BREAKING NEWS: Delta and Northwest’s pilot groups were unable to come to agreement about a merged seniority list. Delta MEC chairman Lee Moak announced the breakdown of negotiations today in a letter to Delta pilots. Without a merged seniority list, a merger might still go through (companies can force master seniority list mergers, as I’ve written before), but moving forward without agreements from labor means the merged airline’s management has to spend time, money, and energy on important operational issues that might have been resolved up front, like US Airways has been doing for the past two years.
What does this mean for industry consolidation? Mergers are probably off. It was reported that United-Continental was ready to move forward as soon as Delta-Northwest was announced (due to Northwest’s golden share in Continental), but that combination will now be scuttled. In the end, I fear that the merger mania was really a plan to goose stock prices, not actually create value. The hyped capacity cuts are coming anyway, thanks to airlines needing to shed planes and routes that don’t make money at $110/barrel oil (see Mike Boyd’s current weekly commentary). With capacity cuts coming to an already-trim industry, I don’t see the added value of mergers anymore. RIP, Merger Mania 2008.
Hat-tip to Things with Wings, where I first caught this story. After the jump, choice excerpts of the letter.
Much to the surprise of the pundits, financial analysts, and some of the more vocal critics within our own ranks, we made ourselves relevant in a process where labor has historically been excluded. Earlier this year, Delta’s senior executives approached your MEC to advise us of their intent to seek the Delta Board’s approval to enter merger discussions with one or more carriers and to include the MEC in the process. The Delta MEC immediately began to implement the unprecedented strategy we had been developing for months, fully prepared to either support or oppose any proposed merger depending upon the particular circumstances and the outcome of our own analysis.
Since January, and under the direction of the respective MECs, committees from the ALPA MECs of both carriers have been meeting in an effort to provide the pilots of both carriers with an alternative to the traditional merger process. Our intent was to accomplish what has never before been done in our industry—reach a three-party agreement between two MECs and management in advance of any corporate merger announcement. If an agreement could be reached, each MEC would decide independently whether or not to adopt the agreement which would include terms to protect the flying of each pilot group during the transition to a single carrier; a joint pilot contract, subject to membership ratification, which would take effect at the close of the corporate transaction; and a fair and reasonable integrated seniority list which would also become effective at the close of the corporate transaction.
As I wrote in my last letter, labor integration issues are often an extremely difficult and contentious part of traditional mergers. As a result, when and if such mergers are eventually completed, many of the corporate synergies originally envisioned are unable to be fully realized or at least significantly delayed. [Emphasis added.] A labor agreement in place ahead of a merger announcement would provide substantial value and flexibility to the merged corporation. In exchange for making this ground-breaking concept a reality, the combined pilot group would receive significant contractual improvements and an equity stake in the merged corporation.
With the remarkably successful results achieved by the Negotiating Committees and terms of the pilot equity in place, the one unresolved element of the overall package was the integration of a joint seniority list.
In a traditional merger scenario, it is common for each Merger Committee to enter negotiations in a very adversarial role with negotiating positions that are very far apart as they posture for the benefit of their pilot group. In a successful negotiation, over time, both parties will find common ground and reach a solution that represents a compromise between the two positions. Almost always, however, the process ends in an abdication of leadership and subsequent binding arbitration.
We were not, however, in a traditional merger scenario. We were breaking new ground and held before us a unique opportunity, but the window for that opportunity was narrow and not able to accommodate either the lengthy timeline or the adversarial relationship of the traditional approach. With that in mind, we approached the negotiating table not at an extreme, but in the middle; not adversarial, but cooperative. We presented a rational and fair integration method that would have provided all pilots of the merged corporation with a post-merger relative seniority very close to that of their respective pre-merger relative positions and included an innovative method of preserving premium flying positions for both pilot groups going forward many years. . . .
. . . . Without an integrated seniority list, there was no overall package to discuss, debate or on which to cast a vote. The motion was made to adjourn, seconded and unanimously passed. The MEC meeting was over and an opportunity, at least for the time being, was lost.
A short time after the MEC’s return from New York, several members of the MEC administration and I travelled to Washington at the request of the other MEC administration to resume seniority list integration discussions. Proposals were developed and exchanged which sought to address the unique needs of both pilot groups, but after several days, it became clear that the position of the other pilot group had not meaningfully changed, and therefore the on-again, off-again integration talks were suspended without substantial movement toward a middle ground agreement.
This weekend, I informed the MEC that I had received a communication from my counterpart at the other MEC. He indicated that while they were unable to address our last proposal, they were willing to discuss their last proposal further—a proposal that in our team’s estimation would jeopardize the seniority and career expectations of Delta pilots. I declined and informed the MEC and Delta’s senior executives that the two MECs were unable to reach an agreement on an acceptable seniority list integration.
We have stated many times that while we are open to the right consolidation, we will not seek a transaction for transaction’s sake. Neither will we chase a transaction for transaction’s sake.
In summary, after months of arduous work by many dedicated pilots from both pilot groups, results were achieved in many areas that were nothing short of remarkable, especially in light of today’s industry environment. We were in a position to shatter the traditional merger mold as it relates to labor integration. But the only way to reach an agreement on seniority list integration would have been to abandon our middle ground position and sacrifice the seniority and career expectations of Delta pilots across the Delta seniority list. Not a single member of the MEC, the MEC administration or the committee members involved in the process was willing to let that happen under any circumstances.
So what happens next? Quite frankly, the answer to that question is unclear. We work in an industry filled with uncertainty. Last week, the price of oil closed above $110 per barrel, a new record high. The price of fuel is just one of the many threats that face our profession and that place the business plans of all airlines at risk. In broad terms, Delta’s senior executive team and the Delta Board of Directors decide the direction of the company, and that direction may or may not include consolidation. For our part, the MEC will determine the course it will take under the many possible consolidation scenarios. It remains the firm belief of the Delta MEC that pilot involvement before a final decision in any consolidation option is absolutely essential, and your MEC will continue to communicate this to the Delta Board of Directors and the senior executive team. Nevertheless, in the event of any corporate merger announcement, we will retain our rights to seek to shape, or if we deem appropriate, oppose a transaction.