Delta and Northwest Announce Merger: It’s About F*@king Time

It’s on like Donkey Kong. Yesterday, Northwest and Delta finally announced that they would merge. This of course follows speculation that began back in 1932 when C.E. Woolman and Lewis Brittin first discussed such a possibility. Now, before I go any further, let me just say once that this all completely depends upon receiving antitrust approval from the government. I’d argue that this administration is likely to be friendly to such a merger, but it’s still far from guaranteed. Enough of the disclaimers; let’s get it on.

You can read the bible-length press release issued by both airlines if you’d like to get all the details. 08_02_21 dlnwmerger If that’s not enough, you can go to the new Delta website found at the ridiculous url of newglobalairline.com. I’ll just focus on what this means to you, the customer. But first, a brief rundown of the deal.

Let’s make no mistake about it; Delta is the lead dog here. The name of the combined airline will remain Delta and it will continue to be headquartered in Atlanta, though oddly there will be “executive offices” in Minneapolis as well. Delta CEO Richard Anderson will be in charge, and his second lieutenant Ed Bastian will continue as President and CFO. So what does Northwest get? Well, the shareholders get 1.25 shares of Delta stock for each share of Northwest stock, and everyone else gets . . . um, screwed.

Routes
On paper, this airline looks mighty sexy. You’ve got Delta’s strengths in the South, Northeast, Europe and in the West to a limited extent. Combine that with Northwest’s domination in the Upper Midwest and Asia and you’ve got very little overlap at all. Now, about the hubs. Delta says it “will maintain all hubs at Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, Salt Lake City, Amsterdam and Tokyo-Narita — each of which will benefit from improved global connectivity.”

The guys who wrote that release were very careful to say that no hubs will be eliminated but notice that they don’t say the same about flights. In fact, they do say in the release, “The transaction is expected to generate more than $1 billion in annual revenue and cost synergies from more effective aircraft utilization, a more comprehensive and diversified route system and cost synergies from reduced overhead and improved operational efficiency.”

Wow, that’s a lot of bullcrap, isn’t it? Anytime I see “synergies” mentioned, I throw up a little. But what this says to me is that they’ve got $1b worth of ideas on how to make this airline more efficient. And that has to involve cutting capacity out of the system. Where are the most likely candidates? I’m looking at you, Memphis and Cincinnati.

Yes, they should keep all their “hubs” if they use that term loosely. By the time they’re done with Memphis and Cincinnati, they might look more like Indianapolis. See, all those small Upper Midwest cities that Delta serves from Cincinnati can now very adequately be served from Detroit and Minneapolis. And all those southern cities that Northwest serves from Memphis can be served from Atlanta. Heck, those two cities themselves are only 400 miles apart. So, I would completely expect to see those hubs shrunk down. Whatever cities they can serve due to strong local demand, they will. But many of those other cities can be better served elsewhere. And Northwest has plenty of old DC-9s that they can just send to the boneyard to easily reduce capacity. And don’t forget, Delta just kicked Mesa’s 50 seaters off the property, so they now won’t need to replace that capacity either.

Internationally, this will probably only result in growth. There aren’t any real overlap issues here. With the recently approved antitrust immunity approval from the US government, they won’t even have to wait until the merger is done to start coordinating with Air France/KLM on routes and fares over the Atlantic. In the Pacific, Delta has just about no presence at all, so this will only create more opportunities.

Onboard Product
Great, so there will be a bunch of flights, but what will it be like onboard? We get one clue from the press release. “The combination will accelerate the upgrading of existing international aircraft with lie-flat seats and personal on-demand entertainment.” Now I’m not sure if they consider Northwest’s angled lie-flat seats to be “lie-flat” but I’d bet those seats will be hanging around for awhile since they’re pretty new. As the Northwest-ordered 787s get delivered, however, I’d expect a true lie-flat product more along the lines of Delta’s new seats.

It will be interesting to see what else Delta plans to do here. It’s probably a safe bet that the current Delta onboard product will become the standard. Northwest currently has no inflight entertainment on their domestic fleet and Delta has been installing personal televisions on a pretty good chunk of their fleet. Will this change their installation plans at all? We’re getting way into the weeds here. This will all come out in time.

