Anybody Heard The Dl Merger Rumor?

[Cosmo]

I agree with Wha...that NW could not unilaterally change its service pattern to begin nonstop service to the US from China without agreement by the Chinese government, who is not interested in seeing US carriers develop a superior service pattern than what they currently hold.

As FWAAA points out, that's simply not true. Any passenger frequency allocated to a U.S. carrier (or a Chinese carrier, for that matter) in the U.S.-China market can be operated nonstop or via one of a number of intermediate points. Just because Northwest chooses to operate all of its passenger flights to China via NRT doesn't mean that it is required to do so. Similarly, United and Continental choose to operate their flights to China on a nonstop basis, as will American when it starts nonstop ORD-PVG service next Spring. In fact, shortly after 9/11, United changed its SFO-PEK flight from a nonstop to a one-stop via NRT, and changed the flight back to a nonstop again in mid-2004 -- none of which needed the approval of China or even the U.S. DOT. So, short of abrogating the current U.S.-China bilateral agreement, the Chinese have no say over U.S. carrier flights to China as long as those flights are operated in a manner consistent with that agreement.

It is very interesting that NW and UA could both be in play at a time when US airlines like AA, CO, and DL need access to Asia more than ever. [My emphasis.]

While Delta may indeed need more access to Asia, it shouldn't be grouped together with profitable carriers such as American and Continental because Delta is certainly in no position to acquire such access at this time. The carrier is losing money at a prodigious rate (faster than any other carrier, including those already in Chapter 11), there is little chance of getting the Congressional action that it desires to spread out its required pension contributions over the next 20-25 years, carriers that Delta hoped would now be in airline heaven are still with us (especially US Airways and Independence Air due to their East Coast focus), and AirTran, JetBlue and Southwest continue to expand their own East Coast operations. So unless several, or all, of these conditions change fairly soon, Delta will likely "enjoy" its own excursion through Chapter 11 in the near future and have much more serious things to worry about, for at least a year or two, than expanded access to Asia. One of those things to worry about might be Delta finding itself in the position of "consolidatee" rather than "consolidator"!

 

[eolesen]

One of those things to worry about might be Delta finding itself in the position of "consolidatee" rather than "consolidator"!

[post="282900"][/post]​

DL's likely to wind up in the same situation as US -- they really don't have anything of value that they could spin off for cash. Any route they're flying today can pretty much be flown by any other carrier who asks for authority.

The Shuttle slots at BOS/DCA/LGA, and their CRJ70 & CRJ90 delivery slots are really the only thing of any value.

They overpaid for Comair and Atlantic Southeast a few years back, and given how saturated the 50 seat RJ markets are right now, there's not much of a chance that anyone would really want to buy either of them as a whole right now.

 

[NuGuy]

NuGuy,
where do you get the idea that NW's Pacific rights are tied to its corporate identity? Every US international route asset belongs to the US government who can negotiate its transfer to any airline it chooses. The US government would insist that any foreign government allow the transfer of any rights held by any US airline to any other airline. That is established aviation law and NW has no different arrangements. I agree with Wha...that NW could not unilaterally change its service pattern to begin nonstop service to the US from China without agreement by the Chinese government, who is not interested in seeing US carriers develop a superior service pattern than what they currently hold.
Singapore and Taiwan do have open skies but neither is a terribly attractive market by itself because of the remoteness of Singapore and the small size of Taiwan. SQ has the rights they do because their government recognizes their remote location and know that without having open skies, SQ would be merely a regional airline. SQ relies on alot of circuitous connections to survive; people are willing to do it because of the superior service. Taiwan is also overshadowed by mainland China and the political reality surrounding Taiwan's identity.

As for Chinese rights, NW may have more by virtue of operating a cargo division but UA actually operates more passenger services, including the only nonstops to the US west coast where traffic can be most efficiently distributed throughout the US.

It is very interesting that NW and UA could both be in play at a time when US airlines like AA, CO, and DL need access to Asia more than ever. I'd say it is very unlikely that both NW and UA will emerge from this round of industry restructuring independent and operating by themselves.

