News Cut: April 15, 2008 Archive

NWA-Delta: Who benefits?

Posted at 7:10 AM on April 15, 2008 by Bob Collins (1 Comments)
Filed under: Northwest Airlines

Keeping up with the analysts and experts and continuing to pass along your question. Add yours to the comments section here?

Live blogging the NWA-Delta conference call

Posted at 8:01 AM on April 15, 2008 by Bob Collins (1 Comments)
Filed under: Northwest Airlines

8:04 a.m. Richard Anderson of Delta and Doug Steenland, boss at Northwest, are holding a conference call for investors.

(Latest factoids are added at the bottom)

8:04 - Anderson: "With fuel prices what they are, the changes in the open skies area, we think it's a really good fit. The balance sheets are in great shape. The route structures have been rationalized. Strong cash position with about $7 billion in liquidity."

8:07 - Steenland: "Merger by addition." He cites relatively little route overlap.

8:09 - Steenland: "Combining functions such as I.T." There's your first clue of whose jobs are in peril, I guess.

8:13 - Steenland tries to downplay anti-trust concerns. Here's a graphic he used:

8:15 - Anderson: "No need for hub closures."

8:19 - How long will this merger take. "We plan to achieve all synergies by 2012," Anderson says.

>> $$$ Alert! NWA stock preopen price up $1.03 at $12.25. Delta opens up .27 at $10.25. The premium is now down to 56 cents based on Northwest stockholders getting 1.25 shares for every share of NWA stock owned. It was $1.88 based on the closing numbers yesterday. This number is changing quickly. See Delta stock details here. See NWA stock details here. <<

8:28 - Anderson expects regulatory approval by the end of the year.

8:29 - Time for questions (Operator: It's not pronounced AX a question!)

8:30 - Company anticipates more use of 100-seat airplanes. But that's not good news for aircraft manufacturers. It'll involve use of existing aircraft. Plans to use DC-9s more; that's the plane Northwest had been trying to phase out.

8:38 - Both of Northwest and Delta coming up on "affinity card relationships." "We'll be in a position to maximize our position for our shareholders." English translation: Between U.S. Bank (Northwest) and American Express (Delta), someone's going to lose some money.

>> The best-laid plans alert!! -- Oil just passed $113 a barrel -- up $1.57. A new record high. <<

8:45 - Steenland: Would like Continental to stay in the "Sky Team" relationship (frequent flier miles and code sharing).

8:54 - "Revenue synergies" (i.e. saving money) depends on pilots getting on board.

8:56 - Analyst Ray Niedel asks "what made you finally decide to do this merger" considering failure of other airline merger attempts. "Not all mergers are created equal," Anderson said. Says two airlines already have alliance "so we're already well down the road and unlike a lot of the mergers you're talking about, those mergers involved carriers -- one or the other or both -- that were in distress." Says the two different "fleets" work better because 'we don't have to sit down and merge a lot of maintenance operations." Large differences in fleets (types of airplanes) gives the new airline more ability to size the jet to the market being served.

9:02 - >>> Disappearing dollars alert!! NWA stock now down 72 cents to $10.50. Delta down almost a $1 a share. That's what a runaway day in the oil market (now up almost $2 a barrel on the day) will do. <<<

9:07 -- End of conference call. During the conference call Delta's stock dropped $1.35 from the preopen price. Northwest dropped $1.65 a share.

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Union's letter to NWA pilots

Posted at 9:46 AM on April 15, 2008 by Bob Collins (0 Comments)
Filed under: Northwest Airlines

TO: All Northwest Pilots

FROM: Dave Stevens

DATE: April 14, 2008

In the wake of the Delta-Northwest merger announcement today, I am writing to update the Northwest pilots. I will start by giving you the conclusion. Since January 2008, we have been working hard to put together a cooperative merger between the Northwest pilots, Delta management and the Delta pilot leadership. Agreement on the terms for a cooperative merger was in all stakeholders' best interest in better times, with oil below $90 per barrel. With oil over $110 and an economy facing recession, and given the recent activities of the two managements and the Delta MEC, a merger with Delta may no longer be in the best interests of all Northwest stakeholders, including the Northwest pilot group. Northwest Airlines has strong standalone prospects given its cash position (best of the legacy carriers) and the flexibility of the NWA fleet, among other things. We are in a good position to weather the potential economic storm.

