Delta and Northwest Combine to Create Giant Headache

I should have known this was coming. Last night, I had just finished up my post for today when the news broke that Delta and Northwest had finally agreed to merge after months of painful speculation. Now, the management nightmare begins. There are so many issues here, it's hard to even keep track.

The basic agreement effectively has Delta taking over Northwest. Delta's top two guys will stay on to run the new company, which will be called Delta, and the headquarters will be in Atlanta. Strangely, they also say they will have executive offices in Minneapolis, New York, Tokyo, Amsterdam, Paris, and Djibouti. Ok, maybe I'm making up that last one, but still, doesn't that seem unnecessary? Anyway, there are plenty of big issues in a merger this size, and that's bound to keep management distracted from actually running an airline for a long, long time. Probably the biggest headache on the horizon involves labor. It could actually be rough enough to make the US Airways still-unfinished labor integration look simple. The biggest issue is the pilots. Why? That's the only major labor group that's unionized at Delta. Meanwhile, Northwest has unions for just about everything. So the pilots will have to deal with technical integration issues as well as the physical and emotional ones that accompany any combination of this size. While an integration is easier with non-union employees from a technical standpoint, the physical and emotional toll will still be large.

Compounding the pain with the pilots is how management went about completing this deal. The original plan was to come to an agreement on pilot integration before announcing a merger. That fell apart back in February when they couldn't agree to a seniority integration plan. So what did they do now? Well, Delta "reached agreement with the company's pilot leadership to extend its existing collective bargaining agreement 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."

Though that may not sound like English, it means that Delta gave its pilots a raise and a stake in the new company to keep them fat and happy. What did Northwest pilots get? Nut n' honey. In fact, the Northwest pilots are now officially against the merger. I think Delta is hoping that they can get the Northwest pilots to capitulate on integration rules in exchange for a raise. Will that work? Uh, it's not looking so good so far. All I know is that I feel bad for the Northwest guys since they've now been sold down the river by their management team. They have some tough decisions ahead.

But don't think labor is the only thing that will keep management up at night. Actually, it probably won't even be on the top of their list. For the merger to really pay off financially, the airline needs to work on cutting capacity where it makes sense.

Delta was clear in saying that "This combination will expand Delta's international and domestic reach, and there will be no reductions in the number of hubs," but that doesn't mean they won't cut flights. How will they do it? This certainly doesn't look good for Cincinnati and Memphis. Both cities are relatively small and are overserved right now. This merger will allow the hinterland around Cincinnati to be served by Detroit and Minneapolis while the Memphis hinterland can be served via Atlanta. Will the hubs disappear? Maybe not, but they may also just be saying that to placate the politicans. And that leads me to the next point of pain . . . regulatory hurdles.

This will probably get ugly, and that's even with a Republican administration that is likely to be friendly to the deal. Why? Well, they say all politics is local, right? And unfortunately for Northwest, they've got Congressman Jim Oberstar in their Minnesota backyard. Oberstar has come out publicly against the merger. Back in February, he even said, "We will do everything we possibly can to stop this from happening." And why does that matter? He was the senior Democrat on the Transportation Committee for years, and he has a lot of sway. Even though he has no technical ability to stop the merger, he can make a lot of noise.

It doesn't help that Northwest made a deal with Minnesota during bankruptcy to keep its headquarters and a large hub there or it would have to face hefty financial penalties. Oberstar is clearly going to be doing anything he can to keep the airline's large presence in Minnesota. And that explains why Delta is keeping "executive offices" in Minneapolis as well. Can they do enough to please Oberstar or will he still need to puff out his chest and claim he's fighting for the people he needs to vote for him, er, I mean, the consumer?

This is just one example of how complicated this is going to get. There will be hearing after hearing to decide whether this should be approved or not. It's going to take months. Delta/Northwest will claim that the new global airline will be better for customers whereas the other side will argue that it will reduce competition and fares will rise.

How do I feel about it? I'm not against it in theory. Were I running an airline, I'd rather focus on running the operation at hand instead of distracting myself with a massive merger just as the economy heads downhill. But if this reduces capacity and raises fares to sustainable levels, then it's not a bad idea. It's all going to lie in the execution, of course. Hopefully the botched dealings with pilots aren't a sign of more problems to come.