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Wednesday
Feb202008

Pondering a Delta – Northwest Merger Yet Again: Irony and Sad Irony

Review of the Catalysts

On February 18, 2008, Justin Baer of the Financial Times wrote a very good – must read - story outlining the catalysts underlying the US industry’s current move to consolidate. More importantly he provided the historical context as to why then was not right for Delta and why now is right. In the face of $100 oil, Mr. Baer reminds us that the industry is still susceptible to economic cycles. As the US economy struggles we now hear stories of its effect – potential effect - on the European economy.

I raise the issue of non-US economic activity because the current consolidation environment is every bit about the ability to address the fragmentation of the US domestic market as it is to position US airlines carrying the US flag around the world to be strong global players again. Economies of scope, scale and density are certainly important in the domestic market but will prove essential in the global market as competition from known competition increases.

But more importantly, it is the competition from the unknown competitors that requires the US industry to address its weaknesses today or face a continued loss of global market presence tomorrow. In the article he writes of the various stakeholders – labor, Oberstar, low cost carriers – and their respective views on change.

Irony #1

Yesterday, MSN's MoneyCentral ran a piece entitled: “$100 oil may just be the beginning”. Isn’t it ironic as we await word from the pilots that the number 1 catalyst for the industry to seriously consider consolidation - oil prices - oil closes above $100 per barrel for the first time? Remember when United and others suggested that oil at this level, and if sustained, would cause each carrier to evaluate the possibility of reducing capacity?

Consolidation more than likely results in a better outcome for communities of all sizes than does an oil environment that renders some markets not economic to serve. In no consolidation scenario being discussed are there markets that would be disenfranchised from the air transportation system. This is because network efficiencies can be found to maximize revenue – or to minimize the loss of continuing to serve marginal markets. Fewer frequencies is a much better outcome than outright exit from currently serving a market.

So rather than fear the loss of service due to consolidation, the alternative of losing service due to changed economic condition – whether oil or economy-driven - is every bit as great, if not greater. Something to consider for the naysayers.

Irony #2

Liz Fedor of the Minneapolis Star-Tribune writes about the issues facing the pilots of each Northwest and Delta on the difficulties of negotiating the workings of a merged seniority list. I am one who believes that time spent negotiating these details today will result in significant time saved tomorrow in getting the deal approved when the transaction in its entirety is scrutinized by the regulators, Congress and the various publics that will opine.

Irony #2a – Sad Irony

Whereas yesterday many stories ran regarding the status of the pilot negotiations at Northwest and Delta, the National Mediation Board approved the application of the US Airline Pilots Association (USAPA) to conduct an election for representation of the former US Airways and America West pilots. Why is this ironical and sad to boot? Because this is precisely what the management and labor at each Northwest and Delta are trying to avoid.

Merger synergies typically need to be captured early in the deal. US Airways realized immediate revenue line benefits of combining their two networks. But until these labor issues are concluded, synergies on the cost side are muted, if not mitigated. So the nation’s smallest network carrier just keeps getting smaller and the upside for its pilots will keep getting less and less. I agree with Captain Prater that this decision is emotional and not rational and does nothing to move the ball forward for either the pilots or the combined companies.

The USAPA is making promises it cannot keep. And that is why it is well worth waiting for the two labor parties at Delta and Northwest to come together. The wait is worth it for all involved.

And besides, is the anticipation of a final deal really any different than any other negotiation that takes place routinely in this industry?