Delta gets its chance to dominate aviation

Delta Air Lines’ executives long talked of being in the pilot’s seat when the next big wave of consolidation swept the airline industry.

Last week, Delta CEO Richard Anderson got his wish. Federal regulators cleared Delta’s merger with Northwest Airlines, creating the world’s largest airline just 18 months after Delta emerged from bankruptcy.

The $2.6 billion stock swap deal —- basically a takeover of Northwest, which becomes a wholly owned subsidiary —- gives Delta a global span that could help raise Atlanta’s profile as an international hub.

“You’re going to have a really strong airline in Atlanta, and you haven’t been able to say that for a while,” Delta President Ed Bastian said in an interview last week.

The airlines say it will be business as usual —- at first. Travelers will not notice immediate changes to schedules, planes, check-in procedures or frequent-flier programs because of the merger.

Delta executives plan to gradually combine the airlines’ operations over the next two years. When the merger is completed, officials think it will generate about $2 billion in annual cost savings or additional revenue by melding Delta’s and Northwest’s largely complementary routes.

Consumer advocates worry that the merger could lead to higher fares because there are fewer competitors and one airline will control a greater share of the market. Government antitrust regulators, however, concluded last week that the merger “is not likely to substantially lessen competition.”

Combined, the companies will have $35 billion in revenues, 75,000 employees and 770 mainline jets flying routes spanning the United States and reaching to Europe, Asia and Africa. The merger enables Delta, which is weak in Asia, to add more connections between Atlanta and the continent, particularly to Northwest’s Tokyo Narita Airport hub.

Atlanta is expected to remain Delta’s key hub. The company will continue its role as one of the metro area’s largest employers as it gains five domestic and overseas hubs from Northwest.

If Delta pulls this off with flying colors, both the airline and Atlanta stand to gain, industry experts said. If not, billions of dollars in cost savings and added revenue could be forfeited, customer service could suffer and labor conflicts could intensify.

The stakes are huge. For Delta, the prize is bragging rights as the first truly global airline and “probably a billion dollars of revenue” that it didn’t have before, said Darryl Jenkins, a longtime airline industry consultant.

Atlanta, meanwhile, gains a bigger, healthier airline that has been a key driver of the regional economy. Local officials hope the merger will create a better lure to recruit other employers. Customers from corporate giant Coca-Cola to vacation travelers are likely to gain better direct access to more overseas and domestic flights, although some critics say the merger could drive up fares.

“It really confirms Atlanta as a global headquarters due in large part to Delta,” said Craig Lesser, a managing director at the McKenna Long & Aldridge law firm and chairman of the World Trade Center Atlanta and the Georgia Chamber of Commerce’s international committee.

As Atlanta tries to attract more corporate headquarters and companies become more globalized, Delta’s ability to connect people to more places makes Atlanta a better place for businesses to locate, he said. However, don’t expect the payoff to come quickly or without some pain, airline industry veterans said.

Anderson’s team faces a tough two-year slog blending two big companies with differing employee cultures, aircraft fleets and computer systems. Most of Northwest’s employees are unionized; most of Delta’s aren’t.

Delta wants to preserve its nonunion work groups, while labor groups are planning campaigns to unionize more of the combined airline’s workers, including flight attendants, ramp workers and others. The unions see an opportunity to broaden their influence to a longtime holdout that’s now an industry juggernaut.

“There are lots of promises made by Richard Anderson in his attempt to get the merger approved, but the only way to hold him to those promises is through a new contract,” said International Association of Machinists spokesman Joe Tiberi.

Few airlines have pulled off such mergers without significant labor strife, service meltdowns and customer service headaches, including canceled flights and lost baggage.

Still, most observers seem confident that Delta will do a better job of avoiding such pitfalls.

“I am bullish on their ability to put it together,” said William Swelbar, a research engineer at the Massachusetts Institute of Technology’s International Center for Air Transportation. “Yeah, there will be some speed bumps on the way, but they’ve been very methodical about this.”

He and other experts noted that Delta and Northwest launched 26 teams to begin planning the integration process soon after the merger was announced. A key hurdle the airlines jumped, they said, was getting the pilots, who are in separate units of the same union, to agree to a joint contract.

The pilots, who hold a lot of clout, still have not resolved a conflict over melding their seniority lists, which dictate job assignments, pay, vacation and other touchy issues. The unions are talking while an arbitration panel looks at the case. Meanwhile, the world hasn’t stood still while Delta and Northwest awaited approval of their merger, announced in April.

After dealing with skyrocketing fuel costs this summer, the airlines now face the prospect of a global recession. Both airlines have cut thousands of jobs this year, and there could be more cuts as overseas and domestic air traffic decline. Delta has announced plans to reduce domestic capacity by 14 percent in the fourth quarter compared to a year earlier. It’s also slowing its international growth.

“They’re going to shrink a lot more than what they originally thought,” said Vaughn Cordle, a former pilot who runs a consulting business, Airline Forecasts. Delta could cut capacity by another 5-10 percent next year as part of the merger, he said. Employment usually tracks fairly closely to capacity changes. However, Delta’s Atlanta operations will likely feel the knife less than smaller hubs such as Memphis, a Northwest hub, or Cincinnati, a Delta hub.

“The good news is Atlanta will obviously remain the largest hub,” said Henry Harteveldt, an analyst with Forrester Research.

Bastian, Delta’s president, said he does not expect large-scale layoffs in Atlanta.

“You’re not going to see any significant reduction in jobs or head count here in Atlanta, frankly, because we have a lot of work to do over the next two years as we integrate the two companies,” Bastian said.

“Eventually, you’ll see some reductions across the two companies, but it’s pretty far down the road, and I would expect we’re going to manage it through attrition and other types of early-out arrangements.”

Over the long haul, said Harteveldt, the merger will enable Delta to continue its international expansion, to the benefit of future employees and customers in Atlanta.

“When Delta emerges [from its integration with Northwest], Delta will remain a significant employer in Atlanta and I think a very attractive employer,” he said.

THE NEW DELTA

> Pre-merger

Employees: 46,000

Planes: 451

Destinations: 287

Industry position: Third largest in the world

> Post-merger

Employees: 75,000

Planes: 770

Destinations: 375

Industry position: World’s largest