Should Northwest Consider a Merger?

According to some recent reports, including this article by The Pioneer Press, the answer is yes. And there are many reasons why Northwest would make a good acquisition target, especially with US Airways (if the US Airways/Delta merger doesn't go through) or even United. However, the possibility of a Northwest merger with United is far less likely for antitrust reasons as both airlines have large market shares in Asia, and particularly China. Neither airline would want regulators to force them to give up what could potentially be their most lucrative routes. But, US Airways on the other hand is a very attractive merger target for Northwest. US Airways now has healthy financials, unlike Northwest, and US Airways's route network fits perfectly with Northwest's, making this merger nearly as attractive as the Midwest/AirTran deal.

US Airways has hubs on both coasts, but lacks a central hub in the Midwest, where Northwest's U.S. hubs are concentrated. Remember that part of the worry with the America West/US Airways merger was that the new airline would have a "barbell network", with extensive service on both coasts, but lacking in the Midwest and Rockies. A Northwest merger would solve that problem. The biggest problem with the two airlines' route networks is the number of hubs in both. If a merger occurred, the airline might consolidate hubs. It's less efficient to have hubs in two cities relatively close to each other, and both airlines already have that problem in their respective networks. Northwest has two close hubs in Minneapolis/St. Paul and Detroit while US Airways has two close hubs in Phoenix and Las Vegas. If a merger occurred, some hubs would likely be closed. Between them, the two airlines operate seven hubs in the United States in addition to Northwest's hub in Tokyo. It's probable that at least three hubs would close down and become focus cities if a merger occurred.

I would guess that Northwest's hub in Memphis, where Northwest's regional lift providers Pinnacle and Mesaba do most of the flying for Northwest, would be the first to go. Memphis is Northwest's smallest U.S. hub, and has struggled with traffic issues for a long time. Memphis is a bad, bad location for a hub, because it lacks a strong base of origin and destination (O&D) traffic, and is in a relatively poor location geographically. O&D traffic refers to the number of passengers that use Northwest to fly to its Memphis hub but who aren't connecting but rather departing or arriving in Memphis. Because Memphis is a relatively small city, the number of flights it gets is very disproportional to the number of passengers who actually are traveling to/from Memphis. Cities like Phoenix or Detroit have larger populations and are better locations for a hub, provided they are in a reasonable geographic location. If Northwest's Memphis hub closed, the merged carrier would probably realign its regional operations. Pinnacle, one of Northwest's two regional lift providers contracts exclusively with Northwest, and their hub is in Memphis. Unless Pinnacle can demonstrate to the merged carrier that it is a valuable supplier, they may have to liquidate. Consequently, a Northwest merger could be opposed by many of Northwest's regional lift provider employees. But, Memphis wouldn't be the only hub to go in a US Airways/Northwest merger. The next likely hub to go would be Minneapolis/St. Paul. Since the hub is located near Northwest's larger hub in Detroit, Minneapolis makes no sense as a location for a hub from a geographic perspective. But moreover, Minneapolis receives far too many flights given its O&D needs. A merged carrier will need a Midwestern hub, and Detroit is a prime location, with Northwest's new terminal and a larger O&D base. Northwest has committed to Minneapolis for too long, and they need to realign their flight schedules in the city to better reflect traffic levels. Minneapolis is simply a duplicate hub that would be too expensive to operate for the merged carrier.

It's important to remember that any hub will receive a disproportionate amount of flights, otherwise, it wouldn't be a hub, since some passengers won't be departing or arriving the hub city. But it makes no sense for an airline to put a hub in a city that will receive few O&D customers, since they help pump up load factors, and airlines can typically charge O&D passengers more since the hub carrier has muscled out low-cost carriers that lower fares. For example, AirTran is currently the only low-fare carrier in Memphis. Minneapolis/St. Paul only has AirTran, Frontier, and Sun Country. Northwest can charge a lot in those markets, and they will make great focus cities, but they don't make sense as hubs.

But now the question becomes which US Airways hub gets eliminated if there are to be four in the merged carrier's domestic network. US Airways operates hubs in four prime cities, Las Vegas, Phoenix, Philadelphia, and Charlotte, and if a merged carrier decides to dismantle a hub operation in a city, there will almost certainly be a smaller, but substantial focus city operation. At first glance, the most logical choice for which hub should be dismantled is Charlotte. The smallest O&D market of the four by far, the city is also relatively out of the way geographically. However, that's where the criticisms stop. There are numerous reasons why it would be foolish for US Airways to dismantle the Charlotte hub. First, the South is one of America's fastest-growing aviation markets, and if Northwest's Memphis hub is dismantled like it should be, then Charlotte needs to remain intact as the Southern hub for the merged carrier. Second, Charlotte itself is a prime business market, and US Airways is able to charge a premium to the business travelers, who travel to/from Charlotte. Charlotte is America's number two city in terms of banking operations, after New York City, so there is a lot of business traffic that goes to and from Charlotte. Third, Charlotte still supports a large network of US Airways regional flights. Even though US Airways has trimmed the size of its regional operation, it's still very sizable compared to other carriers' regional operations, and the Charlotte hub enables US Airways to profitably compete with Delta on flights to and from smaller cities. Charlotte could become a focus city, with the merged carrier dismantling most of its regional and international flights and leaving only point-to-point service from Charlotte to major business and vacation destinations. However, if that were to occur, it would allow Southwest to come in and compete directly with the merged carrier on the routes it still operated. The merged carrier would quickly lose market share to Southwest, and would be relegated a much smaller role in Charlotte. So is there another US Airways hub city that could become a focus city?

