US Airways CEO: Consolidation needed

It seems like a few years can't go by without US Airways CEO Doug Parker talking about a merger. Parker came over from America West Airlines when it merged with US Airways in 2005, and by the end of 2006 had made a hostile bid for Delta. That fell through pretty quickly, but didn't put an end to speculation that Parker would be interested in shopping his airline around or looking to combine it with another. Back in April 2008 Parker mentioned in a letter to employees that the airline would merge if the time was right, and yesterday, addressing the company's annual meeting in New York, he said that further consolidation was much needed in the airline industry.

"The industry continues to be far too fragmented... The result is far too many hubs across the nation and far too many seats competing for those same passengers," Parker said. He also stated that the Delta-Northwest merger was a good thing, since it went pretty far in helping to simplify the industry, but that it wasn't enough: the industry needs to get smaller if it wants to become profitable.

Who could US Airways potentially merge with? The first option that people seem to mention is United. The airlines tried to merge back in 2000, but this was rejected on antitrust grounds; United and US Airways talked last year about a merger once again, but this time United walked away. Nothing has been ruled out between the two airlines in the future, though. American could be a good fit for the airline, too. And even if US Airways doesn't end up merging, the fact remains that capacity needs to be further cut for airlines to stay afloat during these tough economic times.

photo by matt.hintsa from Flickr, licensed under the Creative Commons

Read More

Delta president: bankruptcy was a good thing

photo by Drewski2112

At a recent gathering of the Detroit Regional Chamber's Mackinac Policy Conference, Delta Air Lines president Ed Bastian said that Chapter 11 bankruptcy was a good thing for the newly merged Delta and Northwest, according to a Detroit Free Press article. "Bankruptcy worked for our companies... Now we stand as the strongest airline in the United States and the largest in the world," he said.

Yes, in terms of financial performance, bankruptcy did indeed 'work' for Delta. Just a few years ago Delta was struggling with high labor costs (some pilots at the airline were paid as much as $300,000), high fuel prices, and Song, a low-cost offshoot set up in 2003 to compete with jetBlue that ultimately failed three years later. It filed for bankruptcy in September 2005 and emerged in April 2007 a much stronger carrier, having cut labor costs and restructuring its route network, expanding its list of international destinations. And the merger with Northwest was well-timed and well-executed, with the airlines' route networks containing little overlap.

So even though Delta might be in a relatively strong position, I'm willing to bet that many of its employees have less-than-fond memories of the Chapter 11 process - recent grumblings over executive compensation being proof.

Read More

Air France and Delta finalize joint venture

A Boeing 777 in Air France's new livery. Photo courtesy Air France

Air France/KLM and Delta yesterday put the finishing touches on a $12 billion-a-year joint venture deal that would allow them to operate as a single carrier on North Atlantic routes. The pact extends a previous joint venture that KLM and Northwest have had since 1997. Air France merged with KLM in 2004, and Delta recently took over Northwest, allowing for a four-way alliance (all are already members of the SkyTeam alliance).

The deal is a revenue- and profit-sharing venture, and will have antitrust immunity (something that American and British Airways are seeking right now). It affects more than 200 daily transatlantic flights to over 400 destinations in Europe and North America, or around 27% of total trans-Atlantic capacity. It also allows them to more effectively combine operations. For example, if both Delta and Air France have a flight from New York to Paris, but both flights are only 1/3 full, they can be combined and flown on one aircraft. Marketing, pricing, and ticketing will also be shared, and these result in very impressive cost savings (about $150 million per airline).

As previously mentioned, American, Iberia and British Airways in the oneworld alliance and United, Lufthansa (and soon Continental) in the Star Alliance are working on similar deals. This means that airlines without an alliance affiliation - like Virgin Atlantic - might suffer as a result. And while this means that Air France and Delta are cooperating even more closely, they can't actually merge - under US law, a foreign company can't own more than 25% of a US airline, although this rule might end in the future.

Some slides from the Air France/Delta news conference in Paris on Wednesday:

Read More

Southwest to begin Milwaukee service

photo by YoLoPey

This morning, Southwest Airlines announced that it Milwaukee, Wisconsin would be the fourth addition to its route network this year, following Minneapolis/St. Paul, New York LaGuardia, and Boston. Apparently, Southwest has been adding these new destinations without adding any new aircraft to its fleet; instead, it's been trimming unpopular services and shuffling around resources. "As we have previously announced, we essentially slowed our 2009 and 2010 fleet growth to zero," said Southwest President and CEO Gary Kelly. "All of these new market opportunities are made possible without the addition of a single airplane by our continuous flight schedule optimization process."

