A Hitch on the Path to Airline Consolidation

Posted by: Justin Bachman on February 26

Merger talks between Delta (DAL) and Northwest (NWA) may have struck a rocky patch. That’s the takeaway from a memo sent to Delta employees today by CEO Richard Anderson and Ed Bastian, the airline’s president. In the memo, they spell out five “principles” the company wants to satisfy before it does a deal with another carrier.

This so-called internal memo, freely available for the asking Tuesday, could be a warning to the Northwest pilots as much as anything else. It mentions Delta’s “strong stand-alone plan” and could be seen as suggesting that Delta would be willing to walk if they feel that the Northwest pilots are getting out of hand in their demands. So let’s take a look at each of the “principles” they list.

1) The airline will retain the Delta moniker, with headquarters in Atlanta. (Numerous media reports say this isn’t an issue, as Northwest’s board is willing to cede on it.)

2) The seniority of Delta workers is protected. (This means pilots, and it’s the dicey one in the mix because it forms the crux of how one would meld 11,000 pilots whose pay and schedules are essentially set by their position on the hiring roster. Delta’s 6,300 pilots are better-paid than their Northwest peers but face a disadvantage when it comes to relative seniority, since some 2,000 Delta aviators retired before the airline’s 2005 bankruptcy filing.

3) Pension plans for Delta employees and retirees be maintained. (This is largely a manageable point, coming down to money – and the combined entity is likely to secure a large cash investment from Air France-KLM in exchange for an ownership stake.)

4) Delta wants to strengthen its network and accelerate its international expansion. (Um, hard to see a potential merger partner arguing with this goal.)

5) Secure greater job security and more career opportunities “for our people,” Anderson and Bastian say, laying out what they call their most important principle for any talks. (Hard to say how much this is a potential sticking point. Does job security mean they’d like to keep all the Delta jobs and cut the redundant staff from whichever airline they acquire? I’m no M&A whiz, but that could be a hard sell, particularly since managing the negative political fallout will be a crucial task after any deal announcement.)

“To date, we have not arrived at a potential transaction that meets all of our principles,” Anderson and Bastian write. “Rest assured that we will not complete a transaction unless all of these conditions are met.” That’s not to say a deal won’t come down in the next two, three or four weeks. Managers on both sides see enormous benefit in a combination, and many of their institutional shareholders would love to see this happen.

The impasse between the pilots comes down to one central issue: seniority. In this deal, the Northwest pilots are looking at a pay raise of some 30% since they currently are paid less than the average Delta pilot. They also hold the seniority advantage because of the heavy Delta retirements between 2001 and 2005. But Delta would be the acquiring company, so its pilots – the “buyers” in this transaction – are truly not keen to get in line behind Northwest pilots.

Citing a person familiar with the issue, a report at TheStreet.com today says a current sticking point is whether to arbitrate the seniority question – and Delta pilots want no part of that. When it comes to combining pilot lists, as Mike Stark, a Delta 757/767 captain from Marietta, Ga., puts it: “Somebody gets the short end of the stick no matter what happens.”