General Lee
Well-known member
- Joined
- Aug 24, 2002
- Posts
- 20,442
Delta-Northwest deal faces many hurdles
Fri Feb 22, 2008 1:17pm EST
By Jui Chakravorty Das
NEW YORK (Reuters) - A possible deal between Delta Air Lines Inc and Northwest Airlines Corp faces severe challenges that beg the question: Can this merger work?
Delta (DAL.N: Quote, Profile, Research) and Northwest (NWA.N: Quote, Profile, Research), in the final stages of merger talks, according to people briefed on the matter, are expected to face a tough antitrust review.
Additionally, they face powerful politicians railing against a merger, labor groups wanting a stake in the new company and better integration terms, and a consolidation process that could take years to complete.
"Even if the deal is approved, of which there is a 30 percent chance at this point, integrating the computer systems, the labor and the fleets will take a very long time," Morningstar analyst Brian Nelson said in an interview.
After racking up $35 billion in losses and finally emerging from a five-year slump in 2006, U.S. airlines are hoping that mergers could lead to higher fares as combined carriers reduce flights and use their increased market power to raise prices.
As merger talks between Delta and Northwest hurtle along, Delta, the bigger in size, is expected to be the controlling company in a stock-swap deal that would create the world's largest carrier by traffic.
Delta has a market value of $4.7 billion, while Northwest is worth $4 billion. The value of any deal remains unclear.
Integrating the two labor forces could take years unless the two unions agree to terms before a merger is announced. US Airways (LCC.N: Quote, Profile, Research), which merged with America West in 2005, still operates its staff with two separate labor contracts and has had trouble integrating its customer reservation systems.
COST BILLIONS
Merging labor and infrastructure is not just time-consuming -- it could cost billions of dollars as well.
"A major risk is that to get labor support for any combination, wages and benefits might have to be increased, raising overall unit costs and putting a greater cost burden on any merged carrier," Calyon Securities analyst Ray Neidl said.
Pilots unions at Delta and Northwest, who have been reviewing and negotiating proposed terms if the two airlines were to merge, have yet to agree on the integration of seniority lists, a union official said.
Seniority is crucial to all aspects of a pilot's career, determining wages, schedules, access to prime routes, types of planes flown and vacation days.
In a Delta-Northwest deal, headquarters of the combined carrier are expected to stay in Atlanta, Delta's home, according to people familiar with the situation, leaving the future of Northwest's Minneapolis headquarters in question. Some other hubs would also have to be eliminated.
"Facilities would have to be consolidated, including underperforming or duplicate hubs, in order to achieve cost savings," Neidl said. "For political and business reasons this would take time, probably years to accomplish."
James Oberstar, a Democrat from Northwest's home state of Minnesota and chairman of the U.S. House Committee on Transportation, blasted the possible deal on Friday, saying he plans to hold a hearing once it is announced.
Northwest employs about 12,000 people in Minnesota, including about 1,050 employees in the headquarters building.
"I, and others in Congress, also intend to use any tools at our disposal to prevent further consolidation," Oberstar said in a column in Business Week magazine.
FLEET FEAT
Integrating fleets will also be challenging for the airlines. Northwest, which has the oldest fleet among the larger U.S. carriers, would probably have to get rid of some planes even though it may be committed to paying the leases on them for another few years.
"Merging during bankruptcy would have been easier, when they had no lease obligations on the planes and no labor obligations," S&P equities analyst Jim Corridore said. "Now they'll have to park the extra planes in the desert and negotiate with the unions."
Many analysts remain skeptical of the benefits of a merger. Industrywide capacity will likely stay the same, given that Delta and Northwest have few overlapping routes, and low-cost carriers would likely acquire any gates and flights given up in a merger.
And the merger would do little to address the biggest source of airlines' financial woes in recent years: the persistently high price of oil, which this week hit an all-time high of $101.32 a barrel. Fuel vies with labor as the largest cost at most airlines.
"Consolidation is not going to save the airlines and it's not going to save the industry," Nelson said. "It's a shot in the arm in the short term and could cut some costs, but in the long term, things will return to status quo."