[post="282867"][/post]​

WT,

We are talking about two very different authorities. The US-Asia route authorites are indeed granted by the DOT, and are subject to sale, barter, trade or whatever. However, these routes are from the US DIRECT to points abroad.

However, the fifth freedom rights are something completely different and separate. These rights were awarded to NW at the end of the 1940s, and are an agreement between NW and the Japanese Government, some of which was payback for getting helping get JAL started after the war. Those rights are tied to the NWA corporate entity by agreement, and have to do strictly with NW and Japan. The US DOT has very little to do with this agreement.

Fifth freedom rights are very RARE, as it allows NW to act as basically a Japanese domestic carrier (but not in the sense of point to point inside Japan). It allows NW to actually solicit and provide carrage for O&D traffic from NRT and other Japanese points to various destinations, the same as any other Japanese carrier.

If any US carrier tried now to go to the Japanese government and ask "hey, can we offer travel from Japan to other points in Asia". You'd get laughed out of the office.

 

[FWAAA]

Hey NuGuy:

I'm pretty certain that WT and everyone else posting to this discussion already understands the difference between the 5th Freedom rights enjoyed by NW and UA at NRT and the USA-China routes.

Where we got sidetracked were the assertions (all of them incorrect, IMO) that none of the Asian assets of NW could ever be transferred to another airline thru merger, consolidation, purchase, whatever. They most certainly can, and AA discussed such a deal with NW five years ago. Problem was, NW wanted too much money so AA foolishly (maybe wisely) went looking elsewhere and asked the ugly girl to dance and she said yes.

Another incorrect assertion is that the China frequencies belonging to NW could not be flown as nonstops from the USA and must somehow be flown via NRT. A buyer of NW could always change the origin points of those flights and could eliminate the NRT stops if it desired.

Another major point made by several here is that the 5th Freedom rights may not be as valuable these days as they once were. AA, CO and DL (in addition to UAL and NW) can all fly to Japan. DL has had difficulties over the years, but it does fly there.

Nobody's going to the Japanese government and asking for 5th Freedom rights - but others are eyeing the rights belonging to NW and UAL and might just make a move for them.

 

[WorldTraveler]

Cosmo,
I know it frustrates you greatly that UA is STILL in bankruptcy and DL is not but losing astronomical amounts of money DOES NOT land any company in bankruptcy. Bankruptcy is reserved for companies that cannot manage their cash flow such that they cannot pay their CURRENT bills. That is why UA is in bankruptcy but DL is not; AA, CO, and DL have all lowered costs without having to result to bankruptcy. In fact, UA's costs should be much lower than they are given the amount of time they've been in BK and the benefit BK laws provide. You, of all people should know that. Bankruptcy won't lower the cost of jet fuel which DL and every other carrier has shown is the real issue.

I know you and everyone else at UA would like to thank that the other legacy carriers will be unable to fund their pensions and have to dump them just like UA and US had to do BUT it simply is not a given that Washington won't help the other legacies and that, even if it doesn't, that those legacies couldn't come up with the money to sustain their pensions. Pension reform is a political process and there is no doubt that DL and NW's tales of woe will not let up until there is resolution on the pension issue.
Delta has had several opportunities to head into chapter 11 where you and your friends at US will try to tell us life is good. The minds in Atlanta know the truth about bankruptcy and will do what they know must be done to return DL to profitability if that is what they believe is in their stockholders best interests. I expect NW management will do the very same thing.
It is very possible that some of the investors that UA is courting might decide that some of the SOLVENT airlines actually provide a better risk profile and know how to run an airline better.

 

[magsau]

.
It is very possible that some of the investors that UA is courting might decide that some of the SOLVENT airlines actually provide a better risk profile and know how to run an airline better.

[post="282924"][/post]​

Well certainly not at the cost structures that are in place at NW and DL. I would bet good money that the banks would rather have the contractual(both labor and non-labor) terms afforded from a restructured airline versus one that is burning through cash at rates never seen in the history of any airline.

But I suppose you are right. Someone really wants an ATL hub and its quaintness. Perhaps Airtran will buy DL and get them moving towards a rational cost structure.

