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Northwest Airlines (NWA)
Northwest Merger with Delta Might Be on Chopping Block
The airline industry was probably punished more than any other after September 11, 2001. After the attacks consumers shied away from flying, forcing several carriers to the brink of total bankruptcy. To fan the flame, rising oil prices cut down on margins and made operating airlines that much more expensive. In the last 18 months, however, the major carriers seem to have turned things around. Demand for airline travel has increased dramatically, and U.S. carriers are experiencing some of the largest yield (revenue per passenger mile) improvements in the industry. Northwest knows plenty about pain and suffering: the company just moved out bankruptcy protection in May 2007. Looking toward the future the company has been pushing hard for a merger with Delta, but regulators fear a loss of competition and pilots fear a loss of compensation. With the deal on shaky ground and with other airlines watching with bated breath (they want to follow suit), what are the odds that the merger goes through?
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The latest buzz is over consolidation within the "Big Six" carriers: US Airways, United (UAUA: Charts, News, Offers), Continental (CAL: Charts, News, Offers), Northwest, Delta (DAL: Charts, News, Offers), American (AMR: Charts, News, Offers). Several of the airlines are just now moving out of Chapter 11 protection, and have been forced to cut workforce, wages and retirement benefits. Even with the recent surge in travel the price of fuel is rapidly eroding the efficiencies made by the job and wage cuts. Spending by airlines on fuel has increased 238% since 2002, from $40 billion to $135 billion, and with increased demand for oil from emerging economies like China and India oil prices aren't expected to fall. Looking into a crystal ball has given airline executives and many industry analysts one clear answer: mergers. If Delta and Northwest manage to tie the knot, expect the rest of the Big Six to pair off as well. United and Continental are likely to be one pair, followed by American and US Airways.
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For Northwest a merger could be a make or break deal. The company has experienced some serious battles between cost-cutting executives and both pilots and maintenance crews. The possible merger with Delta might not even get off the ground if pilots cannot resolve the issue of seniority if the merger were to take place (the combined carrier would have about 12,000 pilots). Even though a labor agreement is not required for the merger to take place, having one in place would certainly smooth out the probable bumpy transition. There is also the demand of increased pay and job security by flight attendants. Shares of Northwest have already fallen 30% since last summer (the company moved out of bankruptcy protection in May 2007) despite consumer demand. The company reported a loss in its latest quarterly report, but without a pretax loss resulting from the sale of remaining interest in Pinnacle airlines the company managed to break even.
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The Department of Justice (DoJ) handles anti-trust issues and has placed a lot of scrutiny on the deal. The fear is that a merger between two large carriers will raise prices, limit choices and hurt the consumer; after all, without competitors companies tend to let customer service (and possibly maintenance) slip. Another big issue, especially in the midst of a Presidential election, is that airline consolidation will result in job cuts. Unions have little desire to force members to look for new jobs or for existing members to take pay cuts, and the possibility of a merger limiting destinations means that politicians would have to deal with some seriously upset unemployed workers if they let things slide past without a fight. With airlines remaining in a state of semi-profitability over the course of the past year the government might think that mergers aren't necessary, but what should be all too evident is that profit is fleeting and that it takes very little to send airlines back into the red.
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Delta and Northwest, the airline industry's second and fifth-largest carriers, have been in merger talks for a while. The two carriers have limited route overlap, competing head-to-head fairly infrequently, and would be able to reduce excess capacity and improve efficiencies through combined operations. A combination of two major carriers is unlikely to change the price of travel very much, since the proposed mergers don't afford the airlines a dominant market share. And with the likes of low-cost airlines like Southwest (LUV: Charts, News, Offers) it's unlikely that a carrier will remain profitable if it steps too far out of line on price. Low-cost carriers control roughly 30% of the domestic market. What a merger would allow is the ability of carriers to update their fleets by purchasing more fuel-efficient p***s, something that was clearly not an option when the carriers were sitting in Chapter 11 and loaded with debt.
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The DOJ shot down mergers before: between Northwest and Continental in 1998, between United and US Airways in 2001, and between US Airways and Delta in 2006. Regulators need to understand that an isolated domestic market is no longer a possibility. The recent Open Skies Agreement, a treaty negotiated between the United States and European Union which allows flights between any U.S. city and European cit (and visa-versa), will force carriers to become more efficient. Allowing U.S. companies to merge will allow them to compete between with European rivals, including British Airways and Virgin. The concern over domestic mergers increasing prices will lose some steam as international carriers exert downward pressure on price.
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