Why NWA/DL Merger Won't Work

[LoadMasterC141]

http://money.cnn.com/2008/02/20/news...ex.htm?cnn=yes

Why Delta-Northwest won't work

Industry consolidation is supposed to cure the airlines' most intractable problems, right? It won't.

By Barney Gimbel, writer
NEW YORK (Fortune) -- There was little doubt last summer when former Northwest Airlines executive Richard Anderson took the helm at Delta Air Lines that the carrier would gobble up a competitor. It was just a matter of which one and when.

So Wednesday's board meeting to finalize a merger between Delta (DAL, Fortune 500) and its smaller rival, Northwest Airlines (NWA, Fortune 500), surprised no one. Shareholders clamored for it. Analysts gave their blessing. And the media breathlessly reported its inevitability. Consolidation, the thinking goes, will solve all of the industry's woes.

Not so fast. An analysis of the likely deal terms suggests this merger won't overcome the many problems facing airlines. In the end, we might just have a bigger company plagued by the same problems, including sky-high oil prices and powerful labor unions. Ditto for United (UAUA, Fortune 500) and Continental (CAL, Fortune 500) if they too, as has been widely reported, tie the knot. Let me explain.

What a difference a year makes
It was just over a year ago that Delta's former CEO, Gerald Grinstein, warned a packed room of U.S. senators about the perils of airlines mergers. Grinstein was there to fight off a hostile bid from US Airways (LCC, Fortune 500) and had a phalanx of uniformed Delta pilots standing behind him. He called the transaction "anti-competitive" and said it would "threaten the future stability of our nation's transportation industry."

For a lot of reasons, Grinstein didn't want to sell his airline to US Airways. It was his baby. He had nursed it back from the brink of insolvency and he wasn't about to let what he considered to be an unworthy competitor snap it up and reap any rewards. He may have believed what he told Congress: Once Delta emerged from bankruptcy, it would be worth far more than US Airways' $9.5 billion offer.

Things didn't work out as Grinstein had hoped. Today Delta is worth only $6.7 billion and Grinstein - and his team - are gone. Anderson inherited an angry board of directors and impatient shareholders. The only way to fix the problem was to find a partner - and fast.

What changed was the price of oil. At $100 a barrel, oil is almost double what it was when Grinstein testified in January 2007. It's become all but impossible for airlines to turn a profit. Add to that the inability to hike fares substantially, mounting foreign competition, and signs of a economic downturn, and it's no wonder airlines are scrambling for alternatives.

Combining with a rival would give airlines some much-needed capital. "This is about survival." says former Continental chief executive Gordon Bethune, who recently advised a New York hedge fund that wants Delta to merge with either Northwest Airlines or United Airlines. "These companies just need more revenue than they can generate with that kind of expense level."

Two theories are driving airline merger talks. Cost-cutting by flying the same amount of passengers on fewer airplanes is one. Delta, for instance, has nine daily flights between Nashville and its Atlanta hub. Northwest flies three times a day from Nashville to its Memphis hub. But the passengers often aren't going to either city; they're connecting to Los Angeles or Dallas or Boise. By merging, the combined carrier could, say, cut three flights and still meet demand.

The potential savings is what drove US Airways to bid for Delta last year. US Airways suggested it could save nearly $1 billion by combining the two carriers and lopping off 10 percent of the flight schedule.

But belt-tightening isn't driving the Delta-Northwest talks, according to published reports. The "new" Delta doesn't plan to cut many jobs or reduce much capacity. They don't even plan to drop any hubs. If that remains the plan, then the combined carrier won't be able to generate more revenue through higher fares.

Instead, they plan to boost revenue by leveraging their global network to seize market share. It makes sense in theory: Northwest has an extensive Asian presence while Delta has a large European and Latin American network. The problem is, size alone won't stimulate demand. The new Delta would have to use its larger footprint to steal customers from competitors - a tough proposition if other airlines merge too.

The only way Delta-Northwest plans to save money is through cutbacks in Northwest's Minneapolis base, and by combining their respective airport operations, reservation lines and technology departments. Even so, the costs savings would be negligible - and possibly offset by any deals to secure the approval of the airlines' labor unions. If Delta agrees, say, not to lay off pilots then it can't reduce the number of planes or routes it flies.

None of this bodes well for the airline industry. After a Northwest-Delta deal, expect to see the remaining large carriers - American, Continental, United and US Airways - attempt similar mergers with similar terms. And then what do you have? Bigger companies flying the same routes with the same airplanes - only now with higher labor costs. For some reason, in the airline business, people always forget that bigger doesn't mean better.

[Doug Taylor]

Come on man, synergies and paradigm shifts. The market's changed! Increasing your costs, dealing with the donkey kong nightmare of seniority integration and molding two very different corporate cultures together is going to do MAGIC on the high cost of fuel.

[LoadMasterC141]

I don't really know enough to make any comments on this really. Just saw it on CNN and felt special being the first to post.

I take it your comment is missing a sarcasm tag?

[Doug Taylor]

Oh yeah!