(Editing by Brian Moss)
© Reuters 2008 All rights reserved
Bye Bye--General Lee
Fri Feb 22, 2008 1:17pm EST
By Jui Chakravorty Das
NEW YORK (Reuters) - A possible deal between Delta Air Lines Inc and Northwest Airlines Corp faces severe challenges that beg the question: Can this merger work?
Delta (DAL.N: Quote, Profile, Research) and Northwest (NWA.N: Quote, Profile, Research), in the final stages of merger talks, according to people briefed on the matter, are expected to face a tough antitrust review.
Additionally, they face powerful politicians railing against a merger, labor groups wanting a stake in the new company and better integration terms, and a consolidation process that could take years to complete.
"Even if the deal is approved, of which there is a 30 percent chance at this point, integrating the computer systems, the labor and the fleets will take a very long time," Morningstar analyst Brian Nelson said in an interview.
After racking up $35 billion in losses and finally emerging from a five-year slump in 2006, U.S. airlines are hoping that mergers could lead to higher fares as combined carriers reduce flights and use their increased market power to raise prices.
As merger talks between Delta and Northwest hurtle along, Delta, the bigger in size, is expected to be the controlling company in a stock-swap deal that would create the world's largest carrier by traffic.
Delta has a market value of $4.7 billion, while Northwest is worth $4 billion. The value of any deal remains unclear.
Integrating the two labor forces could take years unless the two unions agree to terms before a merger is announced. US Airways (LCC.N: Quote, Profile, Research), which merged with America West in 2005, still operates its staff with two separate labor contracts and has had trouble integrating its customer reservation systems.
COST BILLIONS
Merging labor and infrastructure is not just time-consuming -- it could cost billions of dollars as well.
"A major risk is that to get labor support for any combination, wages and benefits might have to be increased, raising overall unit costs and putting a greater cost burden on any merged carrier," Calyon Securities analyst Ray Neidl said.
Pilots unions at Delta and Northwest, who have been reviewing and negotiating proposed terms if the two airlines were to merge, have yet to agree on the integration of seniority lists, a union official said.
Seniority is crucial to all aspects of a pilot's career, determining wages, schedules, access to prime routes, types of planes flown and vacation days.
In a Delta-Northwest deal, headquarters of the combined carrier are expected to stay in Atlanta, Delta's home, according to people familiar with the situation, leaving the future of Northwest's Minneapolis headquarters in question. Some other hubs would also have to be eliminated.
"Facilities would have to be consolidated, including underperforming or duplicate hubs, in order to achieve cost savings," Neidl said. "For political and business reasons this would take time, probably years to accomplish."
James Oberstar, a Democrat from Northwest's home state of Minnesota and chairman of the U.S. House Committee on Transportation, blasted the possible deal on Friday, saying he plans to hold a hearing once it is announced.
Northwest employs about 12,000 people in Minnesota, including about 1,050 employees in the headquarters building.
"I, and others in Congress, also intend to use any tools at our disposal to prevent further consolidation," Oberstar said in a column in Business Week magazine.
FLEET FEAT
Integrating fleets will also be challenging for the airlines. Northwest, which has the oldest fleet among the larger U.S. carriers, would probably have to get rid of some planes even though it may be committed to paying the leases on them for another few years.
"Merging during bankruptcy would have been easier, when they had no lease obligations on the planes and no labor obligations," S&P equities analyst Jim Corridore said. "Now they'll have to park the extra planes in the desert and negotiate with the unions."
Many analysts remain skeptical of the benefits of a merger. Industrywide capacity will likely stay the same, given that Delta and Northwest have few overlapping routes, and low-cost carriers would likely acquire any gates and flights given up in a merger.
And the merger would do little to address the biggest source of airlines' financial woes in recent years: the persistently high price of oil, which this week hit an all-time high of $101.32 a barrel. Fuel vies with labor as the largest cost at most airlines.
"Consolidation is not going to save the airlines and it's not going to save the industry," Nelson said. "It's a shot in the arm in the short term and could cut some costs, but in the long term, things will return to status quo."
(Editing by Brian Moss)
© Reuters 2008 All rights reserved
Bye Bye--General Lee
Last edited:
