Possible 2008 Merger: Northwest and US Airways

From a fleet and route perspective, a merger between Northwest and US Airways could be a big winner. But from other perspectives, and more specifically, a labor perspective, it could be a major problem. However, if the merger were successful, it would create a company that would offer forceful competition in key domestic and international markets to a potentially merged Delta/United. For more information on the current merger frenzy that's sweeping the industry, see this post.

One of the largest potential problems that analysts foresaw in the US Airways/America West merger that occurred a couple years ago was that it was the unification of two carriers which had very strong route networks on opposite ends of the country, but there would be no central hub to join the two ends of the barbell, so to speak. Given the fact that the new carrier would not have many larger, more cost-effective aircraft for transporting flyers long distances, it raised the possibility of two-connection travel for many flyers, which, given all the potential problems of delays as well as the extra time it requires, could dissuade many travelers. While this hasn't proved to be as big a problem as I or other industry-watchers suspected, with rising fuel prices, operating transcontinental flights has become rather expensive, especially with A320-size aircraft which have higher available seat mile costs than 757s or 767s. Having a central hub, particularly one that can draw from traffic bases both East and West for international service, will be critical to the success of a national carrier, and that's what Northwest brings to US Airways in a potential merger.

And while the combined carrier would retain probably two central US hubs, if a merger were to occur, Memphis as a hub for Northwest would almost certainly be dumped, though the combined carrier might retain a focus city operation in the city to capitalize on business traffic. However, Northwest's exit from many markets from Memphis could open the door for a low-cost carrier, such as Southwest to enter the market. Or perhaps, if Northwest makes a major withdrawal, Frontier will make another attempt to set up a focus city in Memphis, though the company denies that it is planning any expansions of point-to-point services outside of Denver.

The combined carrier, with six remaining hubs in Philadelphia, Charlotte, Detroit, Minneapolis, Las Vegas, and Phoenix, will likely keep all those cities as hubs. However, to simplify operations, some hubs could focus more on mainline traffic to destinations that can support narrowbody mainline aircraft, while other hubs may focus more on bringing in a variety of connecting traffic, including regional jets and mainline planes (both narrowbody and widebody). By doing this, the airline is still able to maintain strong market positions in all six cities, but it makes the company's operations more efficient by simplifying where regional jets and international aircraft are needed (and thus the related crew scheduling and maintenance functions associated with the different aircraft types).

Phoenix, Detroit, and Charlotte will all likely remain hubs where regional jets, narrowbody aircraft, and widebody aircraft have a large presence. Phoenix is a fast-growing business center, and offering regional jet service from the city helps US Airways draw traffic to its expanding array of international flights from the city. As Phoenix grows, the combined carrier will want to offer increased international service, and so it will need a large supporting base of regional and mainline services to support that service. Given Northwest's massive infrastructure investments in Detroit, with its practically new terminal and assorted facilities, that city will need to remain an all-aircraft hub. Moreover, since Detroit is very close to the Northeast, where US Airways currently has a strong presence with regional aircraft, it can take over some of the regional jet flights that currently make their way into Philly. Charlotte will also need to remain an all-aircraft hub for the combined carrier because of its proximity to the South (no other hub in the network, save for Northwest's Memphis, which will likely get eliminated in a merger, can serve many small Southern cities, and only one other hub operated by any carrier in the South (Delta in Atlanta) has the range of regional jet flights that US Airways at Charlotte offers.

While Las Vegas, Minneapolis, and Philadelphia could lose some of their regional jet flights, and a select few mainline flights, the core of these operations will not be affected. None of these cities will lose all their regional jet service, and I doubt any will receive even a sizable cut in mainline service. Minneapolis and Philadelphia generate high yields for their respective hub operators, and airlines focused on increasing revenue will want to keep these with a considerable amount of service. Las Vegas is an important market for volume and market share reasons. Even though yields are lower to and from Vegas, it can absorb a lot of excess capacity in these carriers' fleets, and even though it's not the most profitable way to use that capacity, it does get utilized and make some money.

The carrier, like all of the consolidated legacy carriers, will need to have a large emphasis on international routes. And it's likely that Northwest gateway cities along the West Coast will maintain their service to Tokyo. Moreover, many large markets also have nonstop Northwest service to Amsterdam, which will also likely be maintained. US Airways, meanwhile, will likely continue with expansion plans from its Phoenix hub, even if it merges with Northwest, and will add additional flights to Latin America and Asia. Even though some hub flights could get realigned, most international flights in the two carriers' networks will not get shifted. There will be some small adjustments, but most of the hubs, even if they lose some of their regional service, will likely maintain many of their international flights because they offer convenience to business travelers.

