nwa/Delta MERGER: General Discussion

[thezipper]

Originally Posted by Klm is Dead - Long Live KLM

If demand shrinks, the industry has to shrink.

and if I had a dollar everytime you used "if" in this thread...

Originally Posted by Klm is Dead - Long Live KLM

NW could go from say #5, shrink, and stay at #5.
Or they could go from #5, shrink, and wind up #10 as others shrink less.
Or they could go from #5, shrink, and then ex- or implode and be #0.

Hmmm well lets look a the prospects for the future... what are the other majors doing? Are they all shrinking or is NWA the only one pulling capacity and imploding to #0... lets look at what was recently posted after the Q1 earnings came out and see...

• Looking out to the final quarter of the year, UAL said mainline domestic capacity will decrease by approximately 9% during the fourth quarter, on top of a 5% reduction in the same quarter of 2007. Also, consolidated capacity will be 4% lower than it was a year earlier.
• AirTran had been planning to increase capacity by 10% next year, but now says growth will be no more than flat.
• Southwest's Kelly said his airline had cut its growth rate from 8% a year ago to about 2% in 2009. "We may not grow at all in 2009," he added.
• Continental will take 14 older jets out of service beginning in September and reduce domestic capacity 5% after the peak summer travel season.
• Among those are a hiring freeze for management and support staff, plans to make additional reductions to its 2008 capacity plan. AMR also plans to accelerate the replacement of its MD-80 fleet with more efficient Boeing 737-800s.
• The company (NW) is looking at its options with higher fuel prices, and "this likely will include further capacity reductions," Steenland said on a conference call.
• Capacity is slated to drop 2% in the second half of 2008, with domestic capacity down 9% to 11%, as Delta removes 15 to 20 mainline jets and 60 to 70 regional jets from its fleet by the end of the year.

wow... whatdaya know... looks like all of the majors are pulling capacity in some type, doesnt look like NW is imploding, but reducing capacity in line with it's peers. I understand some speculation on this merger, but the chicken little "sky is falling" statements need to be backed up if people are going to post them...

just my 2 cents worth

[Klm is Dead - Long Live KLM]

zipper,

Are you debating the statement "If demand drops, the industry needs to shrink?". The news bites you list in your post would seem to support this "if" being a true statement.

So, I am not sure what you are saying.

My point was that this merger could be a way for the new airline to grow to a leading position on the rank list while hopefully requiring that lesser airlines would need to do the most shrinking. That's all.

Here I will use an if:

If anyone thinks that NW is well positioned to become not only an industry survivor in this period of industry change but grow into an industry leader by going it alone, I sure would love to hear the details.

The chief executives of Delta Air Lines Inc. and Northwest Airlines Corp. found a mostly sympathetic ear on Capitol Hill Thursday in their bid to combine the third- and eighth-largest U.S. airlines by passengers carried.

But lawmakers warned that further consolidation among U.S. airlines may not be as welcome.

"I think this merger is a good one. On first glance, it makes some sense," said Sen. Charles Schumer, D-N.Y., at a hearing of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights.
Schumer and several other lawmakers seemed persuaded by the CEOs' main argument that the merger is an "end-to-end" combination of two existing airlines that complement each other, and therefore will not result in hub closures or extensive service reductions.

However, Schumer added, "Some of the other airlines that might merge worry me a great deal."

www.marketwatch.com

This could be good news for the longer term position of NWDL if they are allowed to merge but a later merger say between UACO would be blocked.

[hazelrah]

Originally Posted by Klm is Dead - Long Live KLM

:
My point was that this merger could be a way for the new airline to grow to a leading position on the rank list while hopefully requiring that lesser airlines would need to do the most shrinking.

This is just regurgitating the gurge that Anderson is spouting. No Airline is going to grow in the current environment. At best it is kind of a silly zero-sum game in which you put NW and Delta togther and say Viola, we're number one.

The reality I suspect is much worse; in the current economic environment there is massive overcapacity. Not only is demand impacted by recession, its probably true to say that the demand function is highly elastic. Also as Anderson whines about the cost of jet fuel has negatively impacted his marginal cost. I think he'll find that even with further supplier consolidation he will be unable to raise prices sufficiently. Shrinkage at Delta in inevitable and is only being postponed because of politics.

[andrewwm]

Originally Posted by hazelrah

This is just regurgitating the gurge that Anderson is spouting. No Airline is going to grow in the current environment. At best it is kind of a silly zero-sum game in which you put NW and Delta togther and say Viola, we're number one.

The reality I suspect is much worse; in the current economic environment there is massive overcapacity. Not only is demand impacted by recession, its probably true to say that the demand function is highly elastic. Also as Anderson whines about the cost of jet fuel has negatively impacted his marginal cost. I think he'll find that even with further supplier consolidation he will be unable to raise prices sufficiently. Shrinkage at Delta in inevitable and is only being postponed because of politics.

