Airline M&A Spells Access to Asia

CHARLOTTE, N.C. -- While airlines have many reasons to merge, a key one these days is to enhance the value of coveted routes to Asia.

Among U.S. carriers, Northwest ( NWA) and United ( UAUA) have long been the leaders in Asia.

Now Northwest and Delta ( DAL) are planning a merger, while United and US Airways ( LCC) have discussed one, although the urgency has diminished, sources say.

Experts say the Delta-Northwest deal has the more obvious benefit, combining Delta's superior hubs and traffic with Northwest's Asia system, but a United-US Airways deal would push some US Airways passengers to United's Asian network.

As Northwest CEO Doug Steenland said at a press conference announcing the deal with Delta, "Northwest is the preeminent airline from the U.S. to Asia, but our domestic operation is not optimally sized to support this great Asian access." The merger would bring restoration of Tokyo-New York service, which Northwest suspended in 2005, he said.

Meanwhile, a United-US Airways merger, were it to occur, "would bring along a customer database that United doesn't have," says aviation consultant Robert Mann. "But you don't get a spectacular global network, like you do with Delta-Northwest."

Looking ahead, however, a United-US Airways deal could build on the strengths of the Star Alliance, and could offer an enhanced relationship with alliance member Lufthansa and perhaps with JetBlue ( JBLU), as Star Alliance seeks a stronger presence in the New York market. Lufthansa owns 19% of JetBlue.

A Tight Sky Market

Northwest and United both hold rights awarded under a 1952 aviation treaty with Japan, which provided two U.S. carriers with the ability not only to fly from the U.S. to Japan, but also to fly beyond Japan into Asia.

While Northwest was an original recipient, United purchased Japan rights and a sprawling Asia route system from Pan American World Airways. The 1985 deal is considered one of the wisest aviation investments ever made -- even though then-CEO Richard Ferris, who presided, was forced out two years later.

United's Asia network includes 11 daily departures from Tokyo -- two each to Chicago and San Francisco, and one each to Honolulu, Los Angeles, Seattle, Washington, Bangkok, Ho Chi Min City and Seoul. Additionally, United has 23 daily flights to Asia (including Sydney) from the U.S.

Northwest has nearly two dozen daily departures from Japan, including twice-daily service to Detroit and Honolulu and daily flights to Minneapolis, Los Angeles, Seattle, San Francisco, as well as to Asian destinations in Bangkok, Guam, Guangzhou, Hong Kong, Manila, Beijing, Busan, Seoul and Shanghai. The carrier also flies from Osaka to Detroit and Honolulu, and from Nagoya to Detroit.

FTN Midwest analyst Mike Derchin says United has the advantage of offering more non-stops from the mainland U.S., partially as a result of its hubs in Chicago and on the West Coast. "United has a broader trans-pacific operation and can carry more non-stop passengers," he says. "Northwest is pretty much concentrated at Narita, so they have more connecting traffic."

Northwest's Quest

Any evaluation of the two systems "turns on what you think of the future of a Narita hub," Mann notes. "In a world where the 787 and the A350 can fly all these routes nonstop, do you still want to fly via Narita? This is really a matter of having two different business models."

To be sure, Northwest has made clear that it leverages its assets in various ways. It is the largest U.S. customer for Boeing's ( BA) 787, with an order for 17 and options for 50 more. It has said it may use the airplanes not only to fly to Asia from the U.S., but perhaps to fly from Tokyo to secondary markets in China. After all, "Narita is a huge origin and destination market," Mann says.

"We probably have the most experience in Asia, where we just celebrated our 60th year anniversary, and we are probably are going to be the most ambitious about expanding in Asia," said Laura Liu, senior vice president for international operations at Northwest, in a recent interview. "We are deep in the heart of trying to understand how much demand there is to and from the secondary cities in China."

Next March, Northwest will take an unusual step, temporarily cancelling a Tokyo-Guangzhou flight in order to use the route authority to fly an A330 between Seattle and Beijing. Spokeswoman Tammy Lee said the carrier is responding to business demand from its corporate customers, and noted that the change was planned long before the Delta merger was announced. The route authority in question permits a flight that can originate from any U.S. point to an intermediate point and then to China, says Transportation Department spokesman Bill Mosley.

Northwest already serves Amsterdam, London and Tokyo nonstop from Seattle, an emerging market for Asia flights because it is the closest major U.S. city to many Asian markets. Northwest will also launch Detroit-Beijing service in March.

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