Posted by: Reilly | May 7, 2008

Delta + Northwest: Two Horrible Wrongs (and not much Right)

In 1968, long-time American Airlines CEO C.R. Smith retired with this statement: “These days no one can make money on the goddamn airline business. The economics represent sheer hell.”

Forty years on, it would be difficult to find an airline executive who disagrees with him. There are a lot of things that separate the airline business from nearly every other; it has the all the union-grinding labor disputes common in large manufacturing firms, with the added panache of providing services that are as despised for their inadequacy as they are a crucial component of national infrastructure. And by the way, planes also make excellent missiles.

When Delta and Northwest took the monumental but unsurprising move two months ago to merge, their $10.5 billion in combined 1st quarter earnings losses seemed to seal the deal. Most of this absurd loss is due to writedowns on the companies’ respective valuations; however, it still begs the question: what could they possibly have to gain from one another?

Airline bigwigs cite economies of scale, for one. Not only by pooling together their meager resources of peanuts, biscuits, and four ounce sodas – but ultimately saving on fuel costs, the most relevant cost issue for the airliners. Opinion seems to be divided between laissez-faire capitalists who reckon that the merger is crucial to prevent a collapse of either company, and populist ideologues who foresee a chain reaction of airline mergers and universally high priced airline tickets.

But there are other costs, too. Atlanta-based Delta already has plans to consolidate the combined companies’ headquarters in the more spacious Atlanta-Hartsfield Hub, an annoyance to both Minneapolis-based Northwest as well as Minnesota’s political elite, who are worried about the pending loss of jobs from the state.

CQ Politics points out here that while the advocacy groups on both sides are getting busy consolidating their efforts, the failed 2001 bid of United Airlines and US Air remains fresh in the minds of many. John Ashcroft, while not exactly the poster-child for the anti-corporate agenda, called the planned merger uncompetitive.

What can we expect from a Delta-Northwest merger? Not much. The combined companies, even if able to hold onto the coveted ‘Largest Airliner’ status, will not become profitable overnight; nor, for that matter, will competition be hampered significantly in major consumer markets.

Ding ding, here comes Northwelta.

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