 

[UALDC767]

NW has 29 weekly frequencies to China, more than any other USA carrier. AFAIK, none have to be flown from NRT; they could just as easily be flown as nonstops from LAX, SFO, DFW, ORD or any other hub.

[post="282614"][/post]​

FWAAA,

Just a point of clarification.

I believe NW currently doesnt fly any nonstops to China? So those 29 weekly freqs are all from NRT to HKG/PVG/PEK and Guangzhou (CAN). correct?


just doing a quick search of the UAL timetable...they fly from HKG (to ORD/SFO/NRT)... PVG (ORD/SFO)..and PEK (ORD/SFO). All flights are daily to each destination with the exception of HKG/ORD which is 10x per week. So unless my math is off, that is 52 weekly China frequencies for UAL.

Not gonna get into the debate of which business plan is better, the NRT hub for NW or nonstops on UAL.

Just wanted to get the facts straight.

DC

 

[MCI transplant]

Were you out sick the last 4 years? The rumors of a DL/NW or DL/CO or DL/NW/CO merger have been around since not too long after 9/11.

Just be aware, if it were anywhere close to being a "done deal" it would have to be public by now. Both are publicly traded companies, and Federal securities law requires disclosure of major corporate transactions.

[post="279583"][/post]​

<_< I don't know about that one! The aa/TWA buyout was in the works for at least a year and was one of the best kept secrects in the industry!!!

 

[FWAAA]

FWAAA,

Just a point of clarification.

I believe NW currently doesnt fly any nonstops to China? So those 29 weekly freqs are all from NRT to HKG/PVG/PEK and Guangzhou (CAN). correct?
just doing a quick search of the UAL timetable...they fly from HKG (to ORD/SFO/NRT)... PVG (ORD/SFO)..and PEK (ORD/SFO). All flights are daily to each destination with the exception of HKG/ORD which is 10x per week. So unless my math is off, that is 52 weekly China frequencies for UAL.

Not gonna get into the debate of which business plan is better, the NRT hub for NW or nonstops on UAL.

Just wanted to get the facts straight.

[post="282969"][/post]​

You're counting all the flights to HKG, which everyone can and does fly to. I'm talking about the lucrative part of China - mainland China, and NW has more flights than UAL. Nobody can ever hope to match the service of CX on the HKG route, especially not UAL. We're discussing the part of China that represents a growth opportunity, not the mature market of HKG.

http://dmses.dot.gov/docimages/p80/316402.pdf has a good discussion of who has rights to fly to mainland China.

Just wanted to keep the facts straight.

 

[UALDC767]

You're counting all the flights to HKG, which everyone can and does fly to. I'm talking about the lucrative part of China - mainland China, and NW has more flights than UAL. Nobody can ever hope to match the service of CX on the HKG route, especially not UAL. We're discussing the part of China that represents a growth opportunity, not the mature market of HKG.

http://dmses.dot.gov/docimages/p80/316402.pdf has a good discussion of who has rights to fly to mainland China.

Just wanted to keep the facts straight.

[post="283037"][/post]​

Well not everyone flies there.

Check your original post.....you just said China frequencies.....nothing about excluding HKG. Doesnt matter if its a mature market or not. People and cargo still want to go there or come from there. Why would airlines continue to fly there if it wasnt a lucrative destination?


But ok I'll play by your parameters, so lets wipe out flights to/from HKG.

That leaves NWA (per their timetable on the NWA.com website) with a daily CAN (757)/ PVG(744)/ PEK(332) to NRT. So that 3 flights a day for a weekly freq of 21.
Any disagreement over that?

Lets look at UAL (from their current timetable on UAL.com) daily from PVG to SFO/ORD (777/744) and daily from PEK to SFO/ORD (744/744). So four flights a day, for a weekly freq of 28

So even without HKG it looks like UAL has more freqs.

Nice dig about level of service. Why didnt you group NWA into that "can't compete with CX" too?

DC

 

[WorldTraveler]

Anyway you slice it, UA is the dominant US passenger carrier to all of Asia except for Japan. Whether you like UA or not, their traffic statistics and schedules are hard to dispute. In fact, Asian newcomer CO could be in the position in the very near future of overtaking NW's presence in some Asian cities like Beijing where CO offers more seats than NW.

