Goodbye Northwest: And then there were five
— -- My most recent flight on Northwest Airlines will likely be my last. Now that shareholders have approved the proposed merger between Delta and Northwest, it appears the smaller Minnesota-based airline will soon be absorbed into the Delta network and the Northwest name will disappear from the skies.
While some customers benefit from expanded route networks, most airline mergers result in higher fares, fewer flight options and a period of dysfunction and chaos for travelers as two airlines attempt to combine. As airline mergers go, Delta and Northwest may be less likely to reduce competition because the two airlines have few overlapping routes. There should also be less chaos because these airlines share some of the same computer systems, belong to the same alliance (SkyTeam), and Delta CEO Richard Anderson previously served in the same post for Northwest. In spite of these possible synergies, the new airline and its customers are likely in for a turbulent ride aggravated by volatile fuel prices and a skittish economy.
Bigger is not necessarily better
Airlines often believe "bigger is better" and that one large airline will be more profitable than two smaller airlines. But if the old adage is true, the big six network airlines should be highly profitable, since most are products of previous airline mergers that held great promise at one time. Unfortunately, merger-driven economies of scale never seem to materialize, as the bulk of airline costs are lodged in labor, fuel and expensive assets like aircraft, which offer little gain from economies of scale.
Anderson is quick to point out that the combined airline will be the largest in the world and will operate a global route network. This might be attractive for customers in Delta-Northwest hub cities, like Atlanta or Minneapolis-St. Paul, but it won't sway corporate customers in Chicago, Houston and most other U.S. cities where other airlines dominate. While Delta's strengths in Europe, Latin America and the East Coast complement Northwest's Pacific routes and coverage in the north central U.S., any incremental new business is unlikely to reverse the fortunes of two airlines that lost a combined $1.4 billion in the second quarter of this year.
Only recently emerged from bankruptcy, both Delta and Northwest still have anemic balance sheets and higher cost structures than many competitors. The combined airline is expected to have over $6 billion in cash, but also $16 billion in debt. Inflated oil prices will assure continued losses. This is bad news for the airline and customers who will likely endure additional fare increases and other fees from an airline struggling to stay afloat.
The fate of the hubs
Airline mergers can economize by reducing capacity on common routes and eliminating redundant hubs. The new Delta-Northwest combination has few overlapping routes, but several hubs are too close together and therefore unnecessary. Anderson says all Delta and Northwest hubs make money, but history shows economics change when airlines combine.
With enormous hubs already established in Chicago and Dallas, American Airlines dismantled TWA's St. Louis hub after purchasing that carrier, and America West closed US Airways' Pittsburgh hub after acquiring that airline's Charlotte and Philadelphia hubs on the East Coast.
Despite Delta's party line, it seems inevitable that Northwest's smaller Memphis hub and Delta's Cincinnati hub, which operate in the shadow of much larger hubs at Atlanta and Detroit respectively, will be downsized. When airlines reduce capacity, other airlines often move in to replace that lost capacity. But with record high oil prices, most airline expansion plans have been trimmed or shelved altogether, so it is unlikely that much of the lost capacity will be replaced by existing airlines or new entrants. For business travelers dependent on frequent air service at Cincinnati or Memphis, the Delta-Northwest merger may prove problematic.
Eliminating smaller regional jets
Regional jets (RJs) with 30 to 70 seats revolutionized the airline industry, providing more-frequent and speedier service to many smaller communities. But record high fuel prices make many RJs unprofitable, even if every seat is sold. In the current environment Anderson admits that "34-seaters make no sense" and 50-seat jets make sense only on short flights.
"We are in the process of rationalizing across both our commuter network and our regional carrier network," he told me. With well over half of Delta's Cincinnati operation flown aboard RJs, the airline has already reduced capacity by 25% at that hub. Anderson says RJ flying must be "right sized," which means additional capacity cuts are likely for hubs in Cincinnati, Memphis and Salt Lake City, where RJs dominate. Besides the loss of service at these smaller hubs, displaced connecting passengers will be rerouted over the more congested hubs in Atlanta, Detroit or Minneapolis.
International realignment
The new airline's larger hubs will also undergo realignment, particularly in international services. Today, Delta Air Lines operates numerous international departures from large metropolitan areas in New York and Atlanta using many smaller Boeing 757s and 767s, while Northwest flies much larger aircraft like the Boeing 747 and the Airbus A330 on international routes from the smaller cities of Detroit and Minneapolis. This is likely to reverse when the new airline takes flight.
"It can really help to put the larger-gauged airplanes in the Delta network," says Anderson, meaning many of those 747s and A330s will be reassigned to more populous New York and Atlanta while many 757s and 767s may be redeployed in Detroit and Minneapolis. It is also highly likely the new Delta Air Lines will move capacity on many of Northwest's former Pacific routes to New York and Atlanta. For corporations and business travelers, winners and losers depend on geography.
Fleet incompatibility
Operating multiple aircraft types raises costs and reduces flexibility when airlines must substitute one aircraft for another. This is why low cost airlines like AirTran, jetBlue and Southwest operate only one or two aircraft types. For global airlines this is impractical, which is why all big six network airlines operate between four to six different aircraft types. Northwest and Delta Air Lines each operate five aircraft types, but have just one type in common, the Boeing 757. This means the new airline will operate an unprecedented nine different aircraft types, giving it a distinct competitive disadvantage.
The Delta-Northwest merger will create the world's largest airline by passenger traffic, but will face some big challenges ahead. When America West took over US Airways, chaos and dysfunction ensued for almost three years. Let's hope this merger does not follow a similar pattern and that at least some of the changes will be positive for most business travelers.
Send David your feedback: David Grossman is a veteran business traveler and former airline industry executive. He writes a column every other week on topics of interest and concern to business travelers. E-mail him at travel@usatoday.com.