Northwest Forces Delta into Minnesota Commitment

It would be easy for the new combined Delta/Northwest to pull out of some markets (yes, Cincinnati and Memphis, I’m still looking at you), but Minneapolis/St Paul isn’t one of them. Thanks to an agreement from the early 1990’s, there would be a steep penalty and rent increase for the airline if Northwest’s headquarters left town. Delta has now renegotiated the deal, and Minnesotans should be pretty happy. Delta, well, the airline probably has mixed feelings.

On one hand, Delta no longer has to pay a penalty for pulling Northwest’s headquarters out of town, though it does have to repay its bonds earlier than Northwest would have independently and it will pay more rent. They also have some pretty onerous restrictions on them now.

• Delta must keep at least 10,000 jobs in the Twin Cities (down from 17,000 originally but more like 11,500 now)
• Delta must have at least 400 flights per day from MSP, up from 187 now (250 of those flights must have at least 70 seats)
• Delta must move its regional management team to Minneapolis
• Compass Airlines, the Virginia-based remains of Independence Air that is now a Northwest subsidiary, must move its headquarters to the Twin Cities

The final agreement won’t be done for a month or so, but this tentative agreement was agreed upon by both sides. If I were Delta, there are two things that would concern me here. Keeping 400 flights per day in Minneapolis is a pretty large commitment. Delta has no flexibility if market conditions push them to do otherwise. Also, moving your regional management team away from everyone else will only make communication and coordination more difficult.

Still, Delta knew what it was getting into with the Northwest purchase. These types of agreements certainly make mergers more difficult to digest. This looks ok for now, but we’ll see what they think about it 5 or 10 years down the line.