MPR: Is Northwest Next?

Is Northwest Next?
by Bill Catlin
May 24, 2000

Based on calendar 1998 data, Delta Air Lines is the largest U.S. airline in terms of aircraft departures and passengers enplaned, and the third largest U.S. airline as measured by operating revenues and revenue passenger miles flown.

As of August 1, 1999, Delta served 184 cities in 44 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, as well as 42 cities in 29 countries. With its domestic and international codeshare partners, Delta's route network covers 225 domestic cities in 48 states and 126 cities in 58 countries. In addition to scheduled passenger service, Delta provides air freight, mail and related aviation services.

Source: Delta Airlines

United Airlines' plan to buy US Airways has triggered speculation the deal will fuel a new round of mergers and consolidation in the airline industry. Some analysts are singling out Twin Cities-based Northwest as a likely target.

THE REACTION TO UNITED'S plan to buy US Airways is the latest indication that in certain industries, size matters. Witness the falling share prices of American and Delta Airlines, companies who shrink further in relation to the combined US Airways and United, which is already the largest U.S. airline. One Wall Street analyst said American and Delta will have to address the threat that a new larger United poses. Others said Northwest would make a likely target for Delta Airlines.

Northwest is currently the fourth-largest U.S. carrier. According to Joe Schwieterman, an airline competition expert formerly at United Airlines, now at DePaul University in Chicago, Northwest struggles to keep up with the "big three." And Sweeterman says the United, US Airways combination only makes it harder.

"This is going to force Northwest to integrate itself into a larger route system," Schwieterman says. "If it were to consolidate with Delta, most likely it would be done on Delta's terms. Northwest would probably cease to exist and it would become an enlarged Delta, which would mean, of course, that Minnesota would lose a large corporate headquarters, which does have some troubling implications for people in the state."

Schwieterman is one of many observers who says Delta seems the more likely to make a run at Northwest. "Northwest brings three large hubs, and only the Memphis hub would have a lot of overlap with the current Delta route system. One could envision an American-Northwest consolidation as well, but it would be a little heavy in the northwest, and it still wouldn't buy American what it really wants, which is access to the east coast. So I think Delta is probably the most likely candidate."

"Northwest would probably cease to exist and it would become an enlarged Delta, which would mean, of course, that Minnesota would lose a large corporate headquarters, which does have some troubling implications for people in the state."

- Joe Schwieterman
DePaul University

Others point out that Northwest's dominance in Pacific routes, strong U.S. hubs and controlling stake in Continental airlines make it an attractive target.

Others offer caveats. Darryl Jenkins, an industry expert at George Washington University, says regulators would probably take a dimmer view of the effects on competition of a Delta-Northwest merger than the United, US Airways deal.

"US Airways is a weak partner, which makes it a little more likely to go through the Justice Department, whereas both Delta and Northwest are very strong partners, and I think it makes it less likely," Jenkins says.

Others contend Northwest doesn't have to do anything at all because of the partnership with Continental airlines. "Northwest and Continental have the best of both worlds," says Steve Jaffe with the consulting firm Avitas. He points out that the two airlines sell each others flights, and broaden their geographic reach, without the lengthy difficulties involved in merging workforces and operating systems.

"They have sort of an effective merger, in which they accrue most of the benefits of the merger while avoiding all the problems associated with a merger, and that's contributed mightily to the bottom lines of each carrier."

Northwest says together the two airlines have a domestic market share equivalent to the big-three airlines, and the alliance was worth $160 million to the carriers last year. Northwest says it will be worth $500 million eventually.

But Houston-based Continental has been trying to convince Northwest to sell back its ownership stake, and the Justice Department has sued to force Northwest to give it up - a stance which leads some to question whether the United-US Airways deal will fly with regulators.

And in any case, the Northwest-Continental partnership was designed for an industry power balance that would no longer exist if United gets a green light to buy US Airways.

Northwest Airlines declined to comment. A Delta spokeswoman would only say the airline they continues to explore strategic options.

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