What Delta and Northwest Need to Change in Order to Thrive

Recently, Delta and Northwest got back to merger negotiations, after having broken off talks due to difficulties concerning the combination of seniority lists if a merger were to take place. The Wall Street Journal reported today that a deal could be announced within a couple days. With airlines suffering from record fuel costs, as well as ongoing maintenance issues, a merger is appearing more attractive to airline executives. Unfortunately, the savings they desire may be elusive. The easiest way to combine carriers would be a holding company combination, where management activities, as well as some airport operations, would be combined, but pilots and flight attendants would operate under separate contracts and probably on separate fleets, at least in the near term. A combination is fine because it allows Delta and Northwest to resolve the two issues that are most important, controlling and adjusting capacity to the realities of $100 a barrel oil, as well as improving the company's customer service.

One of the reasons many managers were looking to merge legacy carriers was in order to consolidate domestic capacity. But a merger wouldn't necessarily allow Delta and Northwest to consolidate a significant amount of capacity in terms of seats. Both Delta and Northwest are in the process of removing capacity from their fleets and there isn't a tremendous amount of overlap on their domestic routes. Internationally, both carriers are expanding, and capacity would increase. However, a combination would allow the carriers to better manage their existing capacity, consolidate some flights, as well as reevaluate service to small markets, that with $100+ oil, may not be profitable. With a combination and a restructuring of the combined carrier's route network, the company could have the opportunity to rearrange its agreements with regional jet contractors, such as Mesa or SkyWest, in order to help the companies reduce costs and capacity to unprofitable markets. Even though the number of seats reduced in the carrier's overall system would be small by the trimming of some regional routes, it could save the carrier a great deal of money.

As the US Airways/America West merger has demonstrated, forcing two sides to a labor agreement that neither particularly likes is a bad recipe for employee morale and customer service. The pilots have still not satisfactorily resolved their longstanding disagreements over seniority agreements. Therefore, instead of a complete merger, a combination of the operations side of the business while keeping Delta and Northwest as essentially separate carriers under one parent company might be a preferable arrangement. Unfortunately, this wouldn't lead to as many cost savings as managers would desire, since larger labor groups, such as pilots, would be covered under separate contracts. But what is critical in this deal, even more than cost savings, is that management cannot force the pilots unions to accept an agreement that one side sees as unfair. Airlines will have to deal with large groups of employees for the indefinite future, and they need to do their best to keep them happy. What legacy carriers especially cannot forget is that with the flying experience becoming increasingly unbearable for travelers in the US, airlines need to ensure that their employees deliver top-notch service. And one of the best ways they can do that is by making them feel valued and treating them with the respect they deserve. This is partly why Southwest is known for its service. Even though the company has more leeway than other carriers in its hiring, because it can select from a broader range of candidates, the airline successfully retains and motivates their employees by keeping them in a work environment that lets their voices be heard. If Delta and Northwest cannot improve their customer service, they will seriously threaten their future viability as businesses.

A carrier modeled under the Air France/KLM combo where the carriers operate separately under a holding company that controls scheduling and pricing for both carriers, would allow Delta and Northwest to adjust their route network to make it more efficient as well as adjust pricing to make the carrier more profitable. Unfortunately, restructuring flights will not do enough for the combined carrier. What airlines in the United States are suffering from is a media deluge of negative publicity. Customers are growing more antagonistic towards the airlines. The recent airline quality survey that came out last week was a typical example of this. Nationwide coverage of increased delays, increased rates of lost bags, and so forth, didn't do much to help the airlines. And Congress has caught onto the act, with front-page hearings criticizing airline executives about safety. To put it bluntly, consumers in this country hate airlines. And with rising prices, customers are getting increasingly irritated with putting up with substandard service that they feel they don't deserve given the exorbitant cost of their ticket.

As a result, the merged carrier needs to re-brand itself, with the Delta name, as a carrier that genuinely cares about service. What we don't know in this market with rising prices is whether there will be sustained demand for leisure travel. Business travel (specifically unmanaged business travel), while perhaps decreasing slightly in demand, is going to be a more important target market for the carrier in the coming years. Moreover, Delta has a very strong presence in large business markets, including Boston, New York, and Washington DC, and by making sure that it offers industry-leading service, comparable with carriers abroad, will help the carrier maintain yields and market share in this turbulent market. Business travelers will otherwise look to LCCs such as Southwest and JetBlue, which are pulling out all the stops by offering business travelers more amenities, better service, higher punctuality, and lower fares. With air travel becoming increasingly burdensome for business travelers, airlines that make the experience as pleasant as possible will be those that will see growth in market share and profits.

This company, if it is positioning itself for a future of more competition, especially from overseas, as well as from LCCs on key domestic routes, and a future of high oil prices, needs to discipline itself on capacity and service. The carrier will likely get Delta and Northwest's route networks integrated into a larger whole, and the company will find way to combine operational redundancies to reduce some costs. But, this carrier will not make money if it has too much excess capacity in the market, as well as too little capacity in growing markets. Moreover, it will not make money if it has poor service, because as has been shown in Europe and Asia, customers, and especially business travelers, are willing to pay more for good service if airlines actually deliver it. Now to get good service, management needs to, for lack of a better term, "be nice" to its employees, especially its pilots and flight attendants. That means these labor issues need to get resolved, or at least get to a point where they won't boil over after a combination. If the combined company can focus on these two areas, capacity and service, not only will it be the largest carrier in the world, it will be one of the best positioned for an uncertain future.

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