As a quick review, we started exploration of a cooperative merger with four key requirements from NWA MEC Resolution 08-01:

1. Creation of a profitable merged company with sufficient market presence and network scope to provide a stable platform for growth and sustainable profits;

2. Fair and equitable seniority list integration;

3. Collective bargaining agreement for the merged company with substantial improvements; and

4. Share in the equity of the merged company.

A cooperative merger provides a win-win formula for labor and management. By achieving a joint contract and seniority list prior to the effective date of the merger, revenue synergies and cost efficiencies are generated immediately (worth many hundreds of millions of dollars per year), and a portion of this economic upside could go to the pilot groups in the form of contract improvements and equity.

Since January, we have met with the Delta pilot leadership and Delta management in three extended efforts to accomplish the above requirements. By the end of the second session, we had accomplished requirements #3 and #4. However, we were unable to reach agreement on #2, an equitable seniority list, which is essential to accomplish #1. There was a great deal of collaborative effort expended by the Delta pilot leadership and Delta management to convince us to accept inequities in a seniority list in return for improved economics in a joint contract. As you know all too well, seniority is forever while economic provisions can be short lived.

The first two negotiations took place in New York City with oil below $90 per barrel. While we achieved agreement on a joint contract and equity and made progress on a seniority list, we did not achieve an equitable seniority list. The third negotiation took place in Washington, D.C., and while more progress was made on seniority, a seniority list agreement was not reached.

The seniority negotiations broke down over the Delta pilot leadership's desire to include aircraft options, not just orders, in the seniority integration ratio. We were not willing to adjust the seniority integration ratio in favor of Delta pilots based on options, particularly when such options were unlikely to be exercised, other than as replacement aircraft, in the worsening economic environment. There were additional problems concerning calculation of the number of active pilots at each carrier and staffing assumptions for the future. The resulting difference in our respective positions on a ratio was substantial. The actual breakdown occurred when, in response to my suggestion that we both compromise and bring that to our respective MECs for their consideration, we were advised that the Delta pilot group could not move off their last ratio proposal.

As we had several times before, we then suggested to the Delta pilot leadership that we agree on expedited arbitration of the outstanding issues by a date certain. The result of an expedited arbitration would have been functionally the same as an immediate negotiated agreement since there would have been one seniority list and a joint contract in place on the transaction effective date.

By use of this process, much of the transaction risk would have been taken out of the merger and additional funds would have been generated to pay for one-time transition costs. In the uncertain world of airline economics, this was a key consideration. When two airlines merge, they attempt to realize the benefits of the created synergies before they run out of cash on hand to pay for the transition costs. In our current environment, there is no more money to borrow and airlines have few assets left to encumber.

Unfortunately, the Delta pilot leadership rejected arbitration, whether expedited or not, as a means to resolve the seniority list dispute. From that point, Delta management, the Delta pilot leadership and Northwest management chose a different path. NWA management proposed a traditional merger to Delta management. Then Delta management entered into bilateral negotiations with the representatives of the Delta MEC. The representatives of the Northwest pilots were excluded from the negotiations. Inexplicably, the Delta pilot leadership reversed its position. They are now willing to arbitrate the seniority list issues under ALPA merger policy. At the same time, they abandoned the joint pilot contract approach and have, instead, agreed to a Delta pilot contract amendment which will increase the pay and benefits for only Delta pilots. The Northwest pilots are excluded from the economic benefits. Both managements have cooperated in this change in course.

Yesterday we met with Delta CEO Anderson, President Bastian and EVP Campbell. At that meeting, we suggested that they delay the merger announcement and spend a short period negotiating a joint contract with a focus on their harmonization issues. This suggestion was rejected in favor of the plan they are currently pursuing. In explanation, they said we were out of time to negotiate prior to a merger announcement date (despite the fact they found two weeks to negotiate a deal with the Delta pilot leadership).

As a result, there will be seniority arbitration in a traditional merger process and it may take a long time. The Delta pilot leadership may choose not to cooperate on a joint contract for the benefit of the Northwest pilots while they seek an agreement on seniority that favors the Delta pilots.

