Airport hub is seen as a prize in any NWA merger

A merger between Delta Air Lines and Northwest Airlines could begin a dramatic reshaping of the aviation industry but lead to only small changes in the importance of Minneapolis-St. Paul International Airport to the combined carrier.

The reason is simple: Northwest makes a lot of money in the Twin Cities, a situation no suitor will want to alter.

That means fliers here could see something close to the same number of flights and destinations available to them now from MSP, though they might pay as much or more for that privilege as they do now, according to a number of analysts who have examined the ramifications of a merger.

"I think they'd have reason to leave it the way it is in the Twin Cities," said airline analyst Ernie Arvai, at the Arvai Group in Windham, N.H. "Northwest has a great, dominant position in the Upper Midwest. Clearly, that allows a price premium that they can maintain, as fliers there already know."

It's uncertain whether a Delta-Northwest merger will happen. Delta's directors met Friday in New York to consider merger prospects and are said to be focused on Northwest or United Airlines. Northwest Chief Executive Doug Steenland said Friday his airline is open to a deal. Because Delta CEO Richard Anderson had run Northwest and worked closely with Steenland, and because the carriers have long been alliance partners and have different relative strengths -- transatlantic and East Coast flying for Delta, Pacific routes and Midwestern flying for Northwest -- the two are seen as a complementary fit.

A giant merger -- Delta and Northwest together would be by far the largest U.S. carrier -- that leaves fares and flights relatively unchanged sounds counterintuitive. After all, consolidation is meant to cut costs and flight capacity in the system, making the remaining flights more profitable. And in buying Northwest, managers at Delta would find their system heavy with U.S. hub airports -- New York's JFK, Atlanta, Cincinnati, Salt Lake City from Delta and MSP, Detroit, Memphis from Northwest.

But Cincinnati and Memphis are viewed as far more likely candidates for the ax.

Northwest has a 67 percent market share at MSP and an estimated 60 percent in Detroit, but 49 percent in Memphis.

That kind of dominance makes it easier to make profits. People who fly from MSP pay an average of 21 percent more than fliers taking comparable trips from other U.S. airports, according to the research of Gerchick-Murphy Associates, a Washington-based airline consulting firm.

"I would think their strong market position there is part of the value of the airline," said Patrick Murphy, an airline analyst who was a high-ranking transportation official in the Clinton years. He is a partner in Gerchick-Murphy.

Cincinnati, where Delta has a 39 percent market share, is very profitable for Delta, but its proximity to Atlanta and Detroit make it more expendable than MSP or Salt Lake, which would be the only Western hub for the combined firm.

The Twin Cities area also has a larger corporate market than Cincinnati, and business travelers are crucial to the profits of large airlines.

Twenty Fortune 500 companies are based in Minnesota, most of them in the Twin Cities area. The Cincinnati area is home to 10.

"Almost under any circumstances, Minneapolis is locked in" as a large airline hub, said Michael Boyd, an airline analyst based near Denver. "We see no damage to Minneapolis."

Airline analyst Adam Pilarski also sees the chances of major changes in Minneapolis or Detroit as close to zero.

"When NWA makes money, they make money because they have these two fortress hubs where they have as close to a monopoly position as anybody," said Pilarski, at Avitas, an airline consulting firm near Washington D.C. "For them to get rid of it would be unbelievably stupid," he said.

Kevin Crissey, airline analyst at USB Investment Research, draws a similar conclusion.

"That hub is safe. Flyover country can be very important," he said. "With a strong system, they might even add capacity."

However, Lehman Brothers analyst Gary Chase doubts that service would be unscathed.

In a report late last week, Chase forecast a 15 percent cut in key measure of service -- available seat miles -- at MSP and a 10 percent decline at Detroit. He expects Memphis and Cincinnati to lose their hub status if Delta and Northwest combine. Available seat miles measure how many people fly how far from various cities.

Bigger cuts in service probably won't happen because both airlines already cut back during their recent bankruptcy reorganizations. Northwest reduced service systemwide by about 10 percent.

"They've already pared the unprofitable lines, to some degree," Arvai said.

Airline expert William Swelbar thinks a 15 percent cut at MSP is too dire a forecast.

"I think it would be naive to think there are no changes in Minneapolis," Swelbar said. "But 15 percent would seem to be on the high side on that hub."

The only places a combined airline might shut down routes is in smaller markets with overlapping service, said Swelbar, research engineer at the MIT International Center for Air Transportation.

"I think much of the duplication is among those carriers flying regional aircraft," he said. "That's why there's a lot of discussion of what happens in Memphis and Cincinnati."

Any merger would be subject to antitrust review by the U.S. Justice Department.

"The one attribute of Minneapolis that is truly unique is its relatively low level of low-fare competition," Swelbar said. "If there's one thing the Justice Department would look at, that's it."

But other analysts say that any move to break up or substantially shrink Northwest's major hubs could prove a deal-killer.

Fares inevitably would fall -- and fast -- if a combined Northwest-Delta left room for low-fare competitors, analysts say.

"I can't see a kindler, gentler [Delta-Northwest] that welcomes competition," Pilarski said. "That would mean lower fares."

Mike Meyers • 612-673-1746