Delta (DAL) And Northwest (NWA): A Day Late And A Dollar Short

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The revived merger between Delta (DAL) and Northwest (NWA) is based on the premise that, in a airline industry depression, two carriers mashed together work better than if they remained independent. It is an argument which is half again too clever but has no merit to speak of.

According to The Wall Street Journal "The deal could value Northwest at roughly $3 billion, these people said, though terms were still being negotiated. That would be well below Northwest’s market value of more than $4.6 billion as of Feb. 1, reflecting the industry’s worsening prospects in recent weeks." The airline industry has been keelhauled to the extend that United (UAUA), Northwest, and Delta have lost over 30% of their market caps in three months.

The two significant stimulations for airline mergers now are rising fuel prices and a likely sharp drop in passenger demand as the economy slows. Since a merger will not be effective finished for several months, neither of these is addressed in the short-term.

The more painful reality of the possible transaction is that it solves neither fuel prices nor passenger revenue-based troubles. It may allow for some elimination of duplicate routes and some employees. But, airline pilots have not approved the merger and a strike by them could cost the new company tens of millions of dollars be shutting the operation down. Scabs are hard to find when they have to replace people with twenty years of training.

Merging Northwest and Delta is playing chess while the house is on fire. Better to stay separate and avoid the migraine of integrating reservations and IT systems which usually POs customers to no end.

Negotiating with unions, hedging fuel and cutting routes does not require the expenses and risks of a merger.

Douglas A. McIntyre