02.27.2008 « Time Well Spent; Unchanged Catalysts to Consolidation; and Concerns Surrounding the Delta – Northwest Deal »
Time Well Spent
A significant amount of my career has been spent participating in labor negotiations surrounding a distressed situation. There are two principles I always adhered to when advising clients: 1) you can always make a bad deal; and 2) strive to make a deal where either both sides are happy or both sides are unhappy because in both scenarios that probably means you have negotiated the best deal possible. Trying to avoid a scenario where one side is happy and the other side unhappy means you have negotiated a bad deal – and that is precisely what Northwest and Delta are trying to avoid.
Justin Baer of the Financial Times writes an excellent piece describing why seniority is critical for pilots. So it is important to understand just why these discussions are taking so long. Given that we are more than 20 years from the US industry’s last round of consolidation involving multiple carriers, pilots recognize that decisions made today will more than likely impact the majority of their remaining careers. But the always thoughtful and insightful Liz Fedor of the Minneapolis Star Tribune raises the specter of a negotiating clock. Another important negotiating rule is that it is hard to negotiate without a deadline.
Whereas many journalists and pundits are suggesting that the end is near in these negotiations, and as a result the much discussed deal will die, I am not one of them. Ms. Fedor in her opening paragraph writes: “A veil of silence has encircled the pilot leaders at Delta Air Lines and Northwest Airlines who are struggling to integrate their seniority lists -- the lone impediment to a merger announcement”. So why is this important? I typically read no talking as a positive sign. And the only people I have heard say Hell No to this deal before seeing the details is Congressman Jim “Hell NO”berstar and members of his staff.
I am an open proponent of change. I am an opponent of closed mindedness. One of the big points that I think is being missed: if there is concern over a political clock running out to get regulatory approval, then weeks spent today could possibly save months gaining regulatory approval for the deal tomorrow. In concluding her piece, Ms. Fedor raises this very important point that I have not seen written elsewhere as well: “If an agreement is negotiated in advance of a merger announcement, the two pilot groups also would be expected to be political allies for a merger during a regulatory review in Washington”.
The Catalysts to Consolidation Remain Unchanged
This morning, William Greene, analyst at Morgan Stanley writes a research note referencing the widely covered internal Delta memo to employees yesterday. The text of Mr. Greene’s note follows:
Delta Air Lines, Inc.
Quick Comment: CEO Memo Does Not Change Our Views
Impact on our views: The Delta CEO memo made public on Tuesday highlights the difficulties involved in completing airline mergers. That said, we still believe a deal is possible near-term for 2 reasons: (1) Oil prices at $100/bbl and a slowing US economy will keep the pressure on major airlines “to do a deal” and (2) the very substantial pay increases and equity ownership that labor stands to receive should a deal happen will increasingly put pressure on labor leaders to find common ground on seniority issues. Moreover, the economic arguments supporting consolidation are as compelling today (if not more so given the macro backdrop) as they were 6-12 months ago.
What's new: On Tuesday, Delta released a memo from CEO Richard Anderson to employees that outlined guiding principles for Delta in the event of a merger. The memo is intended to allay concerns that Delta employees have regarding a merger. Key concerns for employees include: seniority, job security, career growth and maintaining pensions. The memo indicates that any deal must satisfy these key concerns and a deal that does has not yet been attained (see memo on next page for more details).
Investment thesis: We maintain an Overweight-V rating on DAL primarily due to the company’s positive stance toward consolidation and good position vis-à-vis our key themes (market exposure, strategic actions, and labor risk). We also see relative value in DAL, although we note that we see the group as a whole as overvalued on an absolute basis at current oil prices. This is one reason we continue to recommend that investors sell into strength on news of consolidation. Should the stock run sharply higher from current levels or if the outlook for consolidation changes dramatically, we may need to revisit our rating.
Concerns – And Yes I Have Some
In a post earlier this month, I asked the following question regarding a labor leader’s decision making whether to support a deal or not: is the implementation risk of a merger deal (seniority integration, single collective bargaining agreement etc.) any greater than a leader having to manage the expectations of any employee group that actually believes they can make themselves whole in the next round of Section 6 negotiations?
While I understand the Northwest pilots are not prepared to sign on just because they would work under Delta rates of pay on the day following consummation of a deal. But doesn’t the question beg, as far as career earnings are concerned, just how much would pilots earn at Northwest if the company were to remain a stand alone entity? What are Northwest’s 20 year growth prospects? Will Northwest be able to duplicate organically what it would get fairly quickly in a deal with Delta? Will labor have any better opportunity over the next 5 years to do any better by their members?
Only the Northwest MEC can answer these questions. Where I am concerned is that the Northwest MEC is being advised by counsel in the Northwest – Republic seniority integration and in the most recent US Airways – America West pilot seniority integration (also reported by Ms. Fedor). By now everyone is aware that there are few, if any, success stories in either of these two cases. I just hope that decision making is not being clouded by the prospect that somehow past wrongs can be righted through this deal. But only those that know, know.
So hopefully either all will be happy or all will be unhappy. Otherwise just go ahead and say "Hell No". At least someone will be happy.
Reader Comments (4)
Welcome back from your trip Bill. Having personally been through 3 mergers/acquisitions [AirCal, Reno, and TWA], I have seen the negative effects of such deals. In my view, the biggest problem this industry faces is not the price of fuel, capacity, or too much competition. It is the dysfunctional labor-management relationship. None is more prevalent than what you see currently with the pilot negotiations at AA.
From the beginning of our nation, to my time at the Virginia Military Institute, to the evil attacks of 9/11, I have learned and observed that even the greatest of challenges can be overcome thru perseverance and people uniting for the common good. Unfortunately, self-interest is all too often seen which leads to negative outcomes.
As for negotiations, a positive outcome for me is only when both sides feel the deal was a fair one -- labor is compensated for their contribution to the company's success while also allowing the company to effectively compete in the marketplace thereby enabling profitability. The negotiation paradigm should be about labor and management working constructively thru their reasonable positions to move down the proverbial football field to score a touchdown [win-win], not start from unreasonable positions to end up on the 50 yard line [lose-lose]. During the negotiation process, there may be a difference as which play to call, but the goal should be to score the touchdown, not punt the ball away.
These are the changes that need to occur in this industry. Mergers will not solve this problem. Let the marketplace weed out the failures and raise the bar for entry, not mergers with its failed history.
Carmen
We are just going to have to agree to disagree. We agree on many negotiating points to be sure. But we will remain disagreed on industry structure and competitive forces. Part of the consolidation attempt is to find new growth and revenue opportunities that are not present today and will not be present for US carriers in a meaningful way for the forseeable future.
If we did not lose a carrier during the bankruptcy era, we just have to accept the fact that the barriers to exit are much greater than the barriers to entry. So if that is the case, then there is not much more to pay labor than what is being paid today. And that is not good for anyone.
Hey Bill,
Do you think anybody at APA is reading this? Maybe they can learn how two people can conduct an exchange of perspective, agree to disagree, not engage in personal attacks, and still remain friends.
Carmen
Carmen
I think the APA readership has declined. But yes Carmen I do appreciate the professional back and forth.
Best, Swelbar