It's a combination about addition, not subtraction

These were the words spoken earlier this week by Delta CEO Richard Anderson, regarding his company's recently announced merger with Northwest Airlines.

Many years ago, we worked with two super bright business consultants named Jim and David Matheson. They believed that mergers are often the result of "brain dead" organizations. They espoused that most were done because one or both organizations' leadership stopped thinking strategically and, thus, could only focus on saving money through operational cost cutting. Inevitably, almost of these mergers failed because little long term value was actually created (versus the money, time and pain spent to create one working organization) and little synergy was ever gained within the new, larger company.

Fast forward to Anderson's comments and one has to wonder how he plans to defy the Mathesons' conventional wisdom of mergers (especially in the airline industry) to create long-term sustainability.

From everything I read, the only means for success in this type of roll up is to either slash costs through over lapping flights or to expand on a global basis to increase revenue. Anderson has proclaimed that he plans to do neither. Instead, he views the airlines' complimentary routes as the silver bullet that can create more than $1 billion in revenue synergies (thus his comment above – "it's a combination about addition, not subtraction.")

I am highly cynical that it can work because of so many short term pressures that this giant company will need to overcome within this industry first. These include:

- Oil isn't getting any cheaper (now upwards of $110 per barrel) and will create major added costs for one giant airline to deal with.
- How about those pilot labor agreements? It guarantees them no layoffs, absolute pay raises and basically ensures that Delta can't reduce the number of planes or routes it flies.
- Then there is the most important issue - combining the overall operations and cultures of two companies that weren't humming along in the first place. Pilots, flight attendants, mechanics, and most other mission critical employees do not see this merger as being good for them. I see lots of constant discord in this newly merged company's future.

And let's not forget the customer (which this deal doesn't really even take into account). As we've seen over and over again in corporate America, bigger certainly isn't typically better. In the airline industry it means that this giant company will fly the same routes with the same old airplanes, only with higher labor costs. You can bet that all the negative aspects of this deal (in terms of cost and bureaucracy) will be a straight pass through to the consumer.

I hate to say it, but this industry is much closer to falling into the abyss because of deals like this. Get ready to hate flying that much more...

Comments

[Michael Moed]

We have a saying in engineering regarding this type of situation - when you multiply two fractions, the result is smaller. :)

[BTM]

Great read Ed. This sad, uncalculated merger could be the first fallen domino in a wave of troubled airline mergers ahead. Sad indeed for Joe Flyer.

[Mariana Sarceda]

Great comment! Sometimes, merges make better results for investors and business owners but not for customers. It's a pity that a flying company lives on customers' expenditures and not on investors ...