US Sec'y of Transp. considers DL-NW merger

WorldTraveler

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Dec 5, 2003
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US transport chief ponders Delta-Northwest merger
Tue Jan 10, 2006 11:50 AM ET

(Adds Delta, Northwest declining comment, background)
By Lucy Hornby
SHANGHAI, Jan 10 (Reuters) -U.S. Transportation Secretary Norman Mineta suggested on Tuesday that a merger between U.S. airlines Northwest Airlines (NWACQ.PK: Quote, Profile, Research) and Delta Air Lines (DALRQ.PK: Quote, Profile, Research) could result from the latest round of industry restructuring.
The U.S. airline industry has been battered by rising fuel costs, weak revenue and low-fare competition, leading some carriers, including Delta and Northwest, into bankruptcy.
"I sometimes wonder whether or not ... Delta and Northwest will come out as a merged carrier," Mineta told an audience of business executives in Shanghai, adding he was just "thinking out loud."
Representatives of Delta and Northwest declined to comment on Mineta's remarks. Both carriers said they were focused strictly on restructuring.
Mineta said he expected carriers UAL Corp. (UALAQ.OB: Quote, Profile, Research) , parent of United Airlines Inc., and Aloha Airlines to emerge from bankruptcy protection in February.
Mineta is not the first industry expert to predict consolidation in the ailing airline industry. And analysts have speculated on the possibility of a Delta/Northwest merger.
The two carriers, the third and fourth largest respectively in the United States, filed for bankruptcy on the same day in September.
At the time, analysts noted that the two have little overlap in their domestic routes, a factor that makes a merger prospect enticing. Internationally, Delta has prominence on Atlantic routes, while Northwest has more flights to the Pacific region.
However, the companies' mismatched aircraft fleets could pose innumerable problems for a combination. The two carriers operate a combined fleet of more than 1,200 aircraft. But the only aircraft model the two have in common is the Boeing 757, one analyst said.
The two carriers also would need large amounts of exit financing and creative management to make a merger work, analysts have said. Some said Delta and Northwest may we seek mergers, but not with each other.
At least one carrier is using a merger as a lifeline to stay in business. US Airways, which left bankruptcy last year, merged with America West to form a new carrier named US Airways Group (LCC.N: Quote, Profile, Research) .
"We're going to have to see consolidation ... right now we do have too many seats following too few passengers," Mineta said.
Higher costs and lower plane utilization would continue to hobble airlines running 'hub-and-spoke' operations, he said. He noted that lower cost carriers like Southwest Airlines (LUV.N: Quote, Profile, Research) and Jet Blue had utilization rates of 78-82 percent, versus 45-48 percent for the hub-and-spoke carriers.
"Until the remaining legacy carriers do something about extracting themselves from a hub-and-spoke operation, I'm not sure they are going to be very successful."
Mineta, who toured Shanghai's new deepwater container port on Tuesday, cautioned that the United States should not become the "broken link" in moving goods and people.
"American companies are expressing growing dissatisfaction over our ability to deliver products efficiently in and out of the U.S.," Mineta said.
But he said rail companies were investing in trans-continental track at the expense of the "last mile," while land and track issues made it costly for the United States to even contemplate high-speed passenger rail. (Additional reporting by Kyle Peterson in Chicago and Paritosh Bansal in New York)
http://yahoo.reuters.com/financeQuoteCompa...10201718_newsml
 
So is this talk serious or just speculation?


It has been speculation for years, but the rhetoric has certainly increased lately on the line. I have heard it mentioned frequently the past few weeks by pilots, mech's, and fa's. I have even heard an announcement will be made around Jan 15th or 16th, or maybe that's just the announcement for more paycuts and layoffs.
 
no announcement anytime soon but NW is defining its future now. any failures to make its restructuring work - as painful as it is - will almost certainly spell its demise. The question is how fast DL can pull off a merger.
 
because there are investors (and apparently government regulators) who believe that the industry can be more profitable consolidated.

