RIP Northwest Airlines

The recently announced Delta/Northwest airline merger agreement teaches us a valuable lesson about the market: Company brands do not exist forever. In our ever-changing international economic environment it would not be wise for anyone to expect to spend an entire career working for the same company brand. Change happens.

While the Delta/Northwest merger is welcome news, it actually might not improve the industry in the long term unless the airlines retire their antiquated business models. The smaller, low-cost, more efficiently run airlines, like Southwest, continue to gain greater market share because they are responding to changes in consumer demand.

We should also be careful not to pay attention to those who do not understand economic systems and seek to scare people into thinking that fares could potentially sky-rocket. This way of thinking, of course, assumes that markets are static. Here's an example from the L.A. Times regarding the Delta/Northwest merger:

"It's good for them, but it's bad for all of us," said Richard Gritta, professor of finance and transportation at the University of Portland in Oregon. "More concentration means higher prices and less service. No matter what they say, you're going to see layoffs."

What Gritta seems to miss is that more "concentration" in the short term will not necessarily result in higher fares in the long term because the merger now opens up new opportunities for other airlines to assume those routes thereby increasing competition and reducing fares. We have already seen this with the affect Southwest and Jet Blue airlines have had on the entire industry. It's not a zero-sum game.

The good news about the merger is that we now have one less airline that will receive corporate welfare checks. The airline industry has perfected the art of going to government protection in bankruptcy so as to hide from their own mismanagement and be shielded from unions that seek to leverage arbitrary wage inflation that companies cannot afford. Flying under bankruptcy actually provides an unfair advantage over competitors. Bankrupt airlines continue to lose money without facing market consequences. Bankruptcy protection, therefore, retards growth in the industry and reduces competition in the long run.

Consolidation of mismanaged airlines makes the industry more efficient, better able to meet consumer demand, and-contrary to popular impression-increases competition. Burdened by excess flying capacity, the top five airlines need to be streamlined. If the top airlines were to consolidate, it would give other airlines opportunities to enter into new markets, providing consumers with more flying options. More flying options mean more competition and lower prices.

So we say good-bye the Northwest Airlines brand name. It was a good run. RIP (1926-2008). Now we simply need America's dead auto industry to take the hint: change or die.