Southwest starts flying to Milwaukee on November 1, and it will put the airline (which already has a formidable presence at Chicago's Midway airport) up against Milwaukee-based Midwest Airlines (formerly known as Midwest Express), which is partly owned by Northwest Airlines. While Northwest has been known to aggressively defend its turf against low-cost airlines, Southwest doesn't seem scared, having first started flying out of Minneapolis/St.Paul (a key Northwest hub) and now Milwaukee. AirTran also has a good number of flights out of Milwaukee and will have to compete as well.

But I think that Midwest is the airline that should really be concerned with this news. The airline has already retired a significant portion of its fleet and only has nine Boeing 717s left (the rest of its flying is outsourced to Republic and SkyWest as "Midwest Connect"), and if Southwest provides significant competition - which I expect it will - on routes out of Milwaukee, Midwest might not make it.

Read More

Northwest to cut 2500 jobs, add fees

photo by caribb

Northwest Airlines announced yesterday that it would be laying off 2,500 employees in all groups of positions (pilots, mechanics, flight attendants, and other employees), but that it would first be looking for volunteers to leave the company. A variety of "voluntary programs including early-out programs, voluntary leaves, work rule modifications and attrition" will be offered, with the airline moving to furloughs as a last resort.

“Our fuel costs have more than doubled in the past year,” said Doug Steenland, President and CEO. “In order to manage through this unprecedented fuel challenge, we have to take action to both control costs and increase our revenue... These reductions are the direct result of our extraordinary fuel costs and the necessary actions we must take to right-size our airline and eliminate unprofitable flying." Last month, Northwest said that it would reduce its system capacity by 8.5%.

In additions, the airline is introducing a set of new fees: for travel in the US and Canada, it will charge $15 for the first checked bag, $25 for the second and $100 for three or more checked bags. Northwest also rolled out new fees for using frequent flier miles as well as ticket changes. Steenland said, “We expect these three incremental revenue enhancing measures to generate $250 million to $300 million a year, which will help ease the burden of these record high oil prices.”

Read More

Delta and Northwest announce merger

It's official: the long-anticipated merger of Delta Air Lines and Northwest Airlines has finally been announced. The combined carrier - already billed as "America's premier global airline", will be known as Delta and will be based in Atlanta. Delta CEO Richard Anderson would head up the new airline.

A press release by the airline touted the benefits of the merger; it "creates a company with a more resilient business model that is better able to withstand volatile fuel prices than either can on a standalone basis." The release went on to say that "the merged airline will maintain all hubs at Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, Salt Lake City, Amsterdam and Tokyo-Narita... Delta customers will benefit from Northwest’s extensive service to Asian markets and Northwest’s customers will have access to Delta’s strengths across the Caribbean, Latin America, Europe, the Middle East and Africa."

Of course, the merger still needs to clear regulatory hurdles, and there's always the issue of the pilots at both airlines, which haven't yet agreed on seniority. But if the merger goes off successfully, it will create the world's largest airline. Also, keep a look out for a United-Continental merger, which has been rumored to occur if a Delta-Northwest merger was announced - it could be announced very soon. (Although United has favored a merger for some time, Continental has said it would consider it only if a Delta-Northwest deal went through.) More details of the Delta-Northwest deal will be revealed tomorrow at a press conference featuring both CEOs in New York, but until then, check out the website that Delta set up about the merger.

I've also posted below the internal memo sent out to employees today at Delta, which sheds a bit more light on the merger process (click on the images to view them at full size):

Read More

Northwest: $100 oil to lead to mergers

photo by caribb

Oil, which has been hitting record highs seemingly every day now, has always been a problem for airlines. But when the price of oil starts getting above $100, it becomes a really big problem. On a pre-recorded telephone message for Northwest employees, CEO Doug Steenland said that oil was becoming a "serious budget-breaker". "If fuel remains where it is today, our increased fuel costs will again create a difficult financial challenge for the airline... This rapid increase in fuel is one reason we continue to believe consolidation in the industry is inevitable." Meanwhile, Northwest's merger talks with Delta are currently in hiatus while pilots unions at both airlines try to figure out how to combine their seniority lists.

Read More

Delta-Northwest, United-Continental mergers soon?

photo by Cubbie_n_Vegas

The Wall Street Journal is reporting that a merger deal between Delta Air Lines and Northwest Airlines could happen as soon as next week. Talks between the two were previously strained as the senior management of both carriers disagreed over whom would keep high-ranking management positions, but they have since come to an agreement.

