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SEAT 2B | By Joe Brancatelli

Merger Most Foul

Northwest Airlines President/CEO Doug Steenland talks about their merger with Delta during a news conference in April.
Northwest Airlines President/CEO Doug Steenland talks about their merger with Delta during a news conference in April. (Craig Lassig - AP)

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By Joe Brancatelli
Portfolio.com: Business Travel
Tuesday, April 22, 2008; 11:30 AM

I've lost track of the number of real or attempted airline mergers that I've flown through in the last 30 years, but I can tell you this: The play is old and the plot is tired, but there are always enough twists to keep you watching until the final scene.

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If it lives up to form, the week-old proposal to combine Delta Air Lines with Northwest Airlines will be a four-act melodrama and a months-long struggle among squabbling labor unions, petulant managers, and queasy stockholders and investors.

We're already watching Act One, in which the two C.E.O.'s do the "done-deal dance." The chief executives of both carriers proclaim that there are no impediments -- legal, regulatory, or competitive -- to a swift, seamless merger of equals. They give interviews to the hometown papers that are long on platitudes and promises and short on reality and circumspection. So-called media influencers -- industry analysts, talking heads, even cranky columnists like yours truly -- are offered private briefings. Slick promerger websites appear; the C.E.O.'s write predictable op-ed pieces. And key national media outlets -- the New York Times, the Wall Street Journal, and USA Today -- crank out reams of copy and acres of charts, all of which help foster the idea that the merger is, in fact, a done deal.

In a later scene, the plot thickens as all that is revealed to be baloney. Airline mergers require the blessing of both the Justice and Transportation departments, and there are always meaningless but time-consuming congressional hearings. The process takes months -- or, in the case of a never-consummated United-US Airways merger, first pitched in 2000, more than a year. As Continental Airlines, itself eyeing a merger, told its employees last week: Aviation combinations happen only after a complex, "lengthy, and rigorous regulatory review."

And this time, the State of Minnesota has a sizable role. A $245 million bond held by a state agency immediately comes due if Northwest Airlines leaves Minnesota. The combined carriers will be based in Atlanta, so Delta chief executive Richard Anderson, who once ran Northwest, is talking about his desire to "fulfill the spirit" of the bond's covenants. But the state's political infrastructure, embarrassed by its past largesse toward Northwest, will want more than spiritual restitution.

Act Two of the all-too-familiar airline-merger melodrama is what I call the time's-a'wasting warning. As the regulatory process drags on, the airlines begin to raise the specter of dire consequences: Jobs will be lost; service to small communities will disappear; travelers will be inconvenienced; and one or both of the carriers will disappear if the government doesn't move with dispatch.

The plot twist this time? Delta and Northwest seem desperate to get the merger approved before the presumably business-friendly Bush administration departs. All of the aforementioned talking-head experts are already prophesying that the next administration will be unwilling to approve a $17.7 billion deal that would create the world's largest carrier.

But the regulatory process at both the Justice and Transportation departments is controlled by lower-level career bureaucrats, and they are rarely motivated by the timetable of administration changes. The United-US Airways merger was passed seamlessly from the Clinton to the Bush administrations. And it was Bush's Justice Department that spiked the deal in July of 2001.

Act Three is the "union dues" phase. Airlines are heavily unionized and longtime line employees resent highly paid, transient bosses controlling their careers. One example: Almost three years after the US Airways-America West merger was first announced, the combined carrier is still trying to consolidate its old union contracts. A bitter fight between the two competing pilots' groups wasn't settled even after a supposedly binding arbitrator's ruling. And just last week, the pilots voted out their old union. The labor squabbles have helped drive US Airways to the bottom of the passenger-satisfaction charts.

This time, only Delta's pilots are unionized; Northwest's rank and filers, who despise the airline's union-breaking chief executive, Doug Steenland, might have welcomed the merger. But the atmosphere has been poisoned: Anderson, who's slated to be top dog of the combined carrier, cut a separate, premerger contract deal with Delta's pilots. Naturally, Northwest's aviators now oppose the merger, and most other Northwest unions have lined up in opposition to the deal too.

The final act is what I call transition turmoil. While they await the government, Delta and Northwest will start contingency planning. Putting two carriers together entails worldwide coordination of hundreds of moving parts -- fleets, employees, routes, maintenance, schedules, airports, advertising, marketing, pricing, distribution -- and requires the spade work of hundreds of middle- and top-level executives. While management diverts time to planning for what may never be, ongoing operations suffer. In the runup to the doomed United-US Airways merger, for example, United's performance was horrific. During some weeks in the summer and fall of 2000, three out of four flights ran late; hundreds were cancelled; and passengers and luggage were stranded from Hong Kong to London's Heathrow Airport. United never recovered: It declared Chapter 11 bankruptcy two years later, spent more than three years working on a botched reorganization, and has been looking for a merger partner since it exited bankruptcy, in February 2006.

The plot twist this time? There isn't one. The Delta-Northwest deal dwarfs any other previous airline combination and will be tricky to execute. And since neither carrier has any spare management, logic dictates that there will be months of pain inflicted on business travelers even before the two airlines learn if they will be allowed to merge.

The Fine Print . . .

Another familiar theme of airline-merger melodramas: Which executive has feathered his nest best? The winner this time is Northwest's Steenland. He has a clause in his employment contract that allows him to leave in June with a $7.8 million special payout. But the payout window reopens if he departs after a merger. As currently configured, Steenland would become a director of the combined carrier with no executive role. In other words: ka-ching!

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To contact Joe, visit his Contributor's page on Portfolio.com.


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