Now we reach the question your MEC considered at its meeting yesterday - Should the pilots, employees and customers of Northwest support this merger as it is currently contemplated? The managements are betting on the merger models of old: Pay the employees of one group less and focus on lowering costs (instead of many of the revenue synergies that are far more likely to improve the bottom line); hope for cost savings going forward from employee division with no concern for the dis-synergies caused by labor dissatisfaction. The point has already been made to us by Delta management that they already have a "B scale" at Northwest, and that they will need to maintain it by phasing in harmonized wages. Mergers based on this model have never worked well, but trying to make this work at $110/bbl fuel, with a looming recession and no access to credit markets, is putting everything at risk.

One can only conclude that the Delta pilot leadership and Delta management have made an arrangement to try to disadvantage the Northwest pilots economically and with respect to our seniority. No pilot group is going to put up with this. No amount of money can sustain a carrier which creates this level of discord. This is a recipe for failure. Under these conditions, Northwest Airlines and all the stakeholders, including the pilots, other employees and customers, are better served by a standalone airline. Under these circumstances, it is Northwest's best option, with its strong international and domestic route structure, a flexible fleet, an order book with fuel-efficient aircraft and the best cash position of any legacy carrier, to remain an independent carrier.

Your MEC reached this conclusion with reluctance. We were very close to concluding a truly cooperative merger which would have served the interests of everyone. We regret that an agreement was not obtained. However, the past is past. The Northwest pilot group now has to face a difficult future. As hard as a standalone course may be in these economic times, it is our judgment that it carries less risk than the merger path which now lies before us. For that reason, we will be turning our efforts to stopping this merger. Over the course of the next few weeks, we will be sending you more information on the MEC's plans. Look for a road show schedule to be posted soon.

Fraternally and in Unity,

Dave Stevens
MEC Chairman

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Delta-NWA news conference

Posted at 11:33 AM on April 15, 2008 by Bob Collins (4 Comments)
Filed under: Northwest Airlines

After the investor conference call, the same three airline officials had a press conference for the ink-stained wretches.

Here's the audio. (Sorry, it's RealAudio. Just pretend it's 1999 and airlines are profitable.)

The most frequently asked questions of the last few months were once again frequently asked.

Q: What about the NWA pilots?
A: "We still have 8 or 9 months to 'bring them on board,' and if we do, it'll be a game changer. If we go past that date it's the traditional policy, which is normally the way these things proceed during a merger. (Translation: There'll be a labor battle)

Q: How quickly do you think you'll achieve profitability?
A: "We expect the combination to be profitable in the first year of operation." (2009)

Q: When did the decision to merge come up?
A: December.

Q: Surveys show a decline in service of major carriers, will these combined companies potentially weaken the level of service?
A: Northwest was tops on network carriers, Delta was second on J.D. Power survey. "At a baseline level, these two carriers have good operating performance." (Reaction, anyone?) Gives more service options to consumers. Frequent flier program will be much more valuable. More capital available to "enhance experience for our customers.

Q: Why is there a need to have hubs in Memphis and Cincinnati? And why use less efficient aircraft?
A: We have the right size of operation to make Memphis profitable (Steenland). It offers its own unique sense of destinations. All of the hubs have a "very secure future." It's not a political decision.

Q: If oil had remained at $60 a barrel, would you be here today?
A: "The strategic basis for this announcement is a sound strategic basis whether fuel is at $60 or what it is today." (English translation: "Yes, because the hedge fund that owned a bunch of our stock made us merge with another carrier.")

Q: Why is getting bigger better?
A: Steenland: Northwest is pre-eminent airline, particularly to Japan. Our domestic operation is not "appropriately sized." Now, because of the strong presence that Delta has -- at JFK, for example -- we can get back into the JFK-Tokyo market. Larger scale domestically allows us to better use that resource."

Combined carriers will have an unprecedented scale and scope. Our ability to go to caterers, suppliers to "streamline operations" will be considerable.

Q: What about non-frontline employees?
A: Administrative and management, we are going to have voluntary programs to avoid "involuntary." But at the end of the day there may be involuntary action. (Translation: Well, do I really need to translate that?)