As a result of Delta and Northwest's merger potential, merger discussions between United Airlines and Continental Airlines have also reportedly "grown more serious," said the article. United has proposed a merger with Continental before and has been turned down, but if Delta and Northwest announce a deal, Continental could change its mind very quickly and agree to merge with United, which has been actively looking for a merger partner for some time now.

An interesting point in all of these merger talks is Northwest's so-called "golden share" in Continental. This is basically some preferred stock that allows Northwest to abort a merger between Continental and another carrier. If Northwest and Delta do merger, however, Continental has the option to acquire the "golden share" for $100. Continental would be able to get the stock even if the Northwest-Delta deal later falls through.

The mergers raise a lot of inevitable questions - what types of aircraft will the combined operations operate (what will happen to Northwest's A330s)? Which hubs will stay open and which will close or be downscaled (Memphis, Cincinnati, etc.)? What international routes will be dropped or added? It's most likely that the answers to these questions will be worked out before the merger is announced (after all, it would be pretty stupid to merge first and then tackle those problems). As always, lots of things could happen. American Airlines, which is being left out of all of the "merger madness" at present, could intervene somehow. Labor unions or antitrust regulators could always prevent these mergers from going through (and with the size of these airlines, any mergers would get a high amount of scrutiny from the antitrust folks).

Read More

Delta moves toward merger talks with United, Northwest

photo by Franco Folini
Publish Post

Delta Air Lines, which has reportedly been interested in a merger for some time now, has requested permission from its board to start "formal" merger discussions with United Airlines and Northwest Airlines soon, with a plan to choose one of the airlines with which to merge.

In the last few years, Delta has carried opposing views on mergers: it exited Chapter 11 bankruptcy last year after successfully fighting off a hostile takeover proposal from US Airways. But soon after leaving bankruptcy, it started exploring its merger options, and has been the target of merger rumors before (such as this past November, with United Airlines). And with a stagnant economy and oil prices at nearly $100 a barrel, mergers might help relieve some of the pressure that the US airline industry is feeling right now.

A Delta-Northwest or Delta-United deal would probably create the world's largest airline (currently American). So which airline could it be? Back in November, Northwest was (and still is) seen as the most likely candidate, because the route structures of the two airlines has less overlap. And Delta CEO Richard Anderson has ties with Northwest, having worked there for 14 years and ultimately rising to the rank of Northwest CEO. But the main problem with a Delta-Northwest tie-up is the fact that two hubs - Delta's Cincinnati and Northwest's Memphis - would probably be shut down, due to their close proximity to each other. This might create trouble from both unions and politicians.

The possibility of a combined Delta-United has been raised before, and United management has been advocating industry consolidation for quite some time. But it will be some time before any merger plans become concrete, and even then, they can still fall apart quite easily. But this time, it appears that the unions - at least at Delta - are more supportive of the merger idea than they have been in the past. Lee Moak, chairman of the Delta pilot's union, said in a letter that “consolidation may indeed be at our door... We do not oppose consolidation, and may even determine that consolidation is desirable.”

Read More

United's "urge to merge"

The world of airline mergers has been buzzing since last week's report that United Airlines and Delta Airlines were being pushed by Pardus Capital Management (which owns a sizable stake in both airlines) to merge. Delta CEO Richard Anderson stated that "there have been no talks with United regarding any type of consolidation transaction and there are no such ongoing discussions." In a press release, Delta said that it "will not speculate on possible airline consolidation".

It's no secret that United has been shopping around for a merger partner for some time. They haven't bought any new planes in quite some time, and United has relatively thin profit margins and high debt.

That said, rumors have been flying for the last few years that United would find a merger partner. These partners have included Continental (which already said no) and Northwest (which wouldn't work out because the two airlines both have strong Midwest hubs) - almost everyone except American (a United-American merger couldn't happen because the combined airline would be too big). The latest to crop up on the aviation forums involves jetBlue, since the two airlines have complementary fleets/networks. United would use jetBlue as an opportunity to become a player again at JFK, which would tie in nicely with international feed from Star Alliance carriers and make it more competitive on the East Coast. And a United-jetBlue merger would also put an end to the fight at Washington-Dulles between the two airlines.

But a United-jetBlue merger isn't too likely, and any merger wouldn't be a cure-all fix for United. Even though United may be holding out on buying new planes to attract merger partners, they're going to need to upgrade eventually to keep up with competitors. And employee-management relations aren't very good, either. Merger or no merger, United really needs to address these issues (and others) if it wants to remain a viable competitor in the industry.

Read More

Northwest-backed group offers takeover bid for Midwest

photo: "Midwest N905ME", by Drewski2112

A group of investors, led by TPG Capital and which includes Northwest Airlines, said that it would buy Milwaukee-based Midwest Air for $400 million. The TPG-led bid was announced right after AirTran, which coveted a Milwaukee hub, said that it would no longer pursue its hostile takeover of Midwest. AirTran's final offer of $15.75 a share was less than TPG's $16.

