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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.

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.

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.

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