Moody's Skeptical of Airline Merger Synergies

Includes: DAL
by: Research Recap

Moody’s Investor’s Service offers a skeptical view of airline mergers in a Special Report on Consolidation in the U.S. Airline Industry.

The synergies of consolidation can be elusive at the best of times, and in the current weak economic and airline industry conditions, could be even more diffficult to realize, Moody’s says.

Moody’s considers the potential for consolidation among U.S. airlines to represent an event risk that could adversely affect ratings in the near term.

Moody’s viewpoints are guided by the current challenging business environment in the industry, where high fuel costs are driving large losses and deficit cash flows, balanced against the protracted time period over which the benefits of any mergers would likely be achieved. A multi-year plan to reduce costs after a merger that is contingent on achieving labor cooperation may not enable the airline to sustain near term financial metrics at levels consistent with the rating.

Airline consolidation has proven to be challenging even under favorable economic conditions, Moody’s says.

There are significant complexities inherent in combining route networks, aircraft fleets, workforce cultures, employee seniority lists and reservations systems technology. The implementation of an airline merger under the current weakening economic conditions is expected to be even more challenging.

Nonetheless, mergers may be more necessary for survival in a downturn than in an up-cycle, given the material operating pressures facing airlines due to high fuel and maintenance costs and weakening passenger traffic that impairs airlines’ ability to realize adequate yields on ticket prices.

These factors are likely to increase the timeframe over which cost and revenue synergies are attained, and the challenges to achieving those synergies, Moody’s says.

Moody’s is reviewing the ratings of Delta (NYSE:DAL) and Northwest Airlines (NWACQ) for possible downgrade following their recent merger announcement.