It seems we may finally see some momentum in the airline mergers that have been long speculated about. The CEO's are looking at a potential Obama or Hillary presidency in 2009 and do not like the forecast for a non-business friendly government. Thus, the "We got to get it done now!" push.
Having worked for three major airlines, I can testify that each airline has its very specific culture. Post-9/11, most airline employees are pretty angry and bitter about having taken huge pay and benefit cuts with little or no appreciation from their employers. The only happy airline employees across the board are Southwest. Amongst the majors, Continental and Alaska have better employee morale than the others. It still is not great though. Airline management does not help the situation by defaulting on pension obligations to millions of lifetime employees, declaring bankruptcy, and then emerging shortly thereafter only to award themselves millions of dollars in bonuses. Corporate greed, while not exclusive to the airline industry, seems to have a meaner and greedier spirit than in other industries.
The major obstacles in merging two airlines are corporate culture and seniority. Corporate cultures are vastly different and mergers past and present have proven disastrous. When Pan American Airways (the original granddaddy of U.S. airlines) went out of business, there was a huge rush to purchase their assets and international route authorities. United ended up purchasing the majority of their Pacific operations and the highly coveted London Heathrow hub. Delta scooped up the remainder of the Atlantic operations which Pan Am operated from JFK airport in New York. Pan Am employees were hired and merged into each airline differently. Almost twenty years later, former Pan Am employees still speak of their former company and culture like it exists today. They still (and never will) get over the demise of their airline. When I worked for Northwest, the number your employee number started with reflected which airline you had been hired by; the original Northwest Orient, Republic, or the merged carrier post-1987. This always provoked some sort of conversation amongst the employees. "Oh, you were original Northwest." This stuff seems petty, but people in the airline business take this stuff to the extreme. America West purchased US Airways in 2005 and they are still negotiating the terms of work groups being integrated with each other.
The tricky part of the seniority equation is mostly for flight crews. A pilot's pay is based upon the size of the aircraft that he or she flies and when a pilot can upgrade to the Captain position. As the airlines stopped hiring pilots and buying new planes in the years following 9/11 due to financial strains, the upgrade to captain became a long wait (sometimes ten to fifteen years or even longer). The question one airline pilot will always ask another carrier's pilot is "How long is it to upgrade at your company?" The ability to upgrade to larger aircraft is one of the few ways to increase your pay at an airline after you have put in ten to fifteen years with an airline. Imagine you have put in fourteen years with an airline and you are just about to upgrade to captain. Figure in a good 20 to 30 percent raise that you have been counting on. Now your airline merges and the airline you are merging with has significantly more senior pilots. In theory, if you slot everyone in according to seniority, then you may never be able to upgrade or you may have to wait another ten years. Not to mention most of the pilots flying captain at the junior airline could conceivably be bumped out of their aircraft and captains positions because they no longer have the seniority to hold the seat. Retraining one pilot to fly a different aircraft costs the airline thousands of dollars in training costs, simulator time, and more. Multiply this times thousands of pilots and you can see what a clusterfuck this whole picture becomes. What normally occurs in an airline merger is what is called a "fence agreement". Basically an airline will fly under one name, but still operate as two separate companies with two separate pilot and flight attendant groups until an agreement is reached to bridge the two. This is a costly and emotional process that takes years to achieve and whose outcome is liked by virtually no one. One knows an airline merger has been successful when no one is happy with the outcome, so the saying goes.
Integration of seniority lists for flight attendants is also a big debate. For flight attendants, it is more about what type of flying you can hold and what position on the aircraft you will be working. Flight attendant and pilot bases also can be contentious. Take the possible merger being talked about between Delta and Northwest. Northwest has a Honolulu base that is relatively junior. If you are a Delta flight attendant with 30 years seniority and you commute from Honolulu to Salt Lake City, obviously being able to work out of Honolulu sounds pretty darn good to you instead of an 8 hour commuter flight each way several times per month. But the junior Northwest flight attendant holding a nice schedule with 15 years is not going to be too appreciative when Ms. Delta arrives and takes away his schedule and forces him back into an on call (or "reserve") status.
These concepts are hard for non-airline folk to comprehend, so I apologize if a lot of it seemed confusing or unclear. As you can see, airline mergers are generally a messy proposition. Unfortunately for the employees, they are badly needed. There are just too many American carriers for the market and they continue to struggle to make a profit. They deliver a mostly unpleasant travel experience and struggle on international routes to compete with foreign carriers who do a much better job. Some form of reregulation has been talked about in government circles as our country is dependent on a functional air transport system. The idea sounds good on paper, but it would inevitably lead to higher airfares which the average American may not want to pay. So the dysfunctional system continues as is.
I thought I would run through some of the airlines that are being talked about in the news and their possible marriages.
First off, we have Delta Airlines and Northwest Airlines. Delta has always been an island unto themselves in the airline world. They are a non-unionized airline (with the exception of their pilots) which is fairly unique for U.S. carriers. They have always done their own thing, prided themselves on their southern hospitality, and not really focused on the competition as much as the other carriers have. Being based in Atlanta, they are strongest internationally in the Atlantic market. Northwest Airlines is based in Minneapolis and is the combination of many mergers of smaller carriers through the years. Northwest's two largest hubs are in Detroit and Minneapolis and it has a strong presence in Asia. They operate a hub in Tokyo from which they fly to many destinations within Asia. Northwest throughout the years has had much labor tension and is the only carrier in recent memory to have had strikes by both its pilot and mechanic groups. (The mechanics were all fired and replaced with non-union members or "scabs" as a result of strike actions.) Northwest has always been a company more concerned about the bottom line versus striving to provide an outstanding inflight product. They also have a very old fleet of DC-9s, some of which are from the 1960s. The worldwide route structure of the combined companies would be formidable. It would be very interesting to see what kind of corporate culture would emerge from this marriage. Rumors from the press are that the merger is being held up by the pilots who cannot agree on seniority integration. The carriers are smart to address this early on because pilots are one group that can ground an airline. Flight attendants, ground workers, and others can be easily trained, but pilots cannot be.
If these two are able to work out a deal, then United and Continental emerge as the next most likely couple. United has been pushing this merger for years, but each airline's management team wants to control the new company. It sounds as if United's management team has finally relented and is willing to allow Continental's team to run the new company. United has been under horrible management for many years now and this could only help employee groups at United to make a fresh start. Continental has had an excellent management team in place since they brought Gordon Bethune aboard in the 90s. Employee relations are very good at Continental, but it would be interesting to see if this would carry over to the new company. People who work at United have a certain sense of entitlement and a sense, however right or wrong it is that they are among the best. Yes, United has an acceptable inflight product and they do have a strong international presence. Still, they are not all that. They are going to have to lose the attitude to make the marriage work. United is the second U.S. carrier with a strong presence in the Pacific (Northwest being the other). Both United and Northwest operate hubs from Tokyo Narita from which they carry passengers throughout Asia. United also operates larger hubs in Chicago, San Francisco, London, Washington D.C., and Denver. United is only U.S. carrier to fly to Australia from the mainland U.S. and used to operate round-the-world service until they ceased service to New Delhi, India from London and Hong Kong post-9/11. Continental is a strong player in the Atlantic market as well as Central America. They operate major hubs in Newark and Houston and have received many accolades in recent years for their domestic and international inflight service. Continental also owns portions of Copa Airlines in Costa Rica and Air Micronesia based in Guam. With their mutual strengths in the Atlantic and Pacific markets, the potential is there for United/Continental to be a great airline. The interesting thing will be seeing if the two different cultures are able to come together. There is an interesting ironic twist to this deal. Northwest owns a small stake in Continental and has veto power over any merger. If Northwest chooses to merge with another airline, then Continental can exercise an exit clause in the deal for $100. So if the Northwest/Delta merger falls through, then this deal will likely fall through also.
There is speculation that if both of these mergers take place, then American may feel left out and seek a merger with US Airways or Alaska. US Airways is dealing with so much internal strife these days, I do not see that happening. Alaska might be a possibility.
The so called "low fare airlines" are also a group to keep an eye on. JetBlue is no longer the darling it once was in the public's eye. Higher fuel costs, employee morale, and congestion at JFK are contributing to growing pains for the young carrier. In an interesting turn of events, Lufthansa recently sank some cash into them. Who knows what that is all about? Virgin America began service in 2007 out of San Francisco, but they are not generating much buzz. They have an upscale inflight product with advanced inflight entertainment systems and wireless internet access coming soon. Still, I have not spoken with one person who has flown them since they began service. They are only flying to a handful of cities at this point and there is talk on the street that they are not doing well. Skybus also started last year out of Columbus, Ohio with a Ryanair formula. Cheap tickets all the time and passengers pay for everything (including a soda onboard, checking a bag, or to get into the first boarding group). I flew them last summer and could not find much to complain about. They were super cheap and are flying brand new A319s. Only time will tell. Some of the older players in the market are having a rough time of it. Frontier is struggling to fight off the rapidly expanding Southwest in Denver. Airtran out of Atlanta would like to expand, but keeps being thwarted. They attempted to purchase Midwest Express for most of last year, but Northwest ended up investing some money into their company to keep them independent and to shore up Northwest's midwest monopoly. ATA has been gutted by owner Southwest and is rumored to be possibly ending scheduled service. This business is not for the faint of heart, that is for certain. You have to be able to ride the waves of change like a champion surfer.
I expect we will see some merger announcements in the next couple of week. Over the next five to ten years is when we will truly see the results.
Cuidate.
