This paper is about the airline industry in the United States. The research explores the merger of two powerful airline companies Delta and Northwest Airlines. The main questions of the paper are the circumstances that potentially motivated an airline CEO to merge with another company and the benefits from this merger.
Keywords: Delta, Northwest Airlines, airline business, merger
Table of Contents
- Literature Review
- The Circumstances that Motivated Delta’s CEO to Merge with Another Company
- How Did an Airline CEO Decide whether a Merger Is a Beneficial Decision or not?
The Merger of Delta and Northwest Airlines
The airline industry of the United States is divided into two different groups. These are the legacy airlines and very popular Low-Cost Carriers (LCCs). The legacy airlines have existed before the Airline Deregulation Act of 1978 and they dominate on international routes. They usually provide high-level services and have the first and business classes. LCCs are working under the low-cost structure with the lower prices and fewer services.
The demand for air travel has steadily increased since deregulation in 1978. In the early 2000's, the largest airline bankruptcies took place in the U.S., including the bankruptcy of the Delta Airlines and Northwest Airlines in 2005. At the same time, the profits of the LCCs steadily increased. In such circumstances, mergers and acquisitions in the airline industry have increased considerably. In 2001, the American Airline purchased the TWA, America West acquired US Airways in 2005 and on April 15, 2008, Delta Air Lines and Northwest Airlines merged.
The Delta-Northwest merger in 2008 was the largest US airline deal. This merger created the global giant in the airline business with annual revenue of nearly $32 billion and more than 800 jets (Mouawad, 2011).
On April 14, 2008, Delta and Northwest Airlines merger created the largest profitable airline in the world. In 2006, the second largest airline in the top 5,000 was Delta at the same time when the Northwest was the fourth largest. Today two big companies operate under the Delta Airlines name. Delta had a strong network across the Atlantic and in Latin America, while Northwest had an infallible one across the Pacific. After the merger of two companies, customers benefit from access to global route system.
There were also some disadvantages after the merger. For instance, the cost of flying was rising because of the reduction of competition between companies.
There have been numerous studies that analyze the effects of mergers of two airline companies. Sora Park (2012) examined the empirical evidence of the merger effects of Delta- Northwest. This paper investigates the causes and consequences of the merger of two airlines.
The Circumstances that Motivated Delta’s CEO to Merge with Another Company
There are many purposes of mergers and acquisition in the airline business. First of all, the companies strive to reduce their total costs on operations, service and labor by eliminating duplicative operating cost. Another reason is the integration of the financial assets, facility, and technology. Thus, the airlines look for operation costs reduction and revenue maximization. One more very important reason to merge is the possibility to expand airline networks.
Richard Anderson (2008), Delta CEO, explaining the reasons of the merger of two airline companies, said:
"We said we would only enter into a consolidation transaction if it was right for all of our constituencies; Delta and Northwest are a perfect fit". He also said that the proposal "combines end-to-end networks that open a world of opportunities for our customers and employees" (Anderson, 2008).
The main circumstances that led to the Delta-Northwest merger included the following:
1. Compensation of the fuel prices. Fleming’s (n.d.) study found the following:
"Record fuel prices have fundamentally changed the economics of the airline industry. Fuel is the highest single expense for Delta and Northwest that significantly erodes the financial benefits of restructuring and placing the airlines' new-found strength and stability at long-term risk. At the beginning of 2007, oil prices were approximately $55 a barrel. Now, oil prices have nearly doubled. This dramatic run-up in the price of oil makes the transaction even more compelling".
2. Creation of the new efficient mega-airline.
3. Increase in its influence in the international traffic.
4. Attraction of the long-term investments.
It is worth noting that the experts analyzing this merger predicted a great success of this case. The author of the Handbook of Airline Economics Jenkins (2008) considered that "the merged Delta will have such reach, from Asia to Europe, and all over the USA, that they will be very close to being the first truly global airline".
Doug Steenland, the Northwest CEO, agreed with Jenkins and emphasized that the merger would give the company a head start on its competitors.
How Did an Airline CEO Decide whether a Merger Is a Beneficial Decision or not?
The benefits from the merger of Delta and Northwest airlines were evident for CEO in spite of the risks that they could face. It was not an easy task to integrate two different airlines with different computer system, fleets and facilities.
In the process of preparing for merger CEOs of Delta and Northwest Airlines hoped for benefits that companies could receive after the merger.
It was a risky assumption for CEO to say about all benefits of the merger. Delta's chief executive Richard Anderson (2008) said, “If you look at the history of mergers, the assumption was that you could not do them successfully. Everybody had come to the conclusion that these things are too big, too complex and too unwieldy to manage”.
The companies often underestimate the effects of a merger with another company. Sometimes, companies have unrealistic expectations about the benefits. Delta and Northwest executives were aware of the risks that companies could face. Among the potential risks there were:
- there was no assurance that the integration would be successful;
- the integration of two companies would take a long time;
- the employees could experience uncertainty of the company’s future.
In 2008, Delta released information about the main elements of the deal with Northwest airlines and what ramifications they foresaw.
The benefits that Delta expected when merging were:
- competition between foreign airlines which continued to increase service in the U.S. last years;
- access to a global route system by the customers of two airlines;
- more new destinations and more schedule options;
- financial stability;
- to increase services to Asian markets;
Delta had strengths across the Caribbean, Latin America, Europe, the Middle East and Africa, so Northwest's customers would benefit from it.
One year later, the experts noted that the Delta-Northwest merger was successful. That was no easy task to integrate two companies in the midst of an unprecedented downturn in air travel.
During the first year, Delta has rebranded almost all its airport stations all over the world. Moreover, Northwest's aircrafts were painted in Delta's familiar red, white and blue. Furthermore, new affinity credit and debit card programs were launched. What is more, Delta’s integrated customer service was conformed to international standards.
It is a foregone conclusion that the company has successfully passed the process of integrating and it is developing steadily today in the airline market.
The purpose of this paper was to analyze the merging of Delta and Northwest Airlines in 2008. The paper examines the main causes and circumstances that led two powerful companies to merge into one. Another objective was to determine the benefits of the Delta and Northwest Airlines merger.
There are many studies that have found the correlation between an airline merger and a price increase, or different trends in the airline market due to a merger. Sora Park (20012) investigated the general influence of the Delta-Northwest merger on the US domestic airline market.