Customer Service
Oh no, this isn’t going to be good. If you thought Doug Parker over at US Airways had a tough job integrating labor groups, that’s now going to look like a walk in the park. Originally, Delta and Northwest said that they wouldn’t merge unless they could get the pilots to agree to an integration plan before the deal happened. Um, yeah, that didn’t work out so well and the deal fell apart a couple months ago because of it. Why are they so focused on the pilots? That is the only large employee group at Delta that’s unionized. Ah, now it becomes clear.

So what do they do? Delta goes to its pilots and gets an agreement with them that will go “through the end of 2012. The agreement, which is subject to pilot ratification, facilitates the realization of the revenue synergies of the combined companies once the transaction is completed. It also provides the Delta pilots a 3.5 percent equity stake in the new company and other enhancements to their current contract.”

Again, what the hell does that mean? It “facilitates the realization of the revenue synergies of the combined companies”? Please shut up. No, just stop talking. I can’t take it. What this actually means is that the pilots get good raises every year until the contract is done and they walk away with a stake in the new company. But what about those Northwest pilots? How about . . . nada. In fact, they’ve already said that they’re against this merger.

On the brighter side, “The company also expects no involuntary furloughs of frontline employees as a result of this transaction and the existing pension plans for both companies’ employees will be protected.” Well that’s good, but that’s also dependent upon them getting enough voluntary furloughs to make up for the job cuts they’ll need to make this work. I’d guess that they’ll be successful on that front. Northwest employees will probably run away in droves.

So, you can expect all kinds of customer service hiccups as this thing goes through. Just hold on tight and try not to cry too much.

Summary
Let’s see, what else can I say? This has been a long time coming. Is it as necessary as everyone claims it is? I wouldn’t say that, but I’m not going to say it’s bad either. It all depends upon how well they execute. If the combined airlines can trim Cincinnati and Memphis at the very least, the industry will be better off. Will fares go up? They should. There, I’ve said it. Hate me if you like.

The airline industry has been an unstable roller coaster ride for 30 years. If this allows airlines to better match capacity to a level where they can actually fly profitably, then it’s a good thing. Though low fares are always nice for the customer, it’s better to have a stable airline industry that can actually survive the ups and downs.

Oh, one more thing before I go. A lot of you have written me over the last few months asking why I hadn’t said a word about the rumored merger. The reason? I’ve seen way too many rumors and barely anything actually come to fruition. So, I won’t speculate on the rumored Continental-United merger. For those who don’t know, Northwest holds a “golden share” in Continental. That means they have the ability to block Continental from merging with anyone. This stems from a deal they made years ago, but when Northwest enters a merger agreement, Continental can buy that back for a hundred measly dollars. We know Continental and United have been talking. If it turns into something more, then I’ll be back with another post.

Until then, I’m going to continue to digest this avalanche of info, and I’ll update you when I find something interesting.

33 Responses to Delta and Northwest Announce Merger: It’s About F*@king Time

  1. DRG says:

    Good analysis!

  2. Lucky says:

    Great analysis Cranky! Just to clarify, CO can now buy back their “golden share,” right? My understanding is that the intent to merge is enough for CO to buy it back.

  3. CF says:

    I guess you’re right, Lucky. Continental says so themselves.

  4. Dave says:

    What about fleet integration? How does integrating these two fleets compare to what US Airways & America West had to pull off?

  5. CF says:

    Integration? What integration? They have wildly different fleet plans. In fact, the only overlap they have is with their 757s. Delta has around 130 and Northwest about 50 I believe, and they’re all powered by PW2037 engines. But that’s it.

    NW flies 747 and A330 widebodies while DL has 777 and 767 aircraft. Delta narrowbodies are MD88/90 and 737-700/800. Northwest flies DC9 and Airbus narrowbodies. So, there won’t be much commonality here.

  6. What happens with the non-union employees at Delta whose counterparts at NWA are unionized? Doesn’t this have the potential for significant grief?

