News Cut Category Archive: Northwest Airlines

The lower the stock of Northwest Airlines and Delta Airlines goes, and the higher the cost of jet fuel climbs, the more savings, apparently is to be realized by the merger of the two companies.

That's because Delta now believes the merger will produce $2 billion in savings and benefits, up from an original estimate of $1.2 billion, and will cost about $600 million, down from the $1 billion projected earlier.

"When we announced in April with oil at $110, we wanted to make certain we did not over-commit to Wall Street what the real value was," said Delta President Ed Bastian, in an interview with TheStreet.com. "We would rather under-commit and then deliver good news.

"Now that we've had an opportunity to do more detailed work, we've been able to validate the synergies we thought were there, but had a difficult time quantifying," he says. "With oil at $130 a barrel, we have to make sure we are getting every last nickel of synergies and also make sure we have good transparency."

$2 billion in savings between now and 2012. How much is that? That's about one-fifth of the total amount the two airlines lost -- at least on paper -- in just the first three months of this year.

If there's a "tipping point" for gas prices (the price at which you change your driving habits), is there a "tipping point" for flying on an airline? If so, what is it?

Higher fares, a slew of tacked-on fees, flights that are late and crowded are the new standard in the airline industry. Does it make a difference?

I'll be live-blogging in the studio with Kerri Miller on Wednesday's first hour of Midmorning. Most of the time, Midmorning asks me when they want me to blog their show. This time, I asked them. The guests are: George Hobica, creator of Airfarewatchdog.com; Joe Schwieterman: professor of public service management at DePaul University; and Tammy Lee: Vice president for communications at Northwest Airlines.

And you.

I sense a pent-up desire to tell the airlines a thing or two, and to tell a few stories about your experience -- good and bad.

That's where the "comments" section below comes in. Let's start talking about this now, so that by Wednesday at 9, we'll have something to tell our radio friends.

9:02 a.m. - It occurred to me while getting ready for today's shows that I hear the word Northwest Airlines and blames in the same sentence quite often. A Google search reveals, for example:

Yesterday, Northwest Airlines whacked its frequent flyers over the head with a $25 charge for redeeming miles. Today, the company -- and other airlines -- asked for their help in a lobbying campaign.

An Open letter to All Airline Customers:

Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now. Visit www.StopOilSpeculationNow.com.

For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities. To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers.

Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.

Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.

The nation needs to pull together to reform the oil markets and solve this growing problem. We need your help. Get more information and contact Congress by visiting www.StopOilSpeculationNow.com.

Perhaps the public should charge the airlines a $25 fee for doing so.

There is, of course, plenty of debate about the role of speculation in the run-up of oil prices.

"If by some chance the speculators and manipulators are correct--that oil prices could go even higher, based on supply and demand--then they will have done all of us a favor by ringing the alarm bell. High prices today are inciting suppliers to produce more oil and consumers to use less, which will ease the transition to a future of costly energy," BusinessWeek economics editor Peter Coy wrote this week.

I can tell just by the sheer intelligence of the comments that are regularly posted on this site, that News Cut readers are smart -- smart enough, I'm betting, to come up with a way around the fees that Northwest Airlines has decided to impose on the traveling public.

To recap, they are:

If ever there was a phrase that was so unthinkingly adopted by the news media, it's the one the airline industry came up with to dehumanize layoffs and firings: "capacity reductions."

Northwest, as I posted last night, sent a news release and employee memo out yesterday to describe their latest capacity reductions, using terms such as "employee impacts" and "headcount reductions."

Here's a translation: People are going to lose their jobs.

How does this feel to the people who make up the headcounts? Not so good, as you might expect. Take Sam, for example, who blogs -- a little anonymously -- at Blogging at FL250. In the past few months, we've enjoyed his accounts of rising through the ranks at one of Northwest's regional partners to become a captain.

Today, he provides an excellent dissertation on how capacity reductions translate into the nuts and bolts of employment:

With recent developments in the industry a downgrade and subsequent furlough is looking more and more likely. It'd only take a few hundred furloughs (flowdowns) from RedCo to kick me off the NewCo list, and that's on the small end of expected furloughs at many companies. The political pressure to avoid cuts until the merger is approved may be my saving grace in the short term.

He also provides some real insight into the young vs. old pilot tension at airlines, now that pilots have been allowed to fly until they're 65.

The irony, of course, is that those enjoying an extra five years at the top of the pay scale are those least likely to be impacted by capacity cuts. A guy on the top 5% of the list isn't going to be displaced, much less downgraded or furloughed. I hope the guys staying past 60 enjoy their extra five years. Their newfound freedom to "fly 'till they die" is going to set back a lot of junior guys' careers at least five years.

Another pilot's blog -- Around the Pattern -- takes issue with the assertion that older pilots are getting fat and happy at the expense of the kids:

Why would somebody who has been flying for an airline for 25 years want to continue to work for that airline past the age of 60? Pilots at three of the legacy carriers have lost their pensions and are now relying on the PBGC formula for receiving a percentage of their once-promised retirement (a formula, by the way, that is based upon working until age 65). Pilots at another legacy carrier had their retirement benefits frozen about 4 years ago at whatever they were entitled to receive effective that date. I have met only one pilot so far who meets that "upper 5%" criteria who is still flying, though I have been told there are about a half dozen others at my airline. They are hanging on to see if there will be a buy out that might get them a little closer to the pension they had been promised for so many years.

Regardless of whether they're young or old, it's clear that pilots for the nation's airlines -- along with employees of many industries today -- are not in their happy place.

