Delta-Northwest merger serves as example for, against complex acquisitions

Acquisitions and mergers are supposed to help businesses cut business costs and grow revenue - when they're executed correctly. That's what Delta endeavored to do when it announced it would buy Northwest Airlines in 2008, but the company has struggled to grapple with the challenges the merger presented, according to a new report.

Companies often expand by strategically targeting other businesses to acquire, usually by choosing companies that either complement or augment their product or service offerings. Google's acquisition of YouTube in 2006 serves as an example of a successful merger, but for every Google/YouTube deal, there are scores of unsuccessful acquisitions.

The New York Times reports that the Delta-Northwest merger presented company executives with a complex set of issues - some expected, some not. The vast scope of challenges they faced prompted concerns over the long-term viability of what currently ranks as the world's biggest airline.

The myriad of tiny details that passengers may not notice but that sometimes mark the difference between a successful merger and a failed one have plagued the Delta-Northwest merger since its infancy. The airline industry is heavily regulated in terms of safety and labor issues, and as a result many airlines have very specific working rules, flying procedures, maintenance schedules and computer programs, analysts assert.

The differing corporate cultures at Delta and Northwest - the former considers itself "gracious," while the latter is more practical - also emerged as roadblocks to a smooth transition. For example, Delta flight attendants pour drinks for passengers, while Northwest attendants simply handed over the cans.

While it is a seemingly innocuous difference in policies, the sheer number of what were formerly perceived as non-issues left company strategists scratching their heads as they struggled to merge not only flight plans and fleets of planes, but also varying corporate cultures and labor policies.

Still, a number of industry watchers contend that the merger is a success and that it spurred other deals within the industry, including United Airlines' takeover of Continental and Southwest Airlines and AirTran's merger.

"If you look at the history of mergers, the assumption was that you couldn’t do them successfully," Delta chief executive Richard Anderson said during an interview with The Times. "Everybody had come to the conclusion that these things are too big, too complex and too unwieldy to manage."

Illustrating the length of time it took for company executives to solve such problems, it took 14 months for the airlines to fly as a single carrier after receiving regulatory approval to merge in October 2008.

Analysts lauded Delta's successful contract negotiations with its pilot unions that were finished before the deal closed. A number of industry watchers assert that by having the crucial labor group backing the deal from the start, Delta had a critical advantage.

However, critics point toward the fact that the company's flight attendants still work under separate contracts - each with its own work rules - and that they can't fly on the same airplanes as a striking example of the failure of the company to account for such potential obstacles as it mulled the deal.

The company was successful in its integration of the varying technological systems that each airline used prior to the merger, according to Delta chief technology officer Theresa Wise. Delta engineers faced the challenge of merging 1,199 computer systems down to roughly 600, and had the added pressure of doing so without passengers noticing that such steps were being taken.

In an effort to seamlessly transition the newly formed company's computer system, computer engineers performed 8,856 steps over the course of several days when it came time to cancel all of Northwest's bookings and transfer them to the newly created Delta flights portal in January 2010.

"This sounds insane," Wise said of the company's transition plan, "but each reservation system has its own personality."

Though Delta posted its highest profit in more than 10 years in 2010, it still has one of the worst records of on-time arrivals and accounted for more than 30 percent of all customer complaints.

Nonetheless, the merger has served as a lesson for airlines mulling deals, both as a cautionary tale against a merger, and an example of the benefits such a move can achieve.