  7. Kromer says:

    Will this have any affect to Midwest, which is fractionally owned by Northwest?

  8. CF says:

    Nick – Good question. Since the employees are non-union, Delta has a ton of flexibility. My guess is that you won’t see too many non-union groups left after this is over. The union guys will continue to work under their contracts, and Delta will try to integrate the groups eventually. I think it’ll be lot easier than it will be for the pilots. The NW pilots have been put in a very bad place.

    Kromer – Very good question (especially since I’m flying them in August). Things look good for Midwest right now. In the new amendment to the Delta pilot contract, they agreed to allow Delta to codeshare with Midwest and to keep the stake in the airline going forward. So, that’s a good sign. Maybe they’ll just fold them into Delta one of these days.

  9. Dave says:

    I guess that’s my question, then – does the little commonality make the merger logistically harder or easier? Or is it a nonfactor?

  10. CF says:

    Dave – That’s a good question. On the plus side, having completely separate fleets means that having separate employee groups doesn’t mean as much in a lot of ways. On the other hand, you can’t get some of those same efficiencies you might like to have with a standardized fleet.

    I’ve been told that if you have one fleet of 200 planes or two separate fleets of 100 planes each, the gains aren’t that great in fleet commonality. It’s only smaller fleets that get the real benefits. Not sure how true that is, but it would indicate that this won’t be a big problem.

  11. Francesco says:

    really nice analysis, and I agree on the word “synergies”!! But, I don’t buy the argument that this may reduce capacity, allowing fares to increase, and airlines to make more money. You know that as soon as they start shedding capacity, somebody with too much money and time will decide to launch another low fare, low cost, new fangled airline and there goes the capacity argument.

  12. CF says:

    Francesco – Normally I agree with you completely, but things might be different now. Getting enough cash to start up an airline in this economy is just about impossible. So, I’d be surprised to see much start up.

    Will existing guys pick up the slack? It depends. I’m sure Southwest, AirTran, or even Frontier are looking for new opportunities, and if Cincinnati or Memphis gets shrunk enough, then others may jump in. That being said, it will hopefully be a more rationale capacity response. We’ll see.

  13. CF do you know if Delta’s employees would get stapled to the bottom of the seniority list at a merged Delta/NWA, or do they keep their current seniority even though they’re not unionized.

  14. John M says:

    Well, I’ve got a Northwest ticket to China for next week, and thanks to my company cost-cutting for the downturn, I’m in coach. Now I get the added benefit of flight attendants worried about their jobs. This is going to be such a joy.

  15. CF says:

    Nick – I would be shocked if they stapled DL employees at the bottom of the list. That’s a recipe for disaster. They will have to find a way to thread them somehow.

  16. Good call says:

    That made me throw up a little too. And good call on the bullcrap. Keep up the excellent work.

  17. Mike says:

    It sounds more like a swallowing than a merger. At least most (at least I think so) people will be allowed to keep their jobs, unlike in the Delta-US Airways deal/takeover they were messing w/ in ’06.

  18. Oliver says:

    CF, how do you think will they deal with their fleet incompatibilities? Retire the DC-9s? Trade their 737s for UA/CO’s narrowbody Airbus fleet?

  19. dskluz says:

    Actually, the airlines have no aircraft in common at all — Northwest’s 757’s have different engines than Delta’s, which makes them incompatible in repairs and gives them slightly different specifications. Pilots would also have to be trained for both engines. Northwest’s 757’s will probably die middle-aged if this goes through. And, yes the DC9’s will be scrapped immediately.
    Yeah, it’s a swallowing, though. But don’t be fooled – there will be plenty of job cuts to go around.

  20. Craig says:

    Now THAT was some quality Crankyness…and pretty much spot-on. MEM and CVG are so very, very doomed.

    On the fleet problem, I’d say keep in mind that besides the time it will take for the corporate merger to take place, it’s likely to take even longer before they’re on a single operating certificate, so keeping the existing fleets in place is not that big a deal initially. And having several types in service isn’t as big a deal as it may seem – look at Air France for an example. The A320/737/MD-88 overlap may not get addressed until Airbus and Boeing announce their next-gen aircraft. Widebodies are anybody’s guess.

