a harder time unloading planes and other assets.

Also, low-cost carriers — Southwest Airlines, AirTran Airways, JetBlue Airways — all want to keep growing. And few things make them happier than seeing network airlines reduce service and increase fares, giving the discounters a big and profitable opening to expand. Hubs in Cincinnati, Memphis and Salt Lake City seem especially vulnerable to being scaled back.