Delta and Northwest Merger Case Study

Delta and Northwest: Chapter 11 Class of 2005

In September 2005 Delta and Northwest Airlines, officially the nation’s number 3 and 4 airlines filed for bankruptcy joining U.S. Airways in Chapter 11 protection. Affected by the fuel spike after Hurricane Katrina and a general loss of revenue since 2001, both airlines knew that they would be unable to continue business in the same vein as they had been doing.

When both airlines emerged from bankruptcy in 2007, they were both poised to recover. Employees of both Delta and Northwest took pay cuts to help the companies reach their goals. Delta spent millions trying to rebuild morale and convinced creditors to give 15% ownership to employees. Northwest created a plan to retain managers they believed important to the progress of the future of the airline.

The bankruptcy brought many changes to both airlines, allowing them to restructure so that they could materialize as stronger companies. Delta emerged with a new Chief Executive Officer (CEO) Richard Anderson, a former CEO from Northwest. Before the bankruptcy both Delta and Northwest’s hands were essentially tied regarding reduction of wages and benefits. Unions always had the upper hand in contract negotiations which prohibited both companies from keeping wages and benefits at the same level as the low cost airlines that had begun to operate. Bankruptcy changed this process and during the restructuring, both airlines were able to fire thousands of employees and impose less generous pay and more flexible work rules. Former employees were also impacted as both Delta and Northwest made significant cuts to the amount they put into retirement annuities.

By all accounts it seems as if Delta treated their employees better than Northwest in their respective restructuring plans. While constructing the bankruptcy Delta’s CEO Gerald Grinstein waived his bonus and executives only stood to collect bonuses if the company hit the targeted amount that would trigger profit sharing payouts promised regular employees. He directed the board to use his stock rewards to create an emergency fund for their employees. At the end of the bankruptcy Delta was able to recall more than 2,300 flight attendants, pilots and other workers that had been let go as far back as 2001. Delta created a pay and compensation structure that discouraged their non-union workers from unionizing. They cut cost for workers by switching pensions to a cheaper 401k plan and non-management employees excluding pilots, because they had received shares of the airline in their contracts, received 3.5% of the company’s new shares. “The same employee group also would get lump-sum cash payments of $130 million, $250 million in retirement contributions, $60 million in pay increases and another $35 million if Delta hits certain operational-performance targets this year. A previously announced profit-sharing plan would give employees an additional