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What the Delta-NWA merger means to Minnesota |
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Wednesday, 14 May 2008 |
David Purdy
Guest Columnist
The recent merger hoo-hah of Delta and Northwest Airlines is like watching a local TV station get gobbled up by one of the Hollywood network monsters. Suddenly there’s new programming, glitz, and whiz-bangs, but your favorite show just went off the air. This merger is more of an acquisition for Delta than an equal merger. With Delta’s 446 planes to Northwest’s 356 vessels, 55,000 employees versus 30,000, and $19.2 billion in revenues to Northwest’s $12.5 billion, it’s pretty clear who the bigger company is.
However, larger does not always mean the best management. Delta produces the same operating profit of $1.1 billion as Northwest. That doesn’t bode well for Minnesota in terms of promised synergies.
Three specific groups profit up front from this merger: individual hedge funds that made large gambles on pending consolidation; a few very senior airline executives looking to realize multimillion-dollar payouts; and Wall Street firms eyeing big merger fees. For consumers like you and me, the airlines so far promise not to reduce service at the hubs or reduce line jobs, yet they would somehow produce miraculous efficiencies via this merger.
What will matter to average folks like us in the short run is that fare prices are going up. Northwest indicated it would match a previous 3%-5% increase first implemented by United Airlines and matched by Delta, American, and Continental Airlines Inc.
And that’s only the beginning: domestic carriers need to raise ticket prices 15%-20% just to break even at existing fuel prices.
One only needs to look at the balance sheets to know why the airlines want the deal. Delta’s financial losses last quarter hit $6.39 billion, and Northwest had $4.1 billion in similar losses, both bottles of red ink filled by increasing jet fuel prices. In recent testimony to Congress, both company CEOs fessed up that it was fuel prices, not the goal of airline synergies that really pushed the merger into high gear. Clearly someone had a clock ticking that was getting to the 11th hour.
But please don’t think the show is over with the merger proposed. Folding the two airlines together doesn’t lower fuel prices or create savings by default. And there are no current plans to cut more U.S. flights which in turn limit any savings or higher fare revenue.
So instead of Tweedledum and Tweedledee, there is now to be just one kingdom with the same number of planes, costs, and employees. If tickets can’t be sold for higher prices, the merged airline will have no choice but to reduce the fleet more. And neither airline has ruled out further capacity cuts if fuel prices keep rising.
Part of the success of the merger is still hung up on the wings of the airline pilots involved. And some of them don’t want to play.
Delta pilots finalized an agreement with their own management prior to the merger announcement. As for the Northwest pilots, at seven years post merger only 300 original Northwest pilots would be left in the top 2000 pilots and Delta would be flying all the international routes.
Northwest pilot leaders also oppose the merger due to being on a lower pay scale to Delta pilots. Money matters. Getting shafted doesn’t help perceptions, either.
Northwest’s history unfortunately for the merger seems to now be cropping up like a bad penny.
Seventeen years ago, Minnesota’s Legislature helped Northwest avoid bankruptcy with an almost $800 million aid package, including the loan the company is still repaying. As part of the deal, Northwest had to keep its corporate headquarters and a hub in the Twin Cities, as well as a certain employment level, until the loan was paid which will still be outstanding in 2009.
If the proposed merger finalizes, clearly Delta would be a successor to Northwest’s obligations and their early payoff if necessary.
And loan forgiveness is not an option. Enforcement is a serious business for the lender, the Metropolitan Airports Commission.
In 2004, the Minnesota hub generated 153,000 jobs, $6 billion in personal income, $10.7 billion in business revenue, $1.3 billion in sales and $626 million in state and local taxes. That’s a lot of airline peanuts!
So far, Northwest and Delta aren’t showing any bad cards on the table. Instead, Northwest CEO Doug Steenland told Congress that the merger would expand Northwest’s long-standing hub service in the Twin Cities.
But please don’t hold it against some of our esteemed legislators for being the hard-to-convince types. They’ve even gone so far as to write up and propose two state bills requiring Northwest to forfeit airport rent reductions and speed up repayment of a $245 million loan that have cleared a Minnesota House panel. The proposed state legislation would come into play if Northwest’s Eagan headquarters were closed and jobs were lost in the merger with Delta Air Lines.
So the die is cast. Either way, Minnesota wants to be covered on the short term, but may lose far more in the long run.
Writer David Purdy is president of Wealth Management Midwest, Forest Lake, and offers securities through Linsco/Private Ledger, Member NASD/SIPC And an investment advisor.
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