Mags,
you might want to wait for UA to report their unit costs before you brashly state that no one will be interested in DL with their cost structure. DL's mainline ex-fuel CASM for the quarter that just ended was 7.11 and the fuel-in CASM was 9.65. Only AA and CO have reported levels lower than that.

 

[Cosmo]

WorldTraveler:

I have several comments in response to your post from yesterday evening that was directed at me:

1.) I'm not frustrated about United's bankruptcy status, either in its own right or relative to Delta's current financial status, because I don't work for United (or any other airline) and have never done so. Clearly, you don't know me at all.

2.) In my previous post, I only mentioned United in relation to its service to China and did not make any financial comparisons between United and Delta. It was you that decided to make the comparisons, perhaps out of your own frustrations that Delta continues to be shut out of the lucrative China market. Indeed, it seems IMHO that you have been getting rather defensive lately as Delta's financial condition continues to lag behind American and Continental, as exemplified by the three carriers' recently-released second quarter 2005 financial results.

3.) In fairness, Delta has made some significant strides in reducing its operating costs and, like you, I am surprised that United has not made greater progess to date in reducing its non-fuel costs given the duration of its stay in Chapter 11. I suspect that the reduced size of United's mainline operation is the primary cause of this phenomenon, a comment that you have also made in the past.

4.) But having said that, Delta hasn't yet come up with a way to solve its coming liquidity crisis. The carrier has more than $20 billion (that billion with a "b") in debt on which it must pay interest and at least some principal each year, an amount that I would conservatively estimate to be at least $1 billion annually. In addition, IIRC, Delta also has over $2 billion in required pension plan payments to make in the next couple of years. Combined with Delta's current negative cash flow from operations and capital expenditures, it's difficult to see how Delta can avoid a bankruptcy filing since the upcoming interest, principal and pension payments within a year will consume Delta's remaining cash. Furthermore, only a few bondholders (representing just $45 million, or 0.2%, of the carrier's total debt of $20.5 billion) accepted the carrier's stock swap offer, and an asset sale (such as the rumored sale of ASA to SkyWest) would only delay the inevitable by 6-12 months while having a negative impact on Delta's operating results. As you said, the inability to pay current bills is what puts a company into bankruptcy, and Delta has not given any indication of how it will be able to avoid that fate within the next year.

5.) Yet perhaps most perplexing IMHO is your head-in-the-sand attitude regarding the likelihood of potential Congressional action on pension relief for the airlines. Every bit of news on this subject that I have seen indicates that, Delta's and Northwest's "tales of woe" notwithstanding, if any airline-specific relief is enacted at all, it will definitely not include anything close to the 20-to-25-year repayment period that those two carriers have been advocating. Let's remember that there are now only two legacy carriers strongly pushing for this legislation, since United and US Airways obviously (albeit unfortunately) no longer offer such defined-benefit pension plans while American and Continental seemingly have the financial strength at the moment to meet their current pension obligations. Let's also remember that the PBGC is adamantly (and publicly) opposed to the relief sought by Delta, as is the White House and Chairman of the House committee that would be responsible for writing any such pension legislation. Finally, Delta's cause is not helped any by being paired with an airline (Northwest) that eagerly seems to be on a path to ruining its employees livelihoods -- with or without a strike -- on a scale that far surpasses the employee pay cuts negotiated by United while in bankruptcy. So, with all due respect, I would suggest that you take a more realistic stance and recognize that Delta's pension woes are very unlikely to be solved by Congressional action in the current political environment despite the desires of Delta's senior management, thus probably necessitating a bankruptcy filing by the carrier. JMHO, of course.

 

[Fly]

Oh no Cosmo, now you've done it.

Get out the NO DOZE folks, I predict we will be reading a novel sized rebuttal tomorrow.

 

[FWAAA]

I certainly hope that no kitties were harmed in the production of that picture.

 

[WorldTraveler]

Fly just wishes that she could construct a five word sentence and is jealous that Cosmo and WT both can read and write such things. Instead she wastes bandwidth posting pictures.

