Monday, November 03, 2008

The DNA saga

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Both Delta and Northwest Airlines face a gory bloody end, if...

Circa 2005: Delta Air Lines, Northwest Airlines (NWA), United Airlines, US Airways et al file for bankruptcy protection. Circa 2006: Delta rejects a takeover bid by US Airways Group Inc. Delta also launches an aggressive campaign to protest the takeover bid [remember the ‘Keep Delta My Delta’ campaign]. Both Northwest and Delta suffer debilitating consecutive losses of $2.83 billion and $6.2 billion respectively. Circa 2008: Delta and Northwest decide to merge their operations in a pursuit to become the number one global airlines.

The story has just one import: Delta and Northwest better merge fast if they need to even have a ghost of a chance of survival! With the accelerating fuel pricing, and killing pricing pressures, global airlines are simply folding up. As Richard Anderson, Delta CEO, commenting on the proposed merger, said to his employees, “We believe that consolidation in the airline industry is inevitable.”

So why’s the deal raking in the support? First, it comes on the heels of both airlines closing 2007 with profits, though relatively spartan (Delta: $1.61 billion; NWA: $2.09 billion). Second, the new consolidated entity ‘Delta’ will be worth $17.7 billion, will have mind boggling revenues of $31.7 billion, (higher than American Airlines’ $22.9 billion sales; FY07), would have a fleet of 800 planes and employee strength of 75,000. Third, Delta then will also displace American Airlines in terms of traffic to become the #1 airline in the world; and will even control a massive 25% of the US air travel market. Fourth, despite the glorious figures above, both the airlines involved are using this as a survival strategy rather than as a leadership strategy. As Peter Harbison, Executive Chairman, Centre for Asia Pacific Aviation, put to B&E, “This is a merger that needs to happen, both for the airlines concerned and as a precedent for immediate imitation. If this opportunity is lost, there will be blood.” Gory... very gory...

Pallavi Srivastava

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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