The airline that is emerging from the marriage of Delta and Northwest has been flying as smoothly as could be hoped in a crippling economy. It headed off most labor concerns early, started extensive codesharing for former Northwest passengers quickly and has already started to see some of the promised operational savings.
"This will be written up in case studies on how to do something right," Robert Cortelyou, Delta's executive vice president of networks, boasted recently.
But the new Delta and its worldwide partners have also done and said some things recently that gave travel professionals pause about the intentions of this biggest gorilla in the airline jungle. Delta CEO Richard Anderson last month went so far as to say he'd like to see some distributors pay to display his airline's content, which would turn the tables on the traditional relationship between airlines and the agents and GDSs that make up the heart of commercial aviation's distribution channel.
Delta executives say the airline is still taking its first baby steps as, in their words, "the first true U.S. flag carrier" with real global reach, adding that the carrier's new branding and mission won't be rolled out for several months.
While the new airline is keeping the Delta name, executives say it is so much bigger than before the merger -- and has such a significantly broader reach -- that it begs for a revamped brand, a fresh image and an expanded mission. Part of that mission, they said, will be a focus on corporate citizenship, including greater investments in nonprofit organizations or civic causes in the communities they serve.
Some analysts argue that a healthy airline the size of Delta will help stabilize the industry by better matching capacity to market size and need, creating a more level pricing environment. But others worry that its sheer size will embolden the airline to mold the market to its own liking when it comes to things like ticket distribution, corporate accounts and consumer issues. Once Delta gets its new house completely in order, they fear, the airline will be in a position to dictate its own terms instead of negotiating deals.
Vaughn Cordle of AirlineForecasts said that's not a concern in the immediate future, because Delta is going to be busy figuring out how best to optimize its routes with the right frequencies and aircraft, deciding which hubs work best and analyzing which business practices of the two carriers will best serve the merged airline.
But eventually, Cordle said, "They're going to have some monopoly power. Right now, Delta is focused on rationalizing everything. In 2010 they can blow away the competition."
By the time the U.S. Transportation Department approved the Delta-Northwest merger last fall, the two airlines had already entered an extensive codesharing agreement to help ensure a seamless transition.
"The big thing we did right away was codeshare," said Jim Cron, senior vice president of global sales and distribution. "That opened up the network more to corporate customers."
Wall Street analysts tended to echo the Delta-Northwest argument that the merger would be a marriage of two healthy airlines with route networks that mostly complemented, rather than competed with, each other.
But the merger still leaves a bad taste in the mouths of many industry players.
"I've always been against this measure," said Raphael Bejar, CEO of AirSavings, a consultant who helps airlines develop programs for boosting their ancillary revenue and purchasing items such as fuel. "They are trying to show that just because there is love, a marriage will be great."
But, like those who favor the merger, he admitted that a half year's time is nowhere near long enough to gauge its success or all its market ramifications.
"We'll find out in another year," Bejar said.
Tim Mapes, Delta's executive vice president for marketing, acknowledged, "We're not ready to hang the 'Mission Accomplished' banner on the side of the building."
Nevertheless, Mapes said the speed at which the integration has proceeded surprised him.
"You're dealing with significant numbers," he said, "and we've got to get to one brand globally. Fast."
That represents a significant challenge. While Cron asserted that "there's no division between Delta and Northwest anymore," he also acknowledged, "We need to develop a sense of seamlessness. The sales team needs to understand the true breadth of the network."
Looming consolidation
Industry analysts argue that while there's probably no merger in the offing that could rival the Delta-Northwest combination, further consolidation is almost certain. In fact, they say, given the economic and competitive challenges legacy airlines now face, it will be a matter of survival. United and Continental head most lists of likely merger candidates.
Even so, the Delta-Northwest merger is of a magnitude greater than anything seen thus far and anything likely to come, creating a workforce of more than 70,000 employees handling flights to 370 destinations on a fleet of 770 planes, with annual revenue of about $36 billion.
Delta executives say the synergies and operational savings alone should add $2 billion a year to the bottom line of the merged carriers. But the bigger issue for the industry is how Delta will use the extra income to its advantage.
"They can use that $2 billion in synergies and provide more competitive fares," Cordle said. "They can bully fares in some markets. They can run out competitors and run up the fares."
Shaun Malay, senior vice president of the online travel agency CheapOair.com, said, "Clearly Delta is now the new big guy on the block. There is leverage they can exert worldwide."
Cron doesn't like the word leverage. He prefers to talk in terms of opportunities, saying, for example, that "relationships with key customers are huge." Fellow Delta executive Mapes prefers to talk of market capability rather than muscle. "This is an industry that can humble the most arrogant," he said.
Whether it's leverage or opportunity, capability or muscle, Delta has been playing its cards close to the vest since the merger was approved last fall. One kernel of evidence for that was an observation by Kevin Healy, senior vice president of marketing and planning at AirTran, who told analysts last month that, so far, he had not seen any change in the way Delta was behaving as a competitor.
Part of that might be due to Delta's immediate focus on surviving the global recession. For the first quarter of this year, the airline reported a $794 million loss, primarily as a result of the drop in demand for business travel. But like most other carriers, Delta is also still recovering from losses in the last half of 2008 as a result of the spike in fuel prices.
Most carriers, including Delta, hedged on high fuel prices just as oil futures were falling. Cordle said that costs associated with fuel-purchasing hedges were masking the real benefits of the airline's consolidation and rationalization efforts.
Delta executives acknowledge that these are difficult times in which to attempt such an ambitious merger.
"Because it's so volatile, you don't want to just focus on the shorter term," said Gail Grimmett, Delta's executive vice president of global operations in New York. (Read more about Grimmett, In the Hot Seat.)
