Theoretical Mergers of Delta and Northwest

Introduction

In the era of the Internet, the world has become smaller and communications have become more immediate. Companies react immediately when world events and climate changes affect their economic performance. For example, news about the hurricane Katrina heading towards the refineries in land, spiked the price of gas worldwide even before the hurricane had a chance to hit the oil refineries.

The Internet has made business transactions available to many parts of the world where markets in the past were impossible to reach from an economic point of view.

It is no longer useful to keep your business plans confined to what you know but they should also account for what you do not know and contingency plans have to be developed to counteract most unforeseen events. The airline industry is a good example of this new world economy. Weather, gas pricing, union demands, political events, terrorism, world competition, and government regulations are just a few of the many events constantly modifying the business model of the airline business and making it very volatile.

This paper attempts to frame the problems Delta Airlines is facing and presents two alternatives paths for management to consider: The use of strategic financial management measures and the possibility of a merger.

New Business Model

Companies in today's marketplace need to be able to adapt to an ever-changing business environment in order to survive. Companies can no longer afford to take the future for granted. This is especially true for the airline industry since September 11, 2001 and one thing has become evident: a company cannot afford to become complacent with its business model. Prior to September 11th, 2001 the business climate for the airline industry in the US was relatively healthy and optimistic. The discount airlines were thought to pose no eminent threat to the major carriers, but when those major carriers failed to account for unforeseen factors and underestimated the competition, the market began to look similar to the days when the US automakers failed to foresee the imminent threat the Japanese products represented. US automakers viewed the Japanese as an inferior quality product, with no possibility of taking over their dominant market share. Similarly, the airline industry failed to recognize the importance of contingency plans and unforeseen events, like the terrorist attacks, that greatly eroded their market revenues. Events like September 11th created a change that left legacy companies like Delta airlines unable to compete. The new business model required was not contemplated in their business plans.

A Strategic Financial Management Plan

After September 11th, Delta initially had a stronger financial performance than most of its big carriers because of its less-unionized work force and more flexible operations. A large fleet of regional jets allowed it to adjust to falling demand despite overall revenues sliding significantly. All U.S. airlines have suffered a substantially more difficult revenue environment since 2001, particularly in the domestic market. Recession, terrorism, and the rapid spread of low-cost carriers have caused erosion in pricing that several years of economic recovery haven't been able to correct. The pressure of high fuel costs prompted a series of changes in Delta's business model to maintain a level of profitability, as pricing still remains far below pre-2001 levels. Despite all the troubles on the domestic arena, Delta has had more favorable revenue performances on its international routes, rebounding to pre-2001 levels. Delta tried two different approaches to become more competitive in the airline industry; the first being the introduction of Song airlines and the second having a simplified cost structure. Both of these plans were created for the sole purpose of allowing Delta to compete with the low cost carriers. Song, the subsidiary of Delta Air Lines, offered state-of-the-art electronic entertainment systems, name brand food, above-average legroom and fares cheap enough to take on growing low-fare carriers like Southwest, Jet Blue and Air Tran. The all-coach approach by Song was designed to give customers a more upscale product while keeping its costs low by getting more productivity out of its planes, employees and airport facilities. In January 2005, Delta's announced a program called "SimpliFares" and represented significant changes from the decades-old system of pricing airline tickets at traditional carriers. In the past, airlines have maximized revenue by charging business travelers, who often need to buy tickets at the last minute, the highest fares. At the same time, airlines rewarded companies that bought lots of tickets with fare discounts. The fare cuts were designed to position big carriers closer to popular low-cost carriers like Southwest Airlines and Jet Blue Airways. However, the cuts also put the majors in a bind because their operating costs are higher than those of the discount fliers, causing some analysts to think the cuts could cost the airlines $2 billion to $3 billion in lost short-term revenue. Both of these plans introduced by Delta could not prevent the resultant liquidity shortfall caused by historically high aircraft fuel prices and other cost pressures, low passenger mile yields and cash holdbacks required by credit card processors. As a result, Delta management concluded that the company could not continue to operate outside of the protections afforded by Chapter 11 of the Bankruptcy Code.

Now, in bankruptcy court, Delta should consider the following plans to achieve the following long-term viable cash flow and operating results:

1. Create a cost structure that is competitive with low cost carriers

2. Share sacrifices equitably among all constituents

3. Ensure that cost reductions are sustainable in order to maintain compliance with financial covenants in the post-petition financing and secure a proper balance of equity and debt financing to enable a successful emergence from bankruptcy

4. Sustain employee morale and provide superior customer service.

To achieve these objectives Delta needs to combine planned revenue and network productivity improvements with savings to be achieved through the Chapter11 restructuring process in order to derive and sustain more competitive employment costs. These revenue and network productivity improvements plan to target more than $1.1 billion in benefits to be realized annually through revenue and network productivity improvements. Key initiatives should include:

1. Achieving