Northwest is, as they say, cutting capacity. That's fewer seats, fewer flights, and maybe a shortage. How badly do you want to fly? How much are you willing to pay?

Interesting to note that NWA boss Doug Steenland is still promising to keep hubs open. And it sounds like Northwest is moving closer to charging for the first checked bag.

Here's Steenland's memo to his employees.

Memo to All Employees from
Doug Steenland
June 17, 2008

I wanted you to hear from me first the necessary actions we are taking in response to the continued fuel challenge. Later tonight, at the Merrill Lynch Global Transportation Conference, I will also give industry analysts an update on how Northwest Airlines is responding to the industry's oil shock -- including additional actions we must take to further reduce capacity.

I will also update them on our planned merger with Delta and why now - with the high cost of fuel - this transaction makes more sense than ever.

To put this into perspective, year-over-year for the first quarter, we have had a $445 million increase in our fuel expenses, necessitating the need for an immediate response. On the good news side, for the remainder of 2008, we have hedged 54% of our jet fuel requirements. While these hedges are important, further actions are required to stabilize our airline.

4th Quarter '08 Capacity Reductions

In response to the extraordinary fuel cost increases, Northwest will reduce its mainline capacity (domestic and international) in the fourth quarter of 2008 by 8.5% - 9.5% versus the fourth quarter of 2007. This includes the reductions previously announced in April.

I am pleased that no domestic stations will be closed as a result of the capacity reductions. Instead, we will pare unprofitable flying while maintaining the scope and presence of our network.

We have not yet finalized the specific employee impacts related to the reduced flying, however, for the resulting headcount reductions, we will first look to voluntary separation programs such as early-outs.

Q4 '08 Capacity (ASMs) % change vs. Q4 '07
System mainline capacity (domestic and international) (8.5%) - (9.5%)
Domestic consolidated (includes regionals) (7%) - (8%)
System consolidated (includes regionals and international) (3%) - (4%)

Fleet reductions

As a result of the reduced capacity, Northwest is removing a combination of 14 B757s and Airbus narrowbody aircraft from the fleet.

In addition, the DC-9 fleet will be reduced from 94 aircraft at the start of 2008 to 61 aircraft (20 DC9-30s and 41 DC9-40s/50s) by year-end.

Northwest also accelerated the retirement of three freighter aircraft from its cargo operation.

Revenue Enhancements

We are also continuing to take actions to improve our revenues with added fuel surcharges, fare and fee increases. In May, we began collecting fees for two or more checked bags, and are exploring whether we match our competitors by charging for the first checked bag.

Cost Containment / Fiscal Discipline

As part of our disciplined fiscal approach, we are closely managing our capital expenditures, having reduced planned non-aircraft cap-ex spending in 2008 from $255 million planned to $150 million as our new target.

Our aircraft leases were renegotiated during our restructuring, with pre-committed financing on favorable terms for all aircraft deliveries.

Our finance team also successfully negotiated a favorable amendment to our credit terms.

Finally, due to our strict fiscal discipline and best-in-class liquidity, we recently negotiated more favorable terms to our credit card processing agreements.

The Case for the Merger is Stronger than Ever

When we first contemplated a merger with Delta, as oil was approaching $100 a barrel, we knew this was the right deal with the right partner. Now, with oil above $130 a barrel, the case for the merger is stronger than ever with its resulting synergies.

· The merger-related synergies will improve the financial ability of Northwest and Delta to meet the challenge presented by the fuel crisis and better position the combined carrier for long-term strength and profitability.

· This is a transaction that is facilitated by best-in-class cost structures; one that will create an industry-leading balance sheet in any operating environment.

· The transaction will create a worldwide, geographically balanced network - which will enhance customer preference and make the combined carrier more competitive.

· This is a merger of choice by the two strongest network carriers. With our colleagues at Delta, our transition teams have already begun planning for a smooth and rapid integration in order to promptly capture and potentially exceed the synergies projected when we announced the deal.

Looking back on the announcement of our merger with Delta, we are more confident than ever that this was the right deal at the right time. Moving forward, the combined carrier will be in the best position to compete globally -- validating that this was the right transaction for our employees, customers, shareholders and the communities we serve.

As we continue the integration planning, we will keep you updated. In the meantime, thank you for continuing to run a great airline and helping to position us for a brighter future in the combined carrier.

Yours Truly,

Doug Steenland
President & CEO

The Associated Press reports today that Delta is adding a $10 to $40 round trip fuel surcharge. Northwest and US Airways say they are studying Delta's move. Last Friday, Northwest was the last of the big carriers to agree to a 3-to-5 percent price increase first announced by United.

Every few days, it seems, there's another story of an airline increase so if you haven't looked at a while, perhaps you're steeling yourself for sticker shock.

But it doesn't always work out that way.

A month ago, I wrote that fares were expected to go up when ATA announced it was ending its Minneapolis to Chicago (Midway) run. The Northwest fare to Midway almost doubled -- from $114 roundtrip to $210 roundtrip -- once the ATA competition disappeared.

However, at the time, Northwest was charging $384 for a roundtrip flight to O'Hare. Today, even after all the news reports of price increases, a roundtrip ticket to O'Hare is half of what it was a month ago ($193).

How do you make a small fortune in the airline business? You start with a big fortune.

Northwest Airlines lost $4.14 billiion in the first quarter of the year. What does burning through that kind of cash look like? Something like this, maybe:

That's $540 in $10 bills sucked into the jet engine every second. Do that every second of the day for three months and you'd be Northwest Airlines.

Up it to $887 a second and you'd be Delta.

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.

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:

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.

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.

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.

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.

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.

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 tradi