Still Pondering a Northwest – Delta Combination

Swelblog.com: The First 183 Days

Time flies. Never did I think I would write anything with a title, “A Flying Pig”. Never did I think that this year’s four number 1 seeds would make it through the Regionals only to meet at the 2008 Final Four in San Antonio. Never did I think that it was possible for one man to dominate the game of golf as we get to witness Tiger Woods’ rewrite of the record books before he is 35. Never did I think that writing could be this much fun as it comes quite hard for me.

I did think that some of what I would write would not be popular with all. I did think, and do think, when I began to write this blog that we were about to embark on one of the most important and necessary journeys along the path of change since the industry was deregulated.

Still Pondering a Northwest – Delta Combination

Pardus Capital, the activist hedge fund, arguably started the consolidation ball rolling with its expressed interest in seeing a Delta and United combination. Today, $2 bln hedge fund Pardus suspends withdrawals just as we begin to think about a Northwest – Delta combination yet again. Capital preservation.

Where to start when pondering a Northwest – Delta combination sans an agreement on pilot seniority? And speculation of a reworked pilot deal? And announced capacity cuts in the face of oil price realities and macro economic weakness? And with CEOs that have spent considerable amounts of personal and political capital since this deal first became news in January 2008? Capital preservation.

I simply do not know where to start on this one. It made sense before and it makes sense today. My thoughts concerning this deal have me stuck on the negotiating positions of all involved. A lot has been said by the CEOs and the MECs that is going to be – and I am assuming that there will be another attempt to revive the deal – most interesting this go around. Some compromise will be necessary.

Labor versus Capital

Just as the Pardus play was summarily dismissed by Captain Moak, Pardus’ interest along with the interest of all capital are watching this deal. The patience of many was tested as Delta and Northwest tried to forge a deal along the path of least resistance and give labor the say that they demanded following the Pardus play last fall. Well labor had their shot to act in the shaping of the deal and there were many cheerleaders, including me.

But not everyone was a fan of the deal cut, including me. I am all for employees having a piece of the deal as it gives them skin in the game and begins to mitigate some of the us versus them mentality that is all too prevalent in the management and labor worlds today. I am not for negotiating significant fixed increases in rates of pay that will stand in the way of capital appreciation. Particularly in today’s economic world where revenue generation is sure to be challenged.

I am encouraged by the decisions of respective players in the industry to begin the process of cutting capacity. This was another area of the first deal that was troubling. But again, economic forces prevail.

The catalysts driving consolidation have been identified and all remain. But another catalyst, capital, is about to emerge and retake the top spot. And on a day when Pardus Capital is in a capital preservation posture.

Just another irony in this deal. And on a day where we liquidate the first US airline in this cycle. And on a day when Champion Air announces it will cease flight operations on May 31, 2008. And.......

Dear US Government: I hope you are reading the newspaper

Thinking About Three Headlines from January 24, 2008

So much of the current discussion surrounding US airline industry consolidation scenarios involves only the Network Legacy Carrier (NLC) sector. In an earlier post this week, I wrote about the catalysts for consolidation. In that post the importance of economies of scope, scale and density is discussed and how they are a most important ingredient to a healthy industry structure. These economies are critical to all players – even the LCCs.

Three headlines in yesterday’s news underscore the negative effects of a highly fragmented and hypercompetitive US domestic industry structure – and those negative effects are not limited to the sector of the industry that is forever blamed for the industry’s woes – the NLCs. Yes, there is even bad news emanating from the Low Cost Carrier (LCC) sector. The very sector that many policymakers believe is solely responsible for the consumer benefits that the entire industry delivers each and every day - NOT.

First off, Holly Hegeman writing in her blog Planebuzz reports the first credit downgrade of the period. No it is not one of the NLCs, it is Southwest Airlines. Not that this is anywhere near the end of the world for the carrier with the industry’s best credit rating – even after the downgrade – but noteworthy in my view.

Second, Terry Maxon in his Airline Biz blog writes about additional stock sales by David Neeleman, founder and non-executive Chairman of jetBlue. Whereas there are always multiple reasons for stock sales, Neeleman has sold nearly 30% of his holdings since May of 2007. This particular announcement comes just days after jetBlue finalized a stock sale to Lufthansa that was designed primarily to address some near term liquidity concerns.

Third, last night Reuters reported out on Frontier’s earnings. The short article was entitled: Frontier reports wider loss, to sell four jets. Enough said.

For government regulators generally: the bad news regarding the industry’s financial performance is not limited to one sector. If you were right, and I was wrong, that the LCCs were/are the sector that will keep the US industry in a global leadership position, then it is time to step back and recognize that even this sector is beginning to show signs of troubled economics. And given that this sector is largely confined to the 48 contiguous states, that would be a good place to start your analysis of the industry’s structure.

For government officials in smaller US communities: the bad news is that the LCC sector of the industry is not your answer. The bad news is that industry economics do not support all of the service currently being provided. The good news is there is an opportunity to look at the current industry structure and allow it to make necessary commercial changes. Scrutinize the proposed changes for sure. But, changes that keep your airport market connected to the US air transportation system is much better than being the subject of attrition from the airline map.

For government officials in cities that serve as corporate headquarters: keeping your city as a critical dot on the global airline and trading map is much more important than housing a few thousand workers. It is simple economic impact math.

Much more to come,