Q: How merger will affect regional partners?
A: Will be operating combined fleet of 600 regional airplanes. Northwest owns two very good regional carriers -- Mesaba and Compass. Delta owns Comair. "We'll be optimizing the number of carriers to maximize the efficiency of the carriers. Our goal is to have the margins in that business to be equivalent to mainline airlines." (Translation: Cuts)

Q: Worried about strikes or job actions?
A: We''ll continue to discuss the benefits of the combination. Confident we'll continue to provide an excellent product. (Translation: The fact there was no yes or no answer allows you to fill in your own.)

Q: In the future, will you be more Boeing or more Airbus?
A: Both Boeing and Airbus make very good airplanes. The combined airline will be the largest operator of A330s and 757s. We would expect that balance to be the case going forward. The combined enterprise has 80 airplanes on order over the next five years; the vast majority have "backstop financing." Airplanes are financeable assets. We will not buy an airplane that doesn't make economic sense.

Q: What does it mean for consumers if there are only 3 big carriers.
A: We can't predict the future but confident the U.S. market will be competitive. "Let's not forget we have Southwest out there. It will provide 'pricing discipline.' Entry in this business is wide open; there's plenty of airport gates, facilities, airplane manufacturers are willing to finance. The market will remain competitive. There's no other business out there that has as much transparency in selling their products. You can go online and see every choice available to you (Bob notes: Do they actually look at Travelocity and see that every airline seems to charge the same price?)

Q: Experts say there's needs to be capacity cuts. Are you planning that?
A: We already are cutting capacity. We're pulling back unprofitable routes. Delta will be down 10 percent compared to last year. Northwest is making a 5 percent cut. The merger isn't predicated on cutting capacity.

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Your frequent flier miles and you

Posted at 1:12 PM on April 15, 2008 by Bob Collins
Filed under: Northwest Airlines

Ask a passenger about the effect of the Delta-Northwest arrangement, and the first thing they want to know is "what about my frequent flier miles?" For the record, both airlines say there'll be no change, that Sky Miles and World Perks will be "integrated seamlessly." But you'll likely see some changes. First, depending on which bank card you use to accumulate miles, you may be doing business with another bank. In an investor conference call this morning, airline officials said agreements with both US Bank (World Perks card) and American Express (Sky Miles card) are up for renewal. It's likely the new airline will sell its miles at a higher price to one or the other. That changes the bank you do business with -- maybe -- and potentially how many miles you get for each dollar purchased.

Even without the merger, says Mark Ashley, who runs the travel site, Upgrade: Travel Better, there are plenty of changes coming.

Here's my full interview.

I'll be posting the Cliff Notes version over the next few minutes.

Airline Branding for Dummies

Posted at 2:38 PM on April 15, 2008 by Bob Collins (4 Comments)
Filed under: Northwest Airlines

Somewhere, deep in the bowels of the Delta corporate headquarters, someone is working on "branding" the "new" Northwest-Delta Airline. But it may take up to three years to wipe out the Northwest Airlines name, and even longer to integrate cultures. A pilot friend told me today that there's still angst at the soon-to-be-former Northwest that stems from the different cultures of Northwest Orient and Republic airlines.

In the end, though, it's all about the perception -- the message -- that a Delta name (as opposed to an NWA name) gives to fliers.

I talked this afternoon with Barbara Schenck, an expert on branding, and the author of Small Business Marketing for Dummies, Business Plans Kit for Dummies, and Branding for Dummies, about the marketing challenges companies face when merging.

Here's the full interview (mp3). I'll add the Cliff Notes versions over the next few minutes.

The investors have spoken

Posted at 3:50 PM on April 15, 2008 by Bob Collins (1 Comments)
Filed under: Northwest Airlines

Wall Street has just closed up shop for the day. Delta lost 12 percent of its value, closing down $1.32 (Chart here). Northwest lost about $1 a share; that's an 8 percent drop in value (See chart).

What were the investors telling us?

They want more cuts.

