Delta acquires Northwest in USD 3.1B deal

Delta Air Lines announced a long-speculated deal to acquire Northwest Airlines for about USD3.1 billion Monday, a combination that will create the world’s largest airline and could lead to a series of other deals to reshape the U.S. airline industry.

The new carrier will operate under