The answer is yes, and that city is Las Vegas. Las Vegas has traditionally been a very low-yield market, with low-fare carriers of all stripes hankering to compete in a leisure market with seemingly endless growth potential. With US Airways having reduced their costs considerably, they can compete head-to-head against Southwest and other discounters. A focus city at Las Vegas wouldn't reconstitute a drastic change in their schedule, it would only mean that US Airways dump what little regional service operates from the airport, and perhaps the little international service to Mexico that exists there as well. US Airways concentrates most of their West Coast regional services and international fights from its Phoenix hub. By reducing non-mainline flights at Las Vegas, the airline would concentrate those resources in a larger, and more profitable O&D market, Phoenix, and save Las Vegas for primarily low-yield O&D passengers.

But hubs aren't the only areas where Northwest and US Airways would be great partners. Northwest provides service to few cities in Europe from its Detroit hub and instead offers connections to cities throughout Europe from KLM's Amsterdam hub. Northwest has a code-sharing agreement with KLM that allows both airlines to offer effective connections to North America and Europe without Northwest having to serve too many cities in Europe and vice versa. US Airways also offers limited European service, but offers a broader array of destinations than Northwest. US Airways also has some flights to Central America while Northwest has extremely limited service to the region. US Airways doesn't have any service to Asia, while Northwest offers an extensive Asia network. Internationally Northwest and US Airways don't fit each other as well as other airlines, since if a merger occurred, Europe and Asia would receive plenty of flights, while Latin America would suffer. Every legacy carrier, except perhaps Delta, has a stronger position in terms of market share and routes in Latin America right now, than a merged US Airways/Northwest would have without any new routes. Domestically, both airlines offer limited point-to-point service, the exceptions being for US Airways flights from focus cities on the East Coast such as Boston, New York LaGuardia, and Washington National, and so if the hubs make sense fiscally and geographically, and Las Vegas, Minneapolis/St. Paul, and Memphis are cut as hubs, but left as focus cities, the combined carrier would have a very strong network domestically and internationally.

Fleetwise, this merger also makes a lot of sense. Both carriers are primarily Airbus carriers, and both operate A320 and A330-series aircraft. There are also some Boeing planes in both fleets, however. Both carriers operate the Boeing 757, so integrating those fleets (aside from some of Northwest's older 757s which have different emergency exit, and thus seating configurations) shouldn't be a problem. US Airways also operates ten older 767-200s, and dozens of older 737-300s and 737-400s. Northwest operates none of these models. Northwest operates the Boeing 747, an aircraft type that the old America West used to own in the 1980s, but has since rid itself of. Integrating these fleets shouldn't be much of a problem. The merged carrier could create a uniform seating configuration on all A320 and A330-series aircraft, and on most Boeing 757 planes. Current seating configurations could be kept on planes that only one carrier currently operates. Planes wouldn't also change their current routes much. If a merger occurred, Northwest's 747s would likely continue to operate Asia-Pacific flights, while US Airways's 767-200s could continue to be operated on Atlantic routes. If capacity cuts occurred, some of the older 737-300s or -400s would likely be taken out of service, helping the merged carrier save on maintenance costs for the older aircraft.

However, like many mergers, this one may encounter problems from labor. Northwest has already strained labor relations immensely, by forcing union mechanics to strike and bringing in scabs to replace them. Northwest also replaced all airport employees in non-hub airports with contract employees, and as a bankrupt carrier, Northwest has slashed employee wages significantly. Northwest pilots and flight attendants may be rightly worried about any proposed merger, but sadly, Northwest may be unable to thrive in the next decade if it doesn't make its route network and costs more competitive. These two labor groups should try to work with Northwest management to find an agreement by which the airline can merge, and the new company will keep seniority, pay, and benefits intact, because if they don't, pilots and flight attendants may decide to strike. It appears that while this merger won't happen right away, since US Airways still needs to figure out whether it will merge with Delta, it makes far more sense than the US Airways/Delta merger for the companies involved in terms of synergies of routes and fleets. What a Northwest/US Airways merger can't do, that a Delta/US Airways merger can do, however, is have the power to raise fares significantly, since Northwest and US Airways dominate different regions, while a Delta/US Airways merger would create a very powerful carrier on the East Coast that could hike ticket prices significantly to certain cities. But the US Airways/Northwest merger would allow both carriers to cut costs and to strengthen their respective networks, something both carriers need even more badly right now than the ability to raise fares.