Beyond the per-share figures, though, there might be another reason that Midwest might go for the TPG bid. The airline code-shares with Northwest, which is a key player at Milwaukee. Northwest didn't want another airline to move into the market, so Midwest's rejection of the AirTran bid is good news for them. However, Northwest said in a statement that they would not take part in managing Midwest (if the TPG bid is successful, of course).

The deal still needs to clear the anti-trust regulators, and AirTran CEO Joe Leonard has voiced, unsurprisingly, pessimistic views about this, saying that the "Midwest board has chosen a path that will benefit current senior management by selling out to a private equity firm and a so-called 'passive' investor whose involvement will surely raise antitrust concerns, casting doubt for shareholders on whether a transaction can, in fact, close." But a Midwest spokesperson was more upbeat, saying that the airline expected the deal to go through.

Read More

US carriers look for more US-China routes

Several US airlines are pushing for more nonstop routes between the US and China, beginning in March 2009. And they're also going straight to the customer for help - most of them have designed separate websites highlighting their bids and are asking fliers to help out by signing petitions that will be presented to the Department of Transportation. Here are the airlines:

• American Airlines filed an application on Monday to start nonstop Chicago O'Hare - Beijing service, to start on March 25, 2009. (This isn't the first time American has tried to do this - a few months ago it filed a similar petition but failed because it couldn't agree with its pilots on work rules for the rather long flights.)
• Continental Airlines wants to fly between Newark and Shanghai starting on March 25, 2009.
• Delta Air Lines applied for Atlanta-Beijing and Atlanta-Shanghai service.
• MAXjet quietly filed for Seattle-Shanghai service, with a continuing flight from Seattle to Los Angeles.
  
• Northwest Airlines wants to fly Detroit-Beijing and Detroit-Shanghai.
  
• United Airlines is seeking San Francisco-Guangzhou service in 2008 and Los Angeles-Shanghai service in 2009.
• US Airways has proposed flying between Philadelphia and Beijing.

The Department of Transportation can only allow one new airline to enter the US-China nonstop market each year. Currently, all of the above airlines except Delta, MAXjet and US Airways serve China nonstop - a fact that might give them a bit of a competitive edge. My prediction: the Continental and Delta proposals will pass, mostly because there isn't any New York area-Shanghai service and Atlanta/the southeastern US are also underserved when it comes to nonstop US-China flights. United Airlines will also probably get at least one of their routes, too.

Read More

A big change for Delta, indeed

Well, it's certainly been a long road for Delta, but only three months after exiting Chapter 11 bankruptcy, it has posted a $1.8 billion profit.

"Delta’s emergence from bankruptcy was a significant milestone in the history of the company and the airline industry,” said Gerald Grinstein, Delta’s chief executive officer, in a press release today. “In delivering the kind of outstanding financial, operational and customer service results we saw this quarter, it is clear Delta people at every level are producing a strong airline with a bright future.”

Delta's profit is even more amazing when compared to the airline's financial performance this time last year (it posted a $2.2 billion loss). Not counting bankruptcy-related costs, profits came out to 70 cents a share - much better than the 59 cents per share that analysts had predicted.

We'll see how United and Northwest, two carriers that have also gone through long, hard bankruptcy processes, have performed financially when they release their second quarter results (on the 24th and the 30th of the month, respectively).

And now for a bit of an editoral. Recently I've noticed that it doesn't seem like United or Northwest are announcing their bankruptcy exits the way that Delta has. Its 'Change the Experience' website allows travelers to suggest ways to improve Delta (or so the website says), and touts such things as its "Clean Campaign". The airline has also run television and print advertisements announcing its 'change'. It also put up a 'Today is a new day' banner on its website following its exit from bankruptcy.


I'm not sure if this effort is having any impact with the flying public, but it probably wouldn't hurt Northwest and United if they did the same thing. After all, Chapter 11 bankruptcy - even if it doesn't really affect the day-to-day operations of an airline - can have a negative effect on the average flyer. So when you exit bankruptcy, be sure to announce it as much as you can. Delta's done a pretty good job of it, and their agressive PR campaign, combined with the latest posted profit, will probably continue to improve the airline's image. (Oh, and the fact that the CEO is giving up a lot of his pay to a fund for employees - that might help employee morale a bit, and morale, good or bad, is something that affects the flying experience.)