Bankruptcy is a good time to prepare for a merger because there is alot of right-sizing of the business that can be done in BK through lease rejections etc. You lose that ability once you leave. UA opted to convert most of its obligations to leases, some of which can be dumped on fairly short notice while others are longer-term. In a CO-UA merger, UA and CO will both dump some more jets because some capacity can be removed and further simplification is needed to make a merger work. Given how quickly DL is renegotiating leases (they've said 90% or more or aircraft leases have been renegotiated), I suspect they are going w/ more traditional leases just at lower rates. DL and NW both had alot of older aircraft that can be grounded fairly easily - either because they are owned or on short-term leases already.

I suspect you will see DL reject its lease on its CVG facilities towards the end of bankruptcy and NW will do the same in MEM - just as US did. Doesn't mean they'll not still be the leading airline in those cities but they'll be free of the obligations and better able to reshape their network to the new environment just as US did.

by the way did you notice that DL and NW had better (or not as bad) operating margins for the 3rd quarter of 05 as reported to the DOT than did US and HP? If US and HP can attract financiers, I don't think it's at all hard to believe DL and NW can do the same.
 
I believe DL owns a fair bit of its facilities at CVG. I think they can reject most of the gate leases in the concourse nearer the terminal, I'm not so sure of the legal obligations with regard to the remote, mainline terminal.

Also, I think a merger of NW and DL would not be a easy as the route maps would suggest. They'd still be a carrier with medium to small hubs with lots of expensive connecting travelers with LCC type fares and a big fare differential for captive business flyers. In other words, the system would still be vulnerable to the increasing need of LCC's to expand and to expand into NW's markets. Dumping both CVG and MEM would still mean that DTW and MSP and to some extent SLC have downside potential. I think there is only room for two full service business man oriented legacy hub and spoke carriers. If DL wants to be one of them, I wouldn't merge with NW. Asia/Europe wont carry that whole domestic system of the combined carrier.
 
Don't forget that regardless of how much Mineta may or may not like such a merger, any merger must also pass muster with the Justice Department. Considering that the public has yet to see any major benefit from the AW-US merger, I'm not sure that Justice is ready to bless another major airline merger just yet.

Remember, the government expects us to wait years for meaningful results. (See also, tax cuts for the rich trickling down to the rest of us, Iraq, Social Security reform.) However, they expect everyone else to show instantaneous results, or at least before the next election cycle. :lol:
 
Well, it's selective. If it eliminates competition between Halliburton and anybody, it's for the public good. If it's anything that might increase prices during an election year, well, it's obviously in violation of anti-trust laws.


Moi? Cynical? How could you say such a thing?
 
If this merger were to go through, which hub(s) do you think would fall significantly in the number of flights? I would say that MEM and CVG would suffer, but i feel that DTW would also suffer. just my thoughts........
 
There are very few airport facilities that are owned by airlines and not leased from airports; most hub airport facilities are on long-term leases by the hub carrier. That’s why bankruptcy is scary for airports because those leases can be rejected, including CVG.

I don’t think Mineta is putting his seal of approval on a DL-NW merger and he isn’t the only one that has to give the thumbs up. I think the more significant aspect of his discussion is that he acknowledged that industry consolidation needs to happen and he believes DL-NW could make a good fit. Yes, there are obstacles to a merger but there are simply to staying alive in the airline industry.

As for CVG and MEM both are not necessary for a combined DL/NW merger. I personally think you would see ATL and DTW as super hubs while MSP would be downsized somewhat. MSP duplicates a lot of flow carrying capacity when compared with DTW and is more expensive to operate; it is also not far enough west to serve the intra-west markets that SLC serves. DL is growing its presence in NYC and to Latin America in addition to its core European markets.

Yes, NW does have some vulnerability to LCC growth but they have chosen not to expand in NW hubs up to this point. Also, NW and DL both have very valuable franchises, have a pretty balanced route system when combined, and yet do not overlap much. Further, both are removing domestic connecting capacity and even more would come out in a merger – perhaps another quarter of the combined DL/NW domestic capacity.

I disagree that there is room for only two global airlines. Approximately 1/3 of the airline traffic worldwide is to, from, or within the US. It is in the US’ interests to have large, healthy airlines that can keep that business on US carriers. Few other industries have two or fewer competitors of comparable size; in fact, the telecommunication companies are also moving toward three large competitors. A industry composed of DL-NW, CO-UA, and AA plus AS or maybe US would be very strong.