(I think the idea of a merger with NWA is straight-up doofus)

[LoadMasterC141]

Well Ok one comment:

It is sad that the MAIN motivator for this is to get the investors richer in the short term, so they can then quickly bail out of what will be an obvious failure in the long. It is not in the best interest of the companies, their workers, the economy, and to that end the American public; Just a few rich people getting richer at the expense of everyone else.

[Tram]

Originally Posted by Doug Taylor

Oh yeah!

(I think the idea of a merger with NWA is straight-up doofus)

Maybe it won't go through..

[Waltpilot8]

Originally Posted by LoadMasterC141

Well Ok one comment:

It is sad that the MAIN motivator for this is to get the investors richer in the short term, so they can then quickly bail out of what will be an obvious failure in the long. It is not in the best interest of the companies, their workers, the economy, and to that end the American public; Just a few rich people getting richer at the expense of everyone else.

Alright! Someone else finally realizes the truth behind this whole thing! Hopefully those same investors are not the ones who are putting the cash into the Congressmans' pockets.

[Doug Taylor]

And besides, I don't want to eat cheese curds and lutefisk in my crew meal while listening to stories about "Oh ya, YOOO betchya! Back in Saint Olaf..." stories when I'm on reserve as a gear puller on a DC-9.

Heavy amounts of

I love my NWA peeps, but I just don't want to shack up!

[Goldmember]

Welcome to Wall Street (ever see that movie, involves an airline!)- Management only has one goal, increase shareholder value, period. Do it, or they're out. Problem is, they're having to do it with a commodity product with ever increasing cost. So, what do they do? Enter a cycle of mergers and splits, it's basically the ONLY thing they can do to make it seem like they are doing ANYTHING. I mean honestly, what would you do to increase shareholder value? You can't reinvent the wheel. Transportation is transportation and offering a "better" product just doesn't hold water these days, demand is for low cost point to point travel. Period. The guys in management don't have meetings about "how can we make this a better company? How can we become the most respected airline in the business? How can we make this the best company to work for in the industry?" The only meetings they hold are "how can we increase shareholder value?" Positive buzz from a possible merger get's the wall street speculators moving, giving the stock a quick boost and then, my personal favorite, gives management an excuse for more time: "folks, bear with us as we are on the right path to greatness, we are just experiencing growing pains associated with the dificulty in combining two great companies." It buys them time with creditors, their shareholders, and sometimes it can get employees to make concessions with promises that after the initial dificult times, things are going to be better in the long run...yeah, we've seen how that one plays out.

[cfii2007]

Bluestar Airlines.........

[Velocipede]

Originally Posted by Tram

Maybe it won't go through..

As long as the greedy NWA bastiges insist on screwing junior DAL pilots, it won't.

[SeanD]

Originally Posted by Doug Taylor

And besides, I don't want to eat cheese curds and lutefisk in my crew meal while listening to stories about "Oh ya, YOOO betchya! Back in Saint Olaf..." stories when I'm on reserve as a gear puller on a DC-9.

Heavy amounts of

I love my NWA peeps, but I just don't want to shack up!

LMFAO Sorry but that there is too funny.

[Mad Doggy Dog]

I have to disagree with this article and play devil's advocate for the NW/DL merger. And I did stay at Holiday Inn Express numrous times while flying domestic.


The problem with the airline biz lies more on the revenue side than the cost side. Consolidation reduces cut-throat competition which will bring increased pricing power. Worked pretty well for the oil companies and banks recently. Might even work for pilot union pricing power too.


SIZE MATTERS.....Despite what many men tell their ladies. High yielding business customers are where the money is at, especially on international. And frequent flier miles are like crack cocain to these folks. You want them hooked on your airline.


Besides, it's hard to make money if your primary business is flying families of mouth breathing walmart shoppers to FLL for vacation. Southwest, and their peers, have very low profit margins.....outside of revenues generated from gambling on fuel hedges.


Also, keep in mind, a merger between DL and NW is effectively a merger between DL, NW, Air France and KLM....and Alitalia. This will make for the world's most powerful network with the most complete global coverage. And we compete on a global market! On a related note, keep in mind that with the US dollar going down the toilet, we are becoming the new India. US based airlines are the low cost carriers among the developed world. Thank you, come again!


But what about cost?


First of all, cost savings can be realised by canning the upper management structure from NW which seems to have been suffering from cranial frostbite for the last few decades. Even if we kept them on the payroll but locked them in a dark room, we would still be better off.


Most importanlty, the days of cheap oil and cheap capital which, [combined with management's target fixation on cheap labor,] lead to the explosion of growth for 50 seat RJs, are over. These aircraft now have incredibly high unit costs. Re-allocating them..........many to the desert......or to short routes, and replacing them with 737-700s or A-319s will yield tremendous savings. Look for eventual hub consolidation....despite what they told the regulators in order to get the gubmint to approve the deal. CVG will still have a few token flights to business centers and other hubs, but will be greatly downsized. Same for MEM. A Harley Davison exec flying from MKE to LHR [London Heathrow] can do so more efficiently if he rides a A-320 through DTW as opposed to taking a CRJ through CVG or DTW as he does now. There will still be a market for 50 to 76 seat RJs, but it won't be on trunk routes.


