Some corporate travel buyers expect Delta Air Lines' merger agreement with Northwest Airlines to inject a bit of health into a struggling domestic industry, but many expect it to prompt more consolidation, diminish competition, reduce declining U.S. capacity and further degrade customer service.
Following months of speculation and reported false starts, Delta and Northwest on April 14 publicly proposed to create the world's largest airline through an all-stock merger deal, valued at $17.7 billion. Contingent on shareholder and regulatory approval, the merged airline within eight months plans to begin integration and relaunch under the Delta Air Lines name, with former Northwest CEO and current Delta CEO Richard Anderson at the helm.
"From my perspective, it's a two-edged sword," said Lockheed Martin director of corporate travel services Richard Wooten. "Somehow they need to get healthy, and maybe this is what it takes, but on the other hand, this will limit competition and may harm smaller markets."
Other buyers shared similar concerns in a National Business Travel Association survey conducted prior to the announcement, which showed only 22 percent of 207 U.S. travel buyer respondents viewed consolidation as "a positive development for the business travel community." Regarding a Delta-Northwest paring, 54 percent of the respondents said customer service would decline and only 6 percent said it would improve.
"The sad thing about this whole situation is customer service will suffer," said NBTA president Kevin Maguire, who also serves as the University of Texas travel manager for intercollegiate athletics. "Service levels are deplorable now and won't get better."
Forty percent expected the deal to deteriorate client account management, with only 10 percent expecting it to improve. However, 46 percent agreed the deal would make for a more financially stable carrier.
"Travel buyers know that airline consolidation, such as the Delta-Northwest merger, can create more financially stable airlines with stronger networks," Maguire said.
Though buyers also were quick to point out that the merger removes a competitor from play, Northwest CEO Doug Steenland said low-cost carriers would continue to ensure domestic pricing discipline. Meanwhile, Delta and Northwest executives said the expansion of Open Skies agreements, most notably between the United States and European Union, continue to increase competition from foreign players.
Fifty-three percent of the buyer respondents to the NBTA survey said the merger would bolster access to international routes.
Delta and Northwest said the merger would create more than 6,000 new citypairs, describing their networks as "complementary," with Delta's strongholds in the South, Mountain West, Northeast, Europe and Latin America, and Northwest's positions in the Midwest, Canada and Asia. The carriers said the combination is "pro-competitive" with "direct competitive service on only 12 of more than 1,000 nonstop citypair routes currently flown."
Though both carriers continue to reduce domestic capacity independent of the merger agreement, Delta president and CFO Ed Bastian said the deal "is not predicated on domestic capacity rationalization," and the carriers intend to maintain Delta's hubs in Atlanta, Cincinnati, New York-JFK and Salt Lake City, and Northwest's in Detroit, Memphis, Minneapolis/St. Paul, Amsterdam and Tokyo-Narita.
"The lack of detail regarding capacity cuts is to be expected since DAL/NWA still need regulatory approval," UBS analyst Kevin Crissey said in a research note. "We have little doubt that smaller hubs will be deemphasized."
Wall Street initially had salivated at such a deal to improve industry fundamentals, but several analysts soured after the announcement, claiming the merged entity as detailed by management would offer too few synergies, not reduce enough capacity and fail to lift expected poor 2008 earnings.
The new Delta expects to gain an annual $1 billion "from more effective aircraft utilization, a more comprehensive and diversified route system and cost synergies from reduced overhead and improved operational efficiency," but expects to incur up to $1 billion in integration costs.
JPMorgan aviation analyst Jamie Baker said the merger is "light on synergies," as each carrier exited bankruptcy protection last year and "rehabilitated its cost structure, leaving less to cut from here."
The merger's impact on corporate travel programs will not be immediate, said Mitch Cwanger, American Express Advisory Services senior practice leader for air, said. "There aren't going to be any changes until the DOJ approves and until the unions, particularly Northwest's, buy into it. They're going to want something in return," he said. "From a buyer standpoint, there's not a whole lot they can do right now. Any change to corporate agreements is at least 12 months away."
Northwest on its Web site said the combined entity would "maintain its agreements with valued corporate partners of both airlines" while honoring "existing sales agreements, including fares, commissions and terms and conditions as established with our travel agencies and other major customers."
The Department of Transportation a week before the agreement tentatively approved transatlantic antitrust immunity for six SkyTeam alliance members and gave the nod to a four-way joint venture for Air France, Delta, KLM and Northwest.
The carriers said the merger would accelerate four-way joint venture integration with Air France and KLM, and Delta's Anderson claimed DOT's approval of the joint venture smooths any international regulatory hurdles. Continental Airlines said it would reevaluate its SkyTeam position in light of the merger.
Despite the speculation that Continental Airlines and United Airlines swiftly would follow the consolidation course, Continental on April 27 said its board of directors agreed with management's recommendation to "not merge with another airline at this time." Continental's decision to stand alone may relieve some buyers who saw little value in the pairing.
Though Continental and United never publicly confirmed merger discussions, Continental during its first- quarter earnings call helped to stoke consolidation fires when it said it had reclaimed its "golden share" from Northwest, enabling a theoretical Continental merger. Since the late 1990s, Northwest had held the preferred stock that precluded Continental from pursuing certain "business combinations without Northwest's consent," Continental said.
While the reclamation of the share made a merger possible, Continental CEO Larry Kellner and president Jeff Smisek in a memo said, "The board very carefully considered all the risks and benefits of a merger with another airline, and determined that the risks of a merger at this time outweigh the potential rewards, as compared to Continental's prospects on a standalone basis."
United Airlines CEO Glenn Tilton, a long-time proponent of industry consolidation, in a statement following Continental's announcement said, "Our strategy is consistent. Consolidation is underway—ensuring you have the right partner is everything. We will pursue all options to ensure a strong, sustainable future for our airline and will not shy away from the tough choices necessary to create value for our shareholders and benefit our employees and customers."
Crissey, like many analysts, expected a deal between United and Continental, but said Continental's decision "may improve DOJ approval odds" of the Delta-Northwest merger, since it may mean fewer air deals in the domestic marketplace. Meanwhile, JPMorgan's Baker wouldn't rule out a US Airways-United pairing.
[email protected]