How Northwest 'Took Over' Delta

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How Northwest 'Took Over' Delta
Ted Reed - TheStreet.com Staff Reporter

CHARLOTTE, N.C. -- It was said that Delta(DAL Quote - Cramer on DAL - Stock Picks) took over Northwest in October, but four months later it is reasonable to ask whether that is really what happened.

Officially, Delta acquired Northwest in a $2.8 billion stock swap. But after every merger, one company's culture predominates, while the other's seems to diminish in importance. In the case of the merger that created the world's biggest airline, the evidence abounds that the acquiree is in the captain's seat.

Start with the obvious (more info on Corporate Leadership Team/Executives, HERE), which is that Delta CEO Richard Anderson spent 14 years at Northwest, leaving as CEO in 2004. Furthermore, of Delta's top 10 officers, five, including Anderson, have worked at Northwest and one came last year from Continental(CAL Quote - Cramer on CAL - Stock Picks), where he worked with Anderson. Only four were at Delta prior to its 2005 bankruptcy.

In terms of cultures, Delta was always a Southern company, occasionally described in terms like "cordial," and "genteel" and, of course, lacking union representation except for its pilots and dispatchers.

By contrast, Northwest has long been considered the most aggressive of airlines, known for sometimes confrontational labor relations and for a fierce response to competitive intrusions. In the late 1990s, when AirTran(AAI Quote - Cramer on AAI - Stock Picks) started to expand at its Atlanta hub, Delta seemed to look the other way, allowing AirTran to flourish. It is widely felt that Northwest would have used the weapons a hub airline possesses, such as scheduling, pricing, amenities and frequent flier loyalties to crush AirTran in its infancy.

In Atlanta, Delta has been the archetypal home-town company, one that grew up with the city and the airport that has become the world's largest. Yet recently, Delta has been in a bitter public battle with the airport, even threatening to move flights to "more efficient" places, like Cincinnati or a Northwest hub, if the airport executes an expansion plan that could double per-passenger costs by 2016.

Simultaneously, Delta is in a pitched battle with its regional carriers -- two of which have filed lawsuits -- and with the American Society of Travel Agents, which objects to Delta's move last June to debit agents' accounts for ticketing mistakes.

"I keep telling people, Northwest took over Delta, using Delta's money and Delta's name," says a recently departed former Delta executive. "Once they put Richard Anderson on the board (in March, 2007), that was it."

To many, however, the selection of Anderson as CEO in September 2007 came as a surprise, particularly because outgoing CEO Jerry Grinstein -- a popular industry icon who rebuilt Delta as an international carrier and rallied employees partially by rejecting financial rewards he could have had -- had pushed for an internal candidate.

Anderson quickly began an effort to streamline Delta's regional operations, where several regional carriers flew as Delta Connection. The effort became more critical after the merger added even more regionals. The intent, Delta maintains, has been primarily to shed carriers with substandard on-time performance.

Some regional carriers saw it differently, saying Delta found ways -- even extending to contract violations -- to reduce costs. Two of the carriers, Mesa(MESA Quote - Cramer on MESA - Stock Picks) and SkyWest(SKYW Quote - Cramer on SKYW - Stock Picks), are suing Delta.

In a third case, Delta threatened to terminate a contract with Pinnacle(PNCL Quote - Cramer on PNCL - Stock Picks), but later backed down.

As for Mesa, Delta last spring sought to terminate a contract under which Mesa subsidiary Freedom operated Delta Connection flights. Delta said Freedom failed to maintain a 95% completion rate during a three-month period. Mesa sued Delta, saying it canceled flights at Delta's request, largely because Delta wanted to use the slots at New York's Kennedy Airport for other flights.

In May, a federal judge in Atlanta said Delta acted "in bad faith" and issued an injunction against it. "But for Freedom's cooperation with Delta's requested coordinated cancellations, Freedom's completion rate in October and December 2007 would have exceeded 95%," wrote Judge Clarence Cooper. Delta, which is appealing, subsequently terminated another contract, under which Mesa flew CRJ-900 regional jets.

Meanwhile, SkyWest sued Delta in Georgia state court, alleging that Delta withheld $32.4 million in payments that should have been reimbursed in connection with irregular operations.

"When you look back at Northwest, and how it treated its regionals, you see the same type of thing," says Mesa CEO Jonathan Ornstein. "Delta always had a reputation for treating everyone fairly, but what the (Delta) board is going to realize is that they destroyed one of the last airlines from the traditional school."

In its dispute with ASTA, Delta is accused of taking a hard line with travel agents.

"A year ago they started drafting travel agent accounts with debit memos for erroneous type things, like not canceling within 24 hours (and) they got very aggressive towards the end of the year," says ASTA President Chris Russo. "These are not cheap -- they are $100 a pop."

In November, Delta said it would discontinue the practice, but Russo says agents are still miffed that Delta wants disputes handled by email or fax. "You still can't talk to a real person," he says.

In one major respect, the new Delta differs from Northwest, because while Northwest frequently had conflicts with its unions, Delta continues to maintain a positive relationship with its pilots. The pilots backed the merger, which other unions opposed, and moved to quickly integrate seniority lists. As it always has, Delta is resisting other unions' efforts to organize workers, including workers who were union members at Northwest.

Delta spokeswoman Betsy Talton says Delta continues to have a "distinctly Delta culture that's been built over decades (and that) continues to be nurtured through positive, direct relationships and a philosophy of sharing successes with frontline employees through equity, profit sharing and monthly operational bonuses.

"From this foundation, we continue to integrate best practices and talent from companies at the top of their industry to build an even stronger Delta," she says. "Our merger provides the opportunity to incorporate best practices from Northwest including expertise that is the foundation of its reputation for strong operational performance."

Regarding the recent conflicts with the airport, ASTA and the regionals, Talton says: " We're constantly looking at every aspect of our business and enhancing policies and procedures to ensure a strong business mode -- one able to succeed through economic cycles and the changing landscape of the airline industry."

Aviation consultant Robert Mann says Delta has clearly seen a cultural transition, part of which naturally follows a merger creating the world's largest airline. "When you get to the size Delta is now, you can afford to be the 800-pound gorilla, and maybe they are getting used to that role," he says. "When the industry outperformed Delta by 13% in (revenue per available seat mile), how aggressive could you be with travel agents when someone was egregiously mispricing? How much did you want to (anger) the Atlanta airport, which wants to double the per passenger cost, when you only had one place where you could grow?"

"So part of it is evolutionary," Mann says. "The other part is the function of a rapid influx of some rather more brass-knuckled personalities from a decidedly more brass-knuckled corporate culture."

Shares of Delta finished higher on Wednesday, up 20 cents, or 4.7% to $4.46.