This also speaks to the question of alliances. Northwest is part of the SkyTeam alliance, while US Airways is part of Star Alliance. It appears that if the two carriers merged, they would probably join SkyTeam. The main reason for this is the very close marketing and codeshare alliance between Northwest and KLM, two large SkyTeam members. Through this partnership, Northwest passengers gain terrific connectivity to destinations across Europe through KLM's Amsterdam hub, allowing customers to reach destinations they couldn't easily reach with other carriers. Northwest and KLM have received antitrust exemptions on certain transatlantic routes through their partnership, and both seem eager to continue the deal, which has resulted in higher yields due to less competition. If Northwest were to discontinue its SkyTeam membership, it could be very difficult for Northwest to continue its KLM alliance, and instead KLM could choose to partner with one of Northwest's competitors, such as Delta or Continental, both of which are also part of SkyTeam. Since Air France, which is under the same corporate umbrella as KLM, is a major Delta partner, a Northwest/US Airways deal could threaten these precious alliances, and force Air France/KLM to choose whether to maintain close relationships with either Delta or Northwest. Even if the combined Northwest/US Airways were to remain a member of SkyTeam, it could lose the close affiliation it has with KLM and only have the looser frequent flyer affiliations that SkyTeam affords. But, those affiliations are still important, and probably better than those offered by Star Alliance.

Another advantageous asset for the combined company are US Airways' slots at LaGuardia and Washington National. Having slots at these airports will allow the combined carrier to offer a greater frequency of flights than other carriers to critical business destinations, and better serve high-yield travelers. With higher fares imminent, especially for business travelers, this will bode very well for the carrier.

Fleetwise, the big focus with all mergers, and this one is no exception, is about removing regional jets (particularly 50-seaters and below) from aircraft fleets, as well as older, less fuel-efficient mainline aircraft. Like I've mentioned before, Northwest's DC-9s will probably see some sort of accelerated retirement in a cost-cutting deal, but given the size of Northwest's DC-9 fleet, that clearly won't happen for at least several years. Regional jet flying, from Mesaba, Mesa, and other contractors could be reduced. On the chopping block are some of Northwest's CRJ-200s, as well as some of the contracted flying done for US Airways. Turboprops will probably be kept in most cases, since they're more fuel efficient, though turboprop (and especially 19-seater flying) could be reduced by some regional partners, who often operate these flights at a higher risk than their regional jet contracted flying. The reductions in this kind of service will likely depend on what sorts of hub route realignments take place.

Northwest may continue to take delivery of its 787 planes, even though it means the combined carrier could have unnecessary redundancies. In the depth's of US Airways' financial hell several years ago, the carrier received a $250 million loan from Airbus, in exchange for the company agreeing to purchase new A330 and A350 (the competitor to Boeing's 787) aircraft. When the combined carrier receives delivery of these planes, they could become a burden because the two fleets overlap and will generate extra costs. However, depending on Airbus's delivery timetable for the A350, this could be seen as an advantage. While many US carriers wait several years to receive their 787s from Boeing (even more so given the recent production delay announced by Boeing yesterday), which has tightened its production capacity to minimize cost, a Northwest/US Airways combined company could be receiving aircraft from two streams, increasing its ability to provide international service quickly at a lower cost and get a jump on the competition. While this advantage may be short-lived, it could be significant, depending on when the company receives these aircraft, when its competitors receive their planes, and what happens to oil prices in the coming years.

The one major area of difficulty that this merger has is what will be done about the labor situations at both carriers. Employees at both Northwest and US Airways have just cause to be angry at their management due to past failings, and unfortunately, a merger will lead to additional job cuts. What cannot be done, however, is treat employees in such a manner that hurts them more than what is inevitable. For instance, after the US Airways/America West merger, many US Air pilots were very upset by the way the two seniority systems at the companies were integrated, partly due to the questionable decision of an arbitrator. It left the pilots angry, and a similar incident cannot happen again if this merger occurs. Management at both companies need to ensure that the two sets of employees reach amicable conclusions.

But more importantly, they need to do a better job of showing that job cuts are necessary and will not be for temporary financial gain. Job cuts need to be justified, and management needs to make sure that they recognize the importance of providing solid customer service as well as supporting the bottom line. When US Airways had a major fiasco a couple years ago with an inability to process bags at Philadelphia due to a staff shortage, the airline quickly added several hundred additional staff. Those kinds of things can't happen, especially when customers are so irate at the service they're receiving and employees are worried about job security. Quick spurts of hiring and firing need to be smoothed out to give greater consistency and predictability to customers and employees.

Fortunately, if this merger is proposed, it will likely encounter far fewer regulatory hurdles than other potential deals. US Airways and Northwest are both smaller carriers than Delta, making the merger more palatable to regulators. A merger would give the combined carrier a market share not much larger than the current largest carrier, American, instead of a potential Delta/Northwest deal which could make the combined carrier substantially larger than any unmerged competitor. If Congress plans to put up hurdles to merger deals, then a Northwest/US Airways deal may be one of the few deals that can be approved. The merger would offer tremendous benefits particularly for US Airways, which is at risk of losing out in the current merger frenzy, since it's the smallest of the legacy carriers, by linking it to a carrier which can cover the service gaps it has in the Midwest, as well as internationally. Meanwhile, Northwest would get a carrier with a lot of capacity in attractive markets, particularly on the East Coast, as well as additional aircraft to help the company grow. While this deal is less talked-about than a potential Delta/Northwest deal, it would probably be a better matchup for both Northwest and US Airways than a Delta/Northwest deal, but whether it will ever get proposed, given the increasingly advanced state of Delta/Northwest merger talks, is up in the air.

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