The Northwest and Delta merger
How's does a combined Delta-Northwest airline stack up?
Together, the two carriers will form the biggest airline in the world. The combined airline has more than 1,000 planes, about $32 billion in annual revenue and carries about 175 million passengers a year, counting regional jet operations.
Why is the deal happening?
The answer depends on whom you ask. For years, many airline execs and industry analysts have been saying there are too many U.S. airlines for the industry to be consistently profitable. They contend consolidation is inevitable. But critics say the push for mergers comes from short-term investors, airline executives, consultants and others who are only interested in trying to enrich themselves. Merger speculation really took off in early January, as oil prices soared and Northwest and Delta shares hit post-bankruptcy lows. At that point, Northwest shares were down about 50 percent; Delta, 40 percent.
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Will it fly?
Maybe. The U.S. Department of Justice could block the deal if the department believes it would seriously reduce competition and hurt consumers. Combined, Northwest and Delta would be the biggest airline in the country. But currently there's not all that much competition between the two airlines. Delta is strong in the East, South, Europe and Latin America. Northwest's strengths are in the Midwest and Asia.
Though the Transportation and Justice departments are the bodies that would need to sign off on a merger, Congress can hold hearings and try to exert political pressure on a review of the deal.
Minnesota congressman Jim Oberstar says he is strongly opposed to airline industry consolidation. Oberstar, chair of the House Transportation Committee, has said he specifically objects to a merger between Northwest and Delta.
No doubt, state and local political leaders in big Delta and Northwest markets will do what they can to try to make sure their cities or states fare as well as possible as the airlines merge. Minnesota Gov. Tim Pawlenty has signaled the state could provide Northwest with financial and other incentives to maintain jobs and air service in Minnesota.
Frequent flier miles?
Don't worry about them going away. It's highly unlikely the combined airline will mess much, if at all, with frequent flier reward programs, not if it wants to keep its most loyal customers happy. Delta and Northwest already allow passengers to earn and redeem points on each others' flights.
What happens to Twin Cites flights and Northwest jobs here?
Industry analysts and consultants believe the Twin Cities hub will be safe in a merger. They don't see Northwest doing much to scale back flights or destinations. That's because of the location and profitability of the Twin Cities airport.
As a hub, the Twin Cities airport serves as a collection point for Northwest to gather passengers in great numbers from around the country and route them to their final destinations.
In 2007, Northwest and its regional airlines carried about 26.5 million passengers to or from the Twin Cities airport. About 60 percent of those passengers were connecting passengers --passengers switching flights in the Twin Cities.
Currently, Northwest serves more than 160 domestic and international destinations nonstop from Minneapolis-St. Paul, including Tokyo, London and Amsterdam. Nonstop service to Paris starts in April.
Northwest averages 480 departures from the Twin Cities Monday through Friday. About 300 of those flights are on big jets; 180 are on regional jets or prop planes.
Isn't Northwest legally bound to keeping its headquarters and hub here?
Well, in exchange for help received from the state and Metropolitan Airports Commission, Northwest has promised --several times--to keep its headquarters and hub here. But that doesn't keep the airline from trying to wiggle out of one or both of those commitments.
Northwest has promised to fly an average of 227 daily flights out of the Twin Cities in exchange for financial incentives granted by the Metropolitan Airports Commission. That's for aircraft with at least 70 seats.
Northwest also has a contract with the Metropolitan Airports Commission to lease about 100 gates at the airport ... 22 through 2015 and another 79 through 2020. Northwest could try to get out of the contract. But the airport would likely force Northwest to pay for the gates, which cost Northwest about $30 million a year.
If Northwest reneges on hub or headquarters pledges, the airline also stands to lose about 450 million dollars. That includes $215 million in rent savings and airport concession revenue through 2020.
Northwest is also on the hook to repay $245 million the carrier owes to the airports commission. If Northwest pulls its hub or headquarters, the commission could demand immediate repayment of the loan.
Last year, Northwest promised the commission that the airline would keep its chief executive, chief financial officer and a majority of other senior management team members in Minnesota.
About 2,300 people work at Northwest's headquarters campus in Eagan, which includes the airline's information technology operations and flight training center. Overall, Northwest has about 12,000 employees in Minnesota, down from nearly 21,000 employees at the end of 2000.
How will it affect competition in the local market?