The demand curve is certainly elastic. But if there are certain economies of scale to be realized in running an airline (as mentioned in the article, the $1B in savings at HQ strongly suggests there is), then the market will over time, find one or more of the firms exiting until the economies of scales are realized, but with fewer firms. A NW+DL combination likely means that it won't be either of them exiting in BK, whereas alone their odds of survival may not be that great.

[thezipper]

I understand there may be some economies of scale to be had, but I really have a BIG problem with this $1B savings number ... this equates to the reported 1,000 positions being cut making an average of $1,000,000 per year... which is a little high IMHO, or even say 10,000 positions at $100,000 per year... now I don't know what the average salaried employee at NWA makes, but I'm betting it's nowhere near $100k

To me the numbers just don't seem to be adding up... or even in the "realistic ballpark" back of the envelope calculation.

Originally Posted by andrewwm

... if there are certain economies of scale to be realized in running an airline (as mentioned in the article, the $1B in savings at HQ strongly suggests there is)...

[TheMadBrewer]

Originally Posted by thezipper

.. now I don't know what the average salaried employee at NWA makes, but I'm betting it's nowhere near $100k

I don't disagree with you on the phony "$1B in savings" but the cost of an employee is much more than his/her salary -- not only are there payroll taxes and benefits but the person needs a place to work, park a car, etc. etc. Some companies factor in at least as much as the salary for other costs.

[thezipper]

Oh, I completely understand and accept that... it's just the $1B for 1,000 employees doesnt wash, what else about this merger doesnt make sense, start peeling the bad spot on the onion and it just gets deeper... and on the flip side... thats ALOT of $$$$ be it $100M or $500M or $1B per year that will not be going into the MN economy thru salaries, state taxes, corporate taxes, etc.

Originally Posted by TheMadBrewer

I don't disagree with you on the phony "$1B in savings" but the cost of an employee is much more than his/her salary -- not only are there payroll taxes and benefits but the person needs a place to work, park a car, etc. etc. Some companies factor in at least as much as the salary for other costs.

[ClipperDelta]

Originally Posted by thezipper

I understand there may be some economies of scale to be had, but I really have a BIG problem with this $1B savings number ... this equates to the reported 1,000 positions being cut making an average of $1,000,000 per year... which is a little high IMHO, or even say 10,000 positions at $100,000 per year... now I don't know what the average salaried employee at NWA makes, but I'm betting it's nowhere near $100k

To me the numbers just don't seem to be adding up... or even in the "realistic ballpark" back of the envelope calculation.

That's because the magic $1B being touted is not just about cost savings from the 1000 jobs. I refer you to the 8K documentation filed with the SEC on 4/15/08 by DL:
The $1B is made up of:

Network Synergies: $700m to $800m
Cost Synergies: $300m to $400m
TOTAL: $1B to $1.2B

Cost Synergies include not just the Admin/HQ headcount reduction but also other items such as lower purchase costs with suppliers, etc.

Network Synergies consists of the following:

Fleet Optimization: $400m to $500m
Network Presence: $200m to $300m
Total: $700m to $800m

Fleet optimization refers to the better use of the diverse combined DLNW fleet so that each route gets the right-sized aircraft. Take the current wide-body fleet for example: DL currently doesn't have a plane bigger than the 777 (276 seats) whereas NW has the A330-300 and 747-400 which carry more; NW currently doesn't have a plane smaller than the A330-200 (around 240+ total seats) whereas DL has the 767-300 (218 total seats). There are current DL routes for example which could benefit from a larger plane (such as TLV, GRU, etc.) while there are current NW routes (or even new ones such as DTW or MSP to new destinations in Europe) that could use a smaller plane.

Network presence refers to the increased revenues that will come from the larger global network/footprint (e.g., ability to secure more lucrative corporate accounts since DLNW can essentially offer the business traveller one-airline service to most of the world and the U.S.

And I am willing to bet that the 1000 jobs will not be exclusively from the NW side - given that some corporate/admin functions will be kept in MN, there will be job losses on the DL side as well. Remember that Anderson knows the NW crew and knows who is good/valuable to retain; it won't be as one-sided as you think. As an example, Anderson did bring on Stephen (sp?) Gorman to head up DL's Flight Operations last year (Anderson knew Gorman from his NW days) - Gorman essentially replaced a long-time DL guy - Joe Kolshak.

[GUWonder]

Originally Posted by ClipperDelta

That's because the magic $1B being touted is not just about cost savings from the 1000 jobs. I refer you to the 8K documentation filed with the SEC on 4/15/08 by DL:
The $1B is made up of:

Network Synergies: $700m to $800m
Cost Synergies: $300m to $400m
TOTAL: $1B to $1.2B

Cost Synergies include not just the Admin/HQ headcount reduction but also other items such as lower purchase costs with suppliers, etc.

