Commentary: Delta Will Fly Farther Without Excess Baggage

A merger would weigh down Delta's healthy balance sheet, risk culture clash, and lead to possible union problems

Delta Air Lines' Leo F. Mullin has a dilemma. He's a close No. 3 in the airline industry but his two larger rivals, United and American, are putting together huge mergers that would give them half of the U.S. market and leave Delta with just a 17% share. Should the chief executive hurry a blockbuster deal of his own? Or should he chill, avoiding the me-too impulses of the M&A industry, and take smaller steps like improving service to outshine the competition?

Mullin should fly solo. Delta today is one of the country's best-run airlines. It moved aggressively into the commuter-airline market years ago and now flies one-third of the country's regional jets. Its expansion into Latin America has paid off handsomely. And it boasts one of the industry's best balance sheets. But if Mullin does a quickie deal, he risks losing Delta's edge by loading up on debt and years of hassles with combative unions and clashing corporate cultures. Just one in five corporate deals, after all, pay off, according to research by consultants KPMG.

All this should have Mullin thinking he can stay competitive without doing a megadeal, but he's keeping his options open. In late January, he resumed early-stage talks with Northwest and Continental. "Continental would be a good transaction, possibly, if we did the deal--big if," Mullin says. But he adds: "We do not intend to rush into anything."

Combining two airlines is especially tricky because seniority determines everything in the industry--pay, scheduling, vacations--so unionized workers are loathe to go along. United and American may face these challenges soon. Pending approval from Washington, United and American will split up US Airways and American will take over Trans World Airlines, giving United and American each roughly a quarter of the U.S. market. That could be a boon for go-it-alone carriers. "If 50% of the market is screwed up, it's kind of a windfall for the other 50%," proclaims Continental Chairman Gordon M. Bethune.

In any event, both Northwest and Continental--the only merger candidates that would allow Delta to match American and United--are probably off the table. Northwest has a marketing pact with Continental that feeds it lots of traffic and gives it a veto over any Continental deal. Douglas M. Steenland, Northwest's chief corporate officer, says flat out: "We are not interested in Delta buying Continental."

Northwest might make more sense. Continental doesn't have the same veto rights, and Northwest's Asian routes and hubs in Detroit and Minneapolis would plug big holes in Delta's route system. But Northwest comes with militant unions while Delta is almost union-free, except for its pilots. A bigger problem: Northwest's asking price. When American approached Northwest about a merger last summer, Northwest demanded more than $100 a share, double American's offer and four times what the stock now trades at. "I don't know that Delta has to do an acquisition," argues Thomas J. Roeck Jr., who was Delta's chief financial officer from 1988 to 1997. "It's not a do-or-die thing."

Commentary: Delta Will Fly Farther without Excess Baggage

To be sure, most industry insiders counter that if Delta doesn't answer these deals, it would end up an also-ran. It would take United and American three years or more to fully digest their acquisitions, predicts Kevin Mitchell, chairman of the Business Travel Coalition. But once that happens they'd be formidable, because corporate travel managers throw business to the airlines with the biggest networks. "Over the long term, Delta will find itself in big trouble if they don't find a way to respond strategically to match the frequency of these carriers," Mitchell says.

That's certainly the conventional wisdom in the industry. But not everyone is convinced. Says Miami aviation consultant Stuart Klaskin: "Being the No. 3 airline in a global marketplace is not a bad thing." Something to consider before taking a flyer.

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