It's unclear how much opportunity the merger may provide for a Southwest, JetBlue or other carriers to enter the Twin Cities. Northwest and its regional airlines dominate the local air travel market, carrying about 60 percent of travelers whose trips start or end here.
The number two airline at the airport is Sun Country. In 2007, it carried about 1.5 million passengers through the Twin Cities airport. That's about equal to one-twentieth of Northwest's action at the airport. Last year, Northwest took nearly 27 million passengers through the airport.
What about fares?
One reason carriers want to merge is to reduce the supply of seats available on the market. Airlines hope that would make it easier for them to raise airfares. But mergers could provide opportunities for low-fare carriers to expand their operations, perhaps limiting the power of traditional airlines to increase fares. Right now, though, the big driver for fares is fuel. Most airlines are trying hard to pass on fuel costs through fuel surcharges.
How may customer service be affected?
Mergers can be very tough on customer service. There are great logistical challenges in merging airline operations and integrating workforces. History suggests service will likely suffer in a merger. Perhaps for months or years.
What about those past megers?
The consensus is that the 1986 Northwest-Republic merger was a good thing because neither airline was likely to survive on its own. But the merger was tough for the airline, its employees and customers. Labor unrest led to chronic flight delays and baggage problems.
In the first month of the merger, October 1986, about 40 percent of Northwest flights were late, according to news reports at the time. It took more than a year for Northwest to resolve some service problems. Employees fought bitterly about seniority rights. That's because seniority directly affects pay, benefits and job security. It took years to resolve seniority issues.
The latest big airline marriage -- involving America West and US Airways -- has been plagued by service woes and ongoing labor discontent. That merger can't provide much reassurance to customers of other airlines that could combine. For the first half of 2007, nearly 40 percent of US Airways flights were late. But the airline has been improving in recent months.
How do the labor unions figure in this?
Northwest's unionized employees have been quite concerned about how they will fare if the airline combines with Delta. They've been worried about pay, benefits, and job security. Northwest's pilots say they've made it clear to the airline's management that any merger will require the cooperation of pilots. And in return for their cooperation, pilots told Northwest they wanted the airline to roll back deep pay and benefits cuts made in recent years. Analyst Vaughn Cordle estimates it could take nearly $1 billion to raise the pay of employees at both airlines to current industry averages. And Cordle expects pilots will be especially adamant about boosting their compensation, perhaps to a new industry high.
Currently, Delta pilots are better-paid than their Northwest counterparts. For instance, a captain with ten years' experience flying a plane with about 100 to 140 seats makes about $6,000 a year more at Delta than at Northwest. ($123,000 a year at Delta and $117,000 at Northwest.) That's according to AIR Incorporated, which tracks pilot pay. But Delta pilots earn less than their peers at United and several other carriers.
Air Incorporated says a 35-year pilot career at Delta is worth $9.8 million. At Northwest, it's worth $8.4 million, counting wages, pension and other benefits.
The biggest union at Northwest has said it would oppose any merger of Northwest with another airline.
The opposition comes from the International Association of Machinist and Aerospace Workers, the IAM, for short. The union, which represents some 11,000 baggage handlers, reservation agents and other workers at Northwest, , fears a merger may lead to job and service cuts.
It doesn't appear Northwest's unions would be positioned to legally strike over a merger. However, as Minnesotans well know, unhappy Northwest workers can readily find ways to cause trouble for the airline -- and its customers -- without striking.
A merger figures to make unions much stronger --or weaker-- at the combined carrier. Most Delta workers are not unionized, except for pilots. At Northwest, almost all employees are unionized. A merger of Northwest and Delta would force union representation elections for flight attendants and other major employee groups.
If Northwest CEO Doug Steenland loses his job in the merger, he stands to get at least $7.8 million in cash, insurance, travel and other benefits. He also qualifies for an annual pension of $1 million, starting at age 65, company filings indicate. The present value of his pension benefits is about $4 million.
If Steenland gets booted in a merger, it seems he'll be free to exercise restricted stock awards and stock options that could bring more than ten million dollars. His restricted stock awards are currently worth about $13 million. Steenland also holds options to buy nearly a half million shares of Northwest. Their value depends on their strike price and the change in the value of NWA's shares. At Delta, CEO Richard Anderson has said he'll forego up to $15 million he could receive if his airline is involved in a merger deal.