Network Synergies consists of the following:

Fleet Optimization: $400m to $500m
Network Presence: $200m to $300m
Total: $700m to $800m

Fleet optimization refers to the better use of the diverse combined DLNW fleet so that each route gets the right-sized aircraft. Take the current wide-body fleet for example: DL currently doesn't have a plane bigger than the 777 (276 seats) whereas NW has the A330-300 and 747-400 which carry more; NW currently doesn't have a plane smaller than the A330-200 (around 240+ total seats) whereas DL has the 767-300 (218 total seats). There are current DL routes for example which could benefit from a larger plane (such as TLV, GRU, etc.) while there are current NW routes (or even new ones such as DTW or MSP to new destinations in Europe) that could use a smaller plane.

Network presence refers to the increased revenues that will come from the larger global network/footprint (e.g., ability to secure more lucrative corporate accounts since DLNW can essentially offer the business traveller one-airline service to most of the world and the U.S.

And I am willing to bet that the 1000 jobs will not be exclusively from the NW side - given that some corporate/admin functions will be kept in MN, there will be job losses on the DL side as well. Remember that Anderson knows the NW crew and knows who is good/valuable to retain; it won't be as one-sided as you think. As an example, Anderson did bring on Stephen (sp?) Gorman to head up DL's Flight Operations last year (Anderson knew Gorman from his NW days) - Gorman essentially replaced a long-time DL guy - Joe Kolshak.

Network synergies sounds like it includes a sizeable amount of revenue enhancement rather than merely cost reduction.

To classify anticipated revenue increases as "savings" sounds an awful lot like political budget talk that I'm used to hearing coming out of the mouths of politicians.

[SpinzCity]

>>>>>The reality I suspect is much worse; in the current economic environment there is massive overcapacity

Though not at Spring Break. Or summer. Or Thanksgiving. Or Xmas.

The solution, clearly, is to convert aircraft into classroom space for public schools during non-holiday times. Aircraft could be shuttled down major thoroughfares to serve as external annexes (upscale quonset huts, with reclining seats) next to existing school structures.

The only drawback is that once the kids get their hands on the AVOD on the 330's, all serious efforts at education will go down the escape slides.

[GUWonder]

Originally Posted by ClipperDelta

Remember that Anderson knows the NW crew and knows who is good/valuable to retain; it won't be as one-sided as you think. As an example, Anderson did bring on Stephen (sp?) Gorman to head up DL's Flight Operations last year (Anderson knew Gorman from his NW days) - Gorman essentially replaced a long-time DL guy - Joe Kolshak.

..... if only it were so simple that we could count on airline management being purely rational and fully informed, perhaps then the US airline industry wouldn't be so notorious for being poorly managed.

There are senior execs who are quite clueless -- even about their current subordinates and often their former subordinates -- and they don't always pick people to retain based on the long-term financial interest of shareholders.

[ClipperDelta]

Originally Posted by GUWonder

Network synergies sounds like it includes a sizeable amount of revenue enhancement rather than merely cost reduction.

To classify anticipated revenue increases as "savings" sounds an awful lot like political budget talk that I'm used to hearing coming out of the mouths of politicians.

Actually, the word "Savings" is not even used anywhere in the actual documentation or descriptions. All those dollar amounts are categorized as "Estimated Annual Value"

[GUWonder]

Originally Posted by ClipperDelta

Actually, the word "Savings" is not even used anywhere in the actual documentation or descriptions. All those dollar amounts are categorized as "Estimated Annual Value"

And the word or the not-so-unrelated word "reductions" has never been publicly stated by a DL or NW exec in relation to this merger?

This "estimated annual value" phrase being used there is language befitting of a spin doctor. So much for the Plain English initiative.

[ClipperDelta]

Originally Posted by GUWonder

And the word or the not-so-unrelated word "reductions" has never been publicly stated by a DL or NW exec in relation to this merger?

This "estimated annual value" phrase being used there is language befitting of a spin doctor. So much for the Plain English initiative.

Name one company that doesn't have a "spin doctor" (it's called the Corporate Communications Department). Yes, yes, we know you can certainly do no wrong no matter what you're in charge of....I'm sure if you were a CEO of a large public corporation that you will be using "Plain English" with your employees and shareholders and the general public because your integrity is unquestionable.

[GUWonder]

Originally Posted by ClipperDelta

Name one company that doesn't have a "spin doctor" (it's called the Corporate Communications Department). Yes, yes, we know you can certainly do no wrong no matter what you're in charge of....I'm sure if you were a CEO of a large public corporation that you will be using "Plain English" with your employees and shareholders and the general public because your integrity is unquestionable.

Just exposing the spin -- nothing to get too upset about .... hopefully.