MPR: Northwest Merger Talks Stall and Alliance Talks Emerge

Northwest Merger Talks Stall and Alliance Talk Emerges
By Bill Catlin
August 7, 2000

Merger talks between Northwest Airlines and American airlines have apparently stalled. The two sides are far apart on the issue of price. Talks occurred after United Airlines announced its plan to buy US Airways. If they're unable to agree on a deal, some analysts think Northwest and American may consider a marketing alliance instead.

AMERICAN IS IN somewhat of a squeeze. Currently they are number two and the airline's biggest competitor, United, is planning to get a lot bigger. American and Northwest officials have talked about a merger, but Northwest may be seeking more than American will pay. After the United deal was announced in May, the credit rating agency Standard and Poor's, revised American's outlook to negative.

Holly Hegeman, head of the website planebusiness.com, says the revision reflects the catch-22 American is facing.

"If they don't do something to counter the US Airways-United deal then their value is going to drop, and yet if they do make an offer for Northwest, it's going to strap them so much financially that it's also going to cause their debt rating to drop," she said.

So if you have to do something, but can't agree on a merger, what are the options?

Some analysts say Northwest and American might consider a marketing alliance. Northwest has led the industry in establishing alliances, most prominently with KLM-Royal Dutch Airlines and domestically with Continental Airlines.

By selling seats on a partner's planes and combining frequent flyer plans, airlines can provide service to more locations without the cost and risk of buying another carrier.

Barbara Beyer, President of the aviation consulting firm Avmark thinks Northwest and American ought to be considering an alliance if they're not already. She says the assets that make them attractive merger partners apply to the issues of an alliance as well.

"Where American is quite strong in Latin America, Northwest is quite strong in the pacific. Then, Northwest dominates the northern tier while American dominates the southern tier, so they offer some strongly complimentary services," Beyer said.

Beyer also says alliances avoid major disadvantages of mergers, including the often contentious and disruptive process of combining labor groups.

Beyer says an alliance would allow Northwest and American to hedge against the potential threat of a United-US Airways merger. Many observers believe that combination faces major challenges from federal antitrust regulators over concerns that the deal would set off a chain reaction of mergers. Depending on the outcome of the Justice Department review, Beyer says Northwest and American could roll back their alliance, or tie up even more tightly.

Holly Hegeman of planebusiness.com says an alliance makes more sense for American than Northwest. She says Northwest doesn't have to do anything and may find another suitor in the number three airline, Delta.

"And route-wise, it's not a bad deal, it's not one that's been talked about that much," Hegeman said. "Usually when we talk about a Delta deal, we're talking about Delta and Continental, and that remains a very big possible, but then again Continental is linked now with Northwest because of the current alliance there. So no, it wouldn't surprise me if Delta walked up and said we're going to make an X-number a share offer for Northwest."

Alliances, however, are not without problems. Critics contend they reduce competition by making rivals partners. The demise of some alliances has given the strategy something of a bad reputation.

Consultant Robert Mann says alliances have a track record worse than the institution of marriage.

"If 50 percent of marriages end in divorce, over time roughly 80 percent of airline alliances have ended in divorce," Mann said. "Some of the biggest players in present alliances have had numerous partners. The only thing that holds them together over the long term is a full financial transaction."

Still, Northwest says its alliances with KLM and Continental are successful and profitable.

Ultimately, a Northwest-American merger probably remains the most likely scenario, but if they can't come to terms on price, an alliance may be the next best option.

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