Here's Nathan Grawe's take on it. He's associate professor of economics at Carleton College

"The argument they (Northwest and Delta) are trying to make is that by providing a better network for consumers, they will increase revenues and so they don't have to touch the cost side. And if you look at what happened to Delta and Northwest stock today, I think what you saw is investors were frankly disappointed by what they heard because they thought the whole point of the merger was to weed out unnecessary costs and we could gain economy of scale by having a larger company and eliminating redundancy." (Listen to his full answer)

"It seems that almost inevitably in the long run, you'd have to have some jobs become redundant," he says. He expects more job cuts. "The only question is how big and how painful."

Here's my entire interview.

By the way, perhaps you -- like me -- have been blown away by the sheer jargon of this thing. "City pairs?" "Revenue synergies?" "Wage harmony?" What language are they speaking?

Here's a couple of explanations, thanks to Grawe.

City Pair -- Start in one city, end in another city. Those two cities are "paired." Minneapolis to Boston, for example, makes Minneapolis in Boston one city pair.

Wage harmonization - When one group isn't paid more -- or less -- than another group of workers for doing the same thing. There are, of course, two ways to achieve "harmony:" Bring the lower-paid worker up or bring the higher-paid worker down. That of creates disharmony.

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Whither the NWA headquarters?

Posted at 3:12 PM on April 15, 2008 by Bob Collins (1 Comments)
Filed under: Northwest Airlines

Here's the letter Gov. Pawlenty said to the Delta-NWA bosses this afternoon, seeking clarification of just what the future is for the Eagan executive offices.

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How long will it take to paint over Northwest?

Posted at 5:28 PM on April 15, 2008 by Bob Collins (2 Comments)
Filed under: Northwest Airlines

In order to "brand" (see interview below) the current Northwest jets into Delta's colors, there'll be a fair amount of work involved. When Northwest last changed its logo, the new paintjobs were done on a staggered basis, as the jets went in for maintenance. There might still be "old" colors on some NWA jets, and that project started in 2003.

The airline can't ground its entire fleet for a paint job, so becoming branded will take time. How much? According to one expert on a forum:

I saw UAL 747-400's get painted in about 10-14 days working 3 shifts.... I've seen Piedmont Dash-8 get painted in about 7 days. Keep in mind a lot of that is driven by the number of people you have working the job. We did an E135.... not a Legacy... for a corporate client last year that was in the paint shop for 3 weeks.

Most agree an average of a week per plane. With 500 airplanes, that would be 9-10 years if they only did one airplane at a time (recognizing they don't paint just one airplane at a time). New airplanes, of course, will be delivered with Delta's colors if the merger is approved.

And in this video, you can see how many coats it takes:

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The Southwest Airlines Factor and more answers to your questions

Posted at 7:02 PM on April 15, 2008 by Bob Collins
Filed under: Northwest Airlines

During the day, we've been getting answers to the questions you've submitted. After the frequent flier question, the most often asked question is "Can we get Southwest Airlines to come here?" The short answer is "probably not." But Southwest is playing a big role in this merger. Late this afternoon, a lot of questions came in about the future of regional airlines. A lot of regional pilots go to school in these parts and then sign on. So we've got some answers. Sort of. (By the way if you want to read a good blog by a regional pilot, go here)

The last interview I have for you today is with Dr. Dan Petree of Embry Ridle Aeronautical University, who once was "one of us," having taught at Concordia College in Moorhead. I tracked him down at a conference in Hawaii, and he turned out to be a fabulous interview.

I'll be writing up the Cliff Notes version but as I do, Here's the whole interview. Oh, and here's audio of my appearance with Tom Crann on All Things Considered tonight. Many thanks for your questions.

With that, let's get to your questions and Dr. Petree's answers.

Q: Northwest/Delta says anti-trust concerns should be allayed by the fact Southwest is still out there providing "price discipline." How big of a factor is Southwest in all of this?

A: Southwest is a metaphor for low-cost carriers that do provide some assurance against predatory pricing or extraordinary rents being attracted by markets that lack competition. We don't really know if Southwest will offset the effect of large airlines, but we do know their impact has been profound. It's hard for a lot of us to understand how you take two high-cost competitors and suddenly make them low-cost competitors, but the market is significantly different today than 20 years ago and the low-cost carriers are playing the tune. Low-cost carriers shouldn't be too worried about the merger. (Listen - 5:55)

Q: Any chance of Southwest coming to Minneapolis-St. Paul?

