Even if the historic merger goes through, the newly combined company will face huge difficulties getting off the ground
Since proposing a titanic merger earlier this month, executives at Delta Air Lines (DAL) and Northwest Airlines (NWA) have been busily laying out the rationale for a deal that would create the world's largest air carrier. With a combined first-quarter loss totaling $10.5 billion acting as a somber reminder of the difficulties facing the would-be company—and the airline industry as a whole—the deal's champions have argued a tie-up would strengthen the new firm's distribution of worldwide routes, help insulate it from a volatile fuel market, and even save billions of dollars by flying the same number of passengers on fewer flights.
The merits of the proposal seem to have made an impression on Congress, which must weigh the deal and whose members were mostly receptive during testimony last week, as well as on analysts, many of whom expect the merger to proceed. But questions remain about the daunting challenges facing the new company. Given widespread industry tumult and a checkered airline merger history, what can a combined Delta-Northwest really achieve? BusinessWeek.com canvassed market analysts, branding experts, and innovation consultants to assess the potential headaches—and opportunities—the new company will face the day after its historic merger closes (assuming it's approved).
"A Terrible Brand"
At the top of the list of woes: the price of jet fuel. According to the Air Transport Assn., through Apr. 22, prices surged 61% in comparison to 2007. Costs have risen 300% since 2002, wreaking havoc on the airlines' bottom lines. Northwest alone expects to spend $1.4 billion more this year than last year on fuel. Making the point succinctly during testimony last week, Delta's chief executive, Richard Anderson, said, "Oil is a game-changer." The extent to which the game will change remains to be seen.
Another of Delta-Northwest's major challenges will be to deal with the new company's tarnished image. In a J.D. Power & Associates survey of U.S. airline-customer satisfaction released last June, Northwest was the lowest ranked while Delta was squarely in the middle, behind carriers including JetBlue Airways (JBLU), Southwest Airlines (LUV), and Continental Airlines (CAL). That's why the new company would jettison the Northwest brand, leaving only the name Delta. Edward Lawler, director of the Center for Effective Organizations at the University of Southern California, who has studied and written about the airline industry, says the move is a wise one: "Northwest has long had a terrible brand."
Even as the Delta name lives on, the company will have an opportunity to reshuffle the brand's many graphic elements, including its logo, airport signage, tagline, and aircraft. According to Rob Giampietro, one of the founders of the New York design studio Giampietro+Smith, refreshing and blending key elements of both airlines' identities could add "a dash of creative energy" to the brand. "Brandwise," he says, "while it may not be the best time in the lives of either company, there is still a lot of brand equity and recognition."
Creating a New Culture
Perhaps more than exterior branding, the new firm will need to breathe new life into two stagnant corporate cultures. "If executives are just thinking about rationalization, cost reduction, efficiencies, and so on, they're not going to win," says John Kao, founder of the San Francisco innovation consultancy Kao & Co.
Framing Delta's challenge, Kao says the new company will have to radically alter its corporate culture as well as its services if it wishes to compete. He points to outfits such as Southwest, which has tried to create a service-oriented culture by rigorously screening new hires to find extroverts who would make friendly customer service representatives or cabin staff. Likewise, Virgin's new youth-oriented U.S. air service features sleek, glossy interiors and quirky extras like a tongue-in-cheek, animated safety film intended to set the tone for the airline's brand. "Unfortunately, incumbent organizations tend not to think disruptively," adds Kao about Delta's chances of success.
No Stranger to Rebranding
The merger could encourage the new company to move upscale in an attempt to widen its margins and recast its image. "They have a chance to try to offer something better than the sum of its parts," says Pat Askew, who leads architectural firm Perkins+Will's airport-design business. Askew says given the limited influence airlines exert over the terminal experience, the new Delta could "radically redefine the upmarket experience," taking a page from carriers such as Singapore Airlines (SINGF) and Virgin Atlantic, which have pursued upscale customers with a bevy of new services, including luxurious cabins and private transportation to and from the airport.
Of course, all those upgrades could add up and require millions of dollars in new investments—a tricky proposition for a company running up gigantic losses. What's more, Delta is no stranger to rebranding escapades. In 2003 the company founded low-cost carrier Song, which was widely hailed for its savvy branding and stylish advertising. The airline, which was targeted at hip, professional women, featured flight crew uniforms designed by Kate Spade and an in-flight exercise program created by fitness guru David Barton. But even the finest finishing touches couldn't make the venture viable, and Song was grounded two years ago.
"Everything Song was as a brand was what Delta needed to learn from and import," says Giampietro. "[But] I don't think that was done." It remains to be seen whether a new, even larger Delta will be willing to implement any of the lessons of Song. These might seem like mere details in the face of the overall business challenge, but other carriers have shown that good experience leads to goodwill (crucial in the age of the Internet and blogs)—and repeat business.
Whichever tack executives settle on, analysts agree the merger presents a rare opportunity to jump-start the company's image. "The relaunch of Delta needs to hook onto something distinct in the brand or the company's mission," says Lawler. "Otherwise the opportunity is lost." Kao adds, "They can say whatever they want [about the new company], but if it's not validated by the experience of customers, it won't mean much."
By all accounts, a combined Delta-Northwest would probably be in for a turbulent flight. The industry at large is in crisis, a situation only likely to get more difficult. Since last December, six airlines have ceased operating or announced the cessation of operations, while bankruptcies and staffing cutbacks have forced carriers to shed some 7,000 jobs since the beginning of 2008. If Delta-Northwest eventually takes off, it will most certainly be in bad weather.
Click to view examples of how other mega-mergers changed the brands involved.