Baby steps now, leaps to come
But Delta executives also see great long-term promise in the progress they have made so far.
"We are taking some baby steps," Cortelyou said. He pointed out that the new Delta network includes Northwest aircraft on former Delta routes or planes from the old Delta on Northwest routes, enabling better mixing and matching of aircraft sizes to various destinations. "We're putting Northwest metal on Delta markets, and in some Northwest markets, we're putting Delta metal," he said. "We're putting wide-bodied Northwest aircraft on transatlantic Delta routes."
The combined airline is also linking up Delta's Latin American routes to Northwest's Asian network -- for example, opening a route between Asia and Manaus, a city in the Brazilian Amazon made desirable by its burgeoning electronics industry.
Next month, Delta is scheduled to launch more than a dozen international routes it has tied to network integration. The new Asian routes include daily 777-200ER flights between New York Kennedy and Tokyo Narita; five-times-weekly Salt Lake City-Narita flights on A330-200s; and daily Narita-Ho Chi Minh City, Vietnam, service aboard 757-200s.
New African flights from Atlanta include daily 777-200LR flights to Johannesburg, South Africa; four times weekly to Nairobi, Kenya, on 767-300ERs; weekly flights to Monrovia, Liberia, on 757-200ERs; twice-weekly 757-200ER flights to Abuja, Nigeria, and Luanda, Angola; and thrice-weekly 767-300ER flights to Cape Town, South Africa.
New European service from New York Kennedy to Europe includes: four-times-weekly flights on 757-200ERs to Goteborg-Landvetter in Sweden and Valencia, Spain; thrice-weekly flights to Prague, Czech Republic, on 767-300s; and daily flights to Zurich aboard 757-200ERs.
"We're still going out and expanding the network," Cron said.
Talk locally, act globally
Though Delta executives cite the importance of domestic markets, their actions appear to be more focused on international routes. Domestic hubs, Cordle and other analysts pointed out, have seen the most overall reductions in capacity.
"Who needs three or four hubs in [the] Midwest?" Malay said. "I question where this leaves Cincinnati, Detroit, Minneapolis."
Cordle said some of those airports have already been seeing Delta-Northwest capacity reductions. In fact, he said, "Those pull-downs, they've been a little shocking."
Meanwhile, Delta continues to build and improve its international service, though the airline's executives say they won't be able to truly fine-tune service on several crucial overseas routes until the merged carrier gets its single operating certificate.
An operating certificate, the FAA's seal of approval for an airline, outlines the methodology, processes, tools and timing required to maintain safe day-to-day operations. Delta expects few if any hiccups in getting the certificate by the end of the year, and having it will enable Delta to maximize its fleet, especially internationally.
"The Japanese government prohibits us from flying Delta metal farther than Tokyo," Cortelyou said. "It can only be served now with Northwest metal. With a single operator certificate, from a network perspective, I get more flexibility. We'll be better able to size the market with the aircraft demand."
Significantly, it has been in the international arena where recent moves by Delta and its Air France-KLM partner have most concerned industry watchers, who worry that the close relationship with those European lines makes the joint venture partners a significant global force.
This week, the airlines made their joint venture official. From then on, the carriers will be able to sell tickets on each other's planes on transatlantic routes as if they were a single airline.
With the joint venture more firmly in place, the carriers will be able to start to push their brand and market their services more efficiently as well as get more capacity and pricing leverage.
The industry got a taste of what that leverage could mean when the airlines started to offer joint-sales contracts in March for "trade and corporate partners," including travel agents and large business travel accounts across Europe.
Industry experts worry that the arrangement will lead to fewer contracts for travel agents and create a worrisome template for deals by other carriers. Mark Pestronk, the travel lawyer who writes the Legal Briefs column for Travel Weekly, predicted that the contracts would mean less revenue for travel agents.
That's especially likely, Pestronk said, in major cities where large agencies until now have negotiated contracts with Delta and Northwest as separate carriers. Those agencies will no longer have the opportunity to pit the two airlines against each other in negotiations.
For that reason, among others, Kevin Mitchell, chairman of the Business Travel Coalition, predicted that the joint-sales contracts would lead to higher prices, fewer choices and less flexibility.
Darin Lee, an aviation expert for LECG, said he saw such joint-sales contracts or similarly worded arrangements as a trend that was likely to grow and spread. That fits with the desire, expressed by Delta executives, for the new airline to be a leader and innovator for the industry, but it does little to calm nervous competitors and industry players concerned about Delta's growing market power.
More than a few worry about just how far Delta's innovation will go, especially in light of CEO Richard Anderson's recent comments about how distribution channels should be paying the airline.
"Over time, the industry has to evolve more to the model of other industries, where people pay us for our content rather than us paying them to take our content," Anderson said last month during Delta's quarterly earnings call. "Our content is very rich."
While Delta executives acknowledge the importance of travel agents, especially within the realm of corporate travel and in certain international cultures, the airline remains determined to seek a more direct relationship with its customers.
"The shortest distance is a straight line," Mapes said. "We need and want to have a direct line of communication" with consumers.
In fact, he said, the greatest challenge to making the merger work lies in making sure that the airline develops and maintains direct communication with customers about what it is doing and how its actions affect passengers.
That has caused concern among agents about how a growing emphasis on direct links could disrupt the traditional distribution channels. While all airlines are pushing to eliminate the middlemen and get consumers to go straight to their websites, the concern is that Delta will wield its newfound market muscle to set the bar at a level that cuts even more deeply into agents' margins.
Significantly, the high-flying executives running Delta 2.0 are saying nothing to calm those fears.