Navigating the deal
Delta, Northwest officials say merger won't mean higher fares
Nicole C. Wong, Boston Globe, 4/16/2008 (excerpted)
Editor's Note: In a surprise move, Continental Airlines announced on Sunday, April 27, that it was abandoning merger talks with United Airlines and planning to remain an independent carrier. United may seek a deal with US Airways, and Continental is expected to continue negotiations to create a three-way alliance with American Airlines and British Airways.
After several months of speculation and negotiations leading up to the revelation [April 14] of a merger between Delta Air Lines Inc. and Northwest Airlines Corp., there are lots of questions. And not many clear answers. Here are some perspectives from airline executives and industry experts on what the effect would be of creating the world's largest airline, which would be called Delta.
Q. I have a ticket - or am thinking of buying one - to fly on Delta or Northwest. Is the merger proposal going to affect my travel plans?
A. Not if you're traveling before the end of the year. The airlines said they will operate "business as usual" until the merger is approved by each airline's shareholders and by government regulators. They expect the approval process to take six to eight months, and only after that would they begin integrating operations. They pledged to alert passengers of changes arising after the approval period.
Q. Is airfare going to go up?
A. Depends who you ask. Combining Delta with Northwest will reduce the country's six major network carriers to five and, as a result, remove a player from the fierce game of instigating price wars and lowering fuel surcharges. But contrary to conventional wisdom and expert opinion, Delta and Northwest executives suggested during a news conference yesterday that the megamerger is unlikely to result in higher airfares.
Even if the country is left with only three or four major hub-and-spoke airlines - which is widely anticipated because consolidation could help other carriers compete with the new industry giant and cope with soaring jet fuel costs - Northwest chief executive Doug Steenland said he was "certainly confident" domestic airfares would "remain very, very competitive."
"Let's not forget we have Southwest Airlines out there," said Steenland, drawing attention to the airline that has spurred growth in the low-cost carrier category over the past decade. "It's 20 percent of the domestic market. It has 600 airplanes. A very, very tough competitor. Very strong. And it will provide pricing discipline across the board."
Indeed, low-cost carriers like JetBlue Airways Corp. and AirTran Airways have held ticket prices down among all the airlines serving Boston's Logan International Airport.
Nationwide, low-cost airlines would be competing on more than 70 percent of the merged airline's domestic route network, according to Forrester Research Inc. airline analyst Henry Harteveldt. He believes this competition will help keep airfares in check. And, he said, "Some airline, like Southwest or JetBlue, may feel emboldened enough to enter or expand service in cities dominated by either Delta or Northwest."
Q. Is the merger going to result in fewer domestic flights or routes?
A. Experts think it should, but Delta and Northwest executives said it won't. "This merger is not predicated on domestic capacity rationalization," Delta's chief financial officer Ed Bastian told reporters yesterday. "The hubs we have today are self-sufficient and profitable as we see them going forward." Delta and Northwest said they will not close any of their seven US hubs as a result of the merger, much to the surprise of analysts.
Bastian noted each airline already - and independently - announced cuts in domestic seat capacity. By eliminating some unprofitable routes and scaling back the frequency of flights on others, Delta will reduce domestic seat capacity by 10 percent by the end of the year, compared with last year. Northwest will cut US seat capacity by about 5 percent.
But industry analysts and other airlines' executives said merging carriers mainly reap savings by reducing "redundant excess capacity" on overlapping routes. That's what US Airways and America West did when they merged a few years ago.
Q. Mergers usually result in layoffs. What happens to Delta and Northwest employees?
A. The airlines said their frontline employees - the ones who encounter customers - will have jobs. However, they will reduce the administrative and managerial staffs, first through buyouts and then - if necessary - through layoffs.
Q. How would the merger affect service at my airport?
A. It's not clear yet. But check out the interactive, state-by-state map at newglobalairline.com, a website unveiled this week by Delta and Northwest, for a rundown of how many employees and peak-day departures each airline currently has at airports in your state.
Q. What happens to my frequent flier miles?
A. Nothing changes just yet. The airlines said you can still accrue, keep, and use your miles. But it's not clear how the redemption rules will change after the carriers combine their programs. It will likely cost some travelers more miles to fly free.
Q. What stands in the way of the merger becoming a done deal?
A. The biggest obstacle could be unionized airline employees persuading Delta's shareholders, Northwest's shareholders, or the Department of Justice's antitrust division not to sign off on the deal. The leaders of Delta's pilots union support the merger, but some other groups, such as Northwest's mechanics and flight attendants, have vowed to fight the merger if it threatens their seniority, jobs, pensions, or other interests.
Still, industry and legal experts believe the megamerger may gain support and pass antitrust muster in part because of record-high fuel costs, a weakening domestic economy, and more competition abroad. Those conditions contributed to four small US carriers declaring bankruptcy and shutting down in recent weeks.
"All the airline problems may actually help with mergers so customers have viable options," said Carl Tobias, a professor at the University of Richmond School of Law.