Cosmo,
first, let me copy what I just posted on the DL board:

Yes. costs are only half of the equation but right now it is probably the most important half because LCCs have removed much of the pricing power from the legacy carriers. And as luv2fly points out, Delta has not completed its transformation plan and yet has accomplished more in six months than some airlines have done in two years or more and others with the benefit of bankruptcy. And DL's employees still have pensions!

Delta does have an inferior network from a revenue generation standpoint - limited access to traditionally premium revenue domestic markets (although those continue to fall faster than bowling pins on a Friday night) and a smaller international network which has limited access to some of the most protected and profitable markets such as Asia and London.

However, if I am an investor contemplating investing in the airline industry, I am going to be much more willing to invest in a company that has low costs and is maintaining its present network and growing where it can rather than retreating from its markets as a couple carriers that begin with U are doing. Further, when consolidation starts taking hold, Delta will be able to make a much more compelling case than other legacies that it can effectively manage (ie make money for an investor) some of the premium revenue markets that may become available.

Finally, if Delta has been able to cut costs this dramatically OUTSIDE of bankruptcy, you don't want to know what it can do with the benefits of bankruptcy on its side. If the lowest cost producer chooses to go into bankruptcy and further cut costs and shore up its balance sheet, everyone else is in serious trouble.

I know you are not an airline employee but are very knowledge which is why I like to debate you. You just happen to be loyal to the wrong team and unable to see how things will shake out in the long term.

Now I'll specifically address your points:
1-3. DL's costs are now industry leading. Yes, it has network deficiencies which I have always acknowledged. There is a truism in life that those who make what they have work are more likely to be rewarded with additional responsibilities and assets. Delta is making a compelling case that it manages its resources well and could very well step up to the plate to manage any number of higher revenue producing industry assets should the current owners/operators of those assets be unable to improve their financial performance to acceptable levels.

4. DL's debt is very significant but, again, lenders are much more willing to work with a company to restructure its debt if there is a strong likelihood that such a restructuring will work and if the likelihood of failure is high by not restructuring. In other words, DL will choose bankruptcy if it cannot shore up its balance sheet, not because it needs to cut costs (although being in BK gives DL even more opportunity to cut costs potentially putting their costs on levels comparable with the lower level of LCCs). DL has already succeeded at implementing several debt for equity swaps and has said they will pursue doing more. Bankruptcy is essentially a big, expensive debt for equity swap process so DL is accomplishing the same thing UA will do although perhaps on a smaller scale without the bankruptcy costs.
Also, as you know, bankruptcy almost always results in a loss of tax assets because of the change in control that results in restructuring. Delta has accumulated over $8B in tax assets, meaning they won't be paying taxes for a long, long time. Further, those tax assets exceed pension liabilities by several billion dollars meaning that filing for bankruptcy would COST Delta future tax savings.

5. There are alot of folks including the Adminstration that don't want to give any airlines a break but logic simply says it makes far more sense to help them than for the government to end up taking over those responsibilites. Thankfully, we have a representative form of government that includes significant checks and balances so what the administration wants is often not what happens.
I fully expect that pension reform legislation that shores up pension funding for all industries will pass first and then airline specific exception legislation will happen. The reason the PBGC doesn't want industry specific relief is because it will set the expectation that other industries can get the same thing when they hit the skids. In reality, defined pensions are a thing of the past for most competitive industries. It is very likely that the same type of industry specific pension assistance with be necessary for other industries including the automotive industry in the coming years. It makes far more sense for government to recognize the trend and encourage the orderly shutdown of defined pensions than force companies into bankruptcy where the costs to all stakeholders is much, much higher. I am optimistic because I believe logic will prevail. And it is not a foregone conclusion that DL or NW couldn't afford their pensions as legislation stands, although even I would be hard-pressed to imagine how either company could come up with the cash to fund their obligations in the next couple years. Finally, while DL and NW are only two companies, their combined liabilities are close to or over UA's liabilities. No one wants to see UA's record setting pension default be replaced by another one, at least not in such a short time in the same industry.

Thank you for your coherent, well thought out response. I'm sure in time you'll come to see my point of view.