A: Unlikely. The conditions have to be exactly right for Southwest. They don't take on people just for the sake of competing. They take people head-on because they think they can get market share and sustain it. They look for available gates at underserved airports, the right mix of business and leisure travel, they look to establish brands in markets where the existing airline appears to have a weakness. The last head-to-head competition was AirTran's entry into Milwaukee. It was resisted by Midwest but at the end of the day it looks to have been successful by AirTran, capturing a large share of the Milwaukee market. They did that because it made sense for them and they perceived a weakness. And Milwaukee is close enough to Chicago that it wasn't considered a major market anyway. Southwest doesn't go head-to-head against major established networked carriers in heavily utilized airports. (Listen - 3:35)

Q: Mia, of St. James, Minn., was one of many people who asked, "What is going to hapen with the regionals that fly for both. Northwest uses Mesaba, Compass, and Pinnacle for their regional routes. Obviously they will not need all three anymore.

A: They have different strategy. Delta has gone from owning the regionals to spinning them off and then competing head-to-head with them. If I were looking at a map, I'd be most concerned if I were in Cincinnati with ComAir. How can you maintain that many hubs and do it efficiently? Clearly they're going to want discipline to flow through the whole system. We just saw Delta just discipline Mesa Airlines, who they had a long-time relationship with. They basically said "you're done." I don't think there's any reason to think these relationships will go on forever just because they always have. The expectations are going to change and the regionals will have to figure out if they can compete. The real question is the communities served by the regionals. Do they have reason to expect their service will increase under this new regime; that goes to the economic vitality to a particular 'city pair.' (Listen - 3:48)

Q: A pilot on a closed pilots' forum online asked us to ask, "What does the combined carrier plan to do about a 100-seat aircraft replacement? Our DC-9s are the only true 100 seaters that the combined carrier owns. There is clearly a need to have a 100-seat airplane, but the 9's are old and need to be replaced. Obviously, we want a mainline replacement airplane, and not another attempt to outsource more of our flying."

A: It's hard to make money with jets under 100 seats. What you're likely to see is an investment in Embraers and additional regional jets at 120-150 seats and get rid of the smaller regional jets, it could lead to higher volume operations in some of the smaller communities. They're going to rationalize their service around demand. If demand for 200 seats, and they're doing it with three flights in a 70-seat aircraft, chances are they're going to reduce service to two 100-seat aircraft until demand demonstrates that they need to add additional aircraft. The DC-9 isn't done. These things take time to work themselves out. If a particular market can sustain the economics of an inefficient and relatively old aircraft and it's available, there's no reason why they wouldn't use a DC-9. Longer term, they're signaling that the current economics do not favor regional jets or any jet that's below 100 seats, primarily because of the price of fuel. They might be trying to buy additional larger RJs, in the 115 seat category as opposed to taking delivery on some orders they may already have in place for 70-seat RJs. (Listen - 2:46)

Q: Jason Voiovich of St. Paul asked, "Another angle on the Northwest/Delta merger is what that merger means not just for the airline industry, but for the Minnesota "brand". Losing the corporate headquarters makes it harder for the state to "sell" itself nationally as relevant in the airline industry (the action will now take place in Atlanta). The more we corporate HQ's we lose at the "top end" of an industry spectrum - like NWA - , the more difficult it will be for the state to attract and retain top talent, investment, and satellite companies that grow up around it. In other words, the economic impact could be deeper than just this specific company.

A: For the answer -- sort of -- we turn to Jason Voiovich who writes about branding on a blog called State of the Brand 2008. He writes:

Minnesota is a "biotech leader" because of Medtronic and Mayo Clinic. Minnesota is a "manufacturing/innovation" leader because of 3M. Minnesota is a "retail powerhouse" because of Target. The state is an agricultural/food innovator because of Cargill and SuperValu.

Until now, Minnesota was an "aviation center" because of Northwest Airlines.

It's a fascinating essay and one well worth reading and discussing. Also see some interesting comments from former Norwest Bank boss Jim Campbell in Brandt Williams' story.

This pretty much wraps up "Northwest-Delta Day" on News Cut. It's a different approach to covering breaking news and I hope you've been able to follow along.