    And just to confirm, the terms of the “golden share” are that CO can buy it back (for $100) as soon as NW announces an intention to pursue a merger, even if it never comes off for any reason. Suspect that the accountants in Houston have already written the check!

  21. CF says:

    Oliver – Assuming they cut capacity, I would expect to see the DC-9s go first. Since they’re owned outright, they can just park them without having to continue to pay for them. As for the rest of the incompatibilities, I don’t think we’ll see any changes for a long time. As Craig says, we may not see the narrowbody issue addressed until the next generation of narrowbodies comes out. And widebodies? Well, they’ll probably ditch the A330/767 for the 787 eventually, but that’s also a long way off.

    dskluz – I think you’re wrong about that. Both airlines use PW engines on the 757. Delta says, “TechOps currently maintains more than 150 PW2037-powered 757 aircraft for Delta and its customers.” About Northwest, “The first Pratt & Whitney-powered 757-300 is destined for Northwest Airlines. The North American carrier currently operates a fleet of 55 757-200s that are equipped with Pratt & Whitney engines.” Now, some could be PW2037 and other PW2040, but that’s not a huge difference.

  22. Yo says:

    Poor Delta, gonna have all those union goombas from NW to figure out.

    No thanks.

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  24. Claudine says:

    That was a very good in-depth analysis. I hope that they keep the personal televisions and make them standard on on planes. I wonder if they are going to make up pay for headphones? Yuck!

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  26. Mike says:

    It appears that Parker is itching to get US Airways in on this merger fun. http://www.charlotte.com/business/story/584663.html

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  28. Adam says:

    Do you think the NW pilots can still derail this “merger”? The politicians? Here in Mpls/St. Paul I can tell you there is plenty of opposition…including the wishful thinking that NW should be the aquiring company.

    Personally I’m against the merger because I don’t trust Richard Anderson farther than I can spit. And as a NW frequent flyer I’m on plenty of Delta codeshare flights and their service is abysmal at best. Not that NW is great, but both could learn much from their Skyteam partners Continental.

    The key to fixing the problems in the airline industry are not mergers but contraction. The small airlines have been dropping like flies lately, but it’s high time one of the mainline carriers gets liquidated ~ gone, adios, goodbye. As a matter of fact, both Delta and NW recently emerged from bankruptcy. They should’ve both been liquidated then. End of story. Merger or not, I think they’re both doomed for another bankruptcy.

  29. CF says:

    I´d be surprised if the pilots could derail this merger. If it goes through, they´re just going to have to figure out how to make it work best for them.

  30. dfwwidget says:

    The Delta pilots came to Delta to try to work out and deal. Delta did not go to them.

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  32. Joe says:

    While most of the article was spot on…it started off WHOAFULLY inaccurate. You must do your due diligence.

    NORTHWEST was and is clearly the lead dog in this transaction.

    Firstly, cost dictates which name will be kept. Delta carried a $9.3 Billion NOL bankruptcy credit that can not be carried over to a new owner. vs. NWA’s $3.1 Billion. (2007-08 10K)

    Secondly, Delta is the larger of the two, you cut your costs in half by changing NW into Delta (painting planes, uniforms, branding, IT) vs. Delta into NWA.

    Thirdly, Delta has a better chance of staying non-union (oustside of pilots) under the Delta brand (by making the larger Delta employees think they are buying NW) vs. Unionized NWA taking over non union Delta, thus continuing the non union savings of hundreds of millions in labor compensation.

    It is clear from former Northwest CEO Anderson’s top executive management (2/3rd’s former NWA)that Delta was the takeover target of Northwest. Remember, Anderson stayed at United Health Care just long enough to get rid of his NWA non compete clause.

    Northwest took over Delta, kept the Delta brand (risky move considering how old Northwest is in Asia and the traditional habits of Asians).

    Operationally, the “New” Delta will improve drastically as NWA was the industry leader in on time and profitability of the 6 majors.

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