To be fair, Northwest has announced its exit as well. In the July 2007 copy of WorldTraveler, its inflight magazine, President and CEO Doug Steenland penned a letter entitled 'A New Day at NWA, along with a link to the "NWA Moments" photo gallery on Flickr. And United did release a Hemispheres magazine article highlighting the changes it underwent during restructuring. But whether United and Northwest can genuinely 'change' (and whether Delta's 'change' extends beyond a slick PR campaign) remains to be seen.

Read More

Even more problems for Northwest

Things just seem to be getting worse for Northwest Airlines.

The carrier exited Chapter 11 bankruptcy last month, and that's about where the good news ends. It announced a few weeks ago that it expected 2nd quarter mainline domestic revenue per available seat mile to go down by 2 to 3 percent. Last Tuesday, the J.D. Power and Associates annual customer satisfaction survey was released, and among airlines, Northwest came in last place (JetBlue finished first). "[Northwest's] largest drop in rank position over last year was in satisfaction with the flight crews," said Linda Himeise, of J.D. Power. "The flight crews weren't happy. Courtesy, friendliness and helpfulness represent 43 percent of flight crew satisfaction. According to the customers, it just wasn't there."

The airline's pilots union, the Air Line Pilots Association, also recently gave a vote of no confidence to Northwest's management. "We didn't give up 40 percent of our pay and commit to a severely degraded lifestyle to watch it be squandered by poor management," said Monty Montgomery, a 20-year Northwest pilot and spokesman for ALPA. Naturally, the Northwest board has spoken out against these claims, saying that Northwest is "a much stronger and now profitable airline". But it's going to be hard for Northwest CEO Doug Steenland to keep the unions happy, especially when employees have had to give up $1.4 billion in annual concessions (pilot labor costs alone had been cut by $608 annually). Steenland has also received an estimated $26.6 million in stock and options - something that has got the unions even angrier.

To make matters worse, Northwest has also canceled hundreds of flights within the past few days, supposedly due to weather problems. “The recent severe weather events have caused Northwest Airlines to experience some crew shortages. Northwest apologizes for any inconvenience incurred as the airline continues to recover from these recent weather events," said a company spokesman. But the pilots union has a different explanation. “It’s a staffing issue,” said Monty Montgomery, spokesman for the union. “Our pilots are operating at contractual limits. The summer flying season is in full swing and we are operating at our max... I think they [Northwest] didn't realize the severity of the problem.” A spokesperson at Detroit's Metro Airport, home to one of Northwest's largest hubs, said that he wasn't aware of any weather-related delays there.

But regardless of the reason, Northwest has reason to be worried about cancellations. It should be looking to avoid a repeat of United's infamous meltdown in the summer of 2000 in Chicago, when a combination of factors, including weather, meant that it had to cancel a large percentage of its flights. The incident stuck with United for a while and, for a few, still does to this day. If it is an issue of pilot staffing - which it probably is - Northwest needs to get that resolved ASAP.

Secondly, the time is not right for CEO Steenland to be taking over $26 million when rank-and-file employees have to be sacrificing so much. Whether or not he deserves that $26 million (the board says he does, the unions say he doesn't) shouldn't matter; if he wants to increase his popularity (and perhaps employee morale), perhaps he ought to take a page out of Gerald Grinstein's book. As CEO of Delta, Grinstein earns a relatively modest salary and has said that he won't accept cash or stock awards following Delta's exit from Chapter 11 bankruptcy - instead, he's giving to a fund that will help Delta employees in times of hardship. Steenland should also take a look at the history books while he's at it, too - past CEOs at Delta and American have been forced down in recent years by angry unions upset over executive compensation.

Read More

Flights between US and China could double

A recent agreement between the US and Chinese governments lets the amount of flights flown by US carriers between the two countries to more than double. Right now, US carriers fly 10 daily flights to China, and the agreement allows for 13 more flights, with 1 new flight this year, another next year, four more in 2009, and seven more between 2010 and 2012.

This deal is significant because it will probably result in a tough race between US carriers like United, Northwest, American, Delta, and Continental. United and Northwest already have a pretty big presence in the Asia-Pacific region, and United was recently awarded the latest China route (Washington-Beijing). This provides other airlines like Delta and Continental, which want to enter the Chinese market, an opportunity to do so. 'Established' airlines, like United and Northwest, also have an opportunity to expand in the Asia-Pacific region, which is very profitable for both airlines. In a statement today, Northwest said it "applauds the U.S. Government’s success in achieving a major liberalization of the U.S.-China market. The new agreement opens the door for important new routes including Detroit-Shanghai, Detroit-Beijing and Minneapolis/St. Paul-Shanghai which Northwest urgently wants to offer its customers." The government will decide which airlines will get the routes.

Read More