Size still matters. Economies of scale lead to competitive advantage.


Hub consolidation: Did I mention that DTW kicks the snot out of CVG as a hub? Well it does! DTW has much higher capacity, is a much nicer facility, has room for easy expansion, and has a de-ice "car wash' run by people who've actually seen snow. DTW has a sushi bar run by Japanese people. DTW has 2 coney island diners run by Greek people. And coney island style chili blows away the Skyline style chili hands down. CVG has mostly really bad fast food run by hillbillies or carnival folks. DTW, which 6x times larger than CVG, has good origin and destination traffic. DTW is the world mecca for manufacturing technology. CVG is the mecca for toilet paper. Nuff said. I'd go off on MEM but I do not want to get the ghost of Elvis upset.


But what about the pilots? Delta is still hiring about 70 pilots a month and needs to do so for the rest of this year alone. NW still needs over 300[?] pilots this year despite their parking of the diesel 9s. Delta has 777s on order as well as 737s. Some used MD-90s with very low miles driven by little old ladies to church only on Sundays may be coming our way too. NW is getting 787s and more Airbuses.


Will there be mass fuloughs among small jet providers? Doubt it! Even if they shrink in size, pilots are still leaving for jobs at major airlines, foreign airlines, corporate jobs, etc.


My gut feeling is that a deal will soon be reached regarding DL-NW pilot seniority list integration, and the merger will soon come to fruition.....


.......Whether we like it or not.




One more thing: RED WINGS RULE !!!!!!!

[Baronman]

So you're saying this deal makes sense because DTW has good chili versus the CVG food services being run by circus carnies?

[MQAAord]

The DL terminal in CVG is a fairly sizable, nice facility.

It is home to the "World's Slowest McDonalds". Bill would talk about the World's Slowest McDonalds there, and I never really believed him until one day I was going through CVG and I was going to grab something quick between flights. I waited in line. And waited. And waited. Then I finally got to the counter and I really don't think they could have worked much slower if they actually tried to! It really was THE World's SLOWEST McDonalds!

[deek]

Originally Posted by Doug Taylor

And besides, I don't want to eat cheese curds and lutefisk in my crew meal while listening to stories about "Oh ya, YOOO betchya! Back in Saint Olaf..." stories when I'm on reserve as a gear puller on a DC-9.

Heavy amounts of

I love my NWA peeps, but I just don't want to shack up!

Doug, are you making fun of my Minnesota peeps??? Don't make me get Viking on your @$$

[tonyw]

Look, the only people this will benefit will be the boys on Wall Street. They make money by merging the companies, and they make money when they take them apart.

They don't care whether or not it benefits customers, employees or shareholders. As long as they're making money, that's what matters to them.

[SmoothLanderJ]

Originally Posted by Tram

Maybe it won't go through..

Hopefully not..................

[Doug Taylor]

Originally Posted by MQAAord

The DL terminal in CVG is a fairly sizable, nice facility.

It is home to the "World's Slowest McDonalds". Bill would talk about the World's Slowest McDonalds there, and I never really believed him until one day I was going through CVG and I was going to grab something quick between flights. I waited in line. And waited. And waited. Then I finally got to the counter and I really don't think they could have worked much slower if they actually tried to! It really was THE World's SLOWEST McDonalds!

OMG! I thought it was just me that made that observation.

Yes, that's the world's slowest McDonalds. Far slower than the McD's next to Spondivits in ATL.

Last time I went there in CVG, there were eight people standing around, one person with his iPod on in one ear, cellphone in the other, taking orders.

And one person cooking.

[Doug Taylor]

Originally Posted by deek

Doug, are you making fun of my Minnesota peeps??? Don't make me get Viking on your @$$

I live in a "Cash 'n Carry" state. (well, it used to be)

Bring it on, Lutefisk boy!

[SD3Dog]

Originally Posted by Goldmember

Welcome to Wall Street (ever see that movie, involves an airline!)- Management only has one goal, increase shareholder value, period. Do it, or they're out. Problem is, they're having to do it with a commodity product with ever increasing cost. So, what do they do? Enter a cycle of mergers and splits, it's basically the ONLY thing they can do to make it seem like they are doing ANYTHING. I mean honestly, what would you do to increase shareholder value? You can't reinvent the wheel. Transportation is transportation and offering a "better" product just doesn't hold water these days, demand is for low cost point to point travel. Period. The guys in management don't have meetings about "how can we make this a better company? How can we become the most respected airline in the business? How can we make this the best company to work for in the industry?" The only meetings they hold are "how can we increase shareholder value?" Positive buzz from a possible merger get's the wall street speculators moving, giving the stock a quick boost and then, my personal favorite, gives management an excuse for more time: "folks, bear with us as we are on the right path to greatness, we are just experiencing growing pains associated with the dificulty in combining two great companies." It buys them time with creditors, their shareholders, and sometimes it can get employees to make concessions with promises that after the initial dificult times, things are going to be better in the long run...yeah, we've seen how that one plays out.

Well said. I agree 100%. The only thing you left out is an excuse for the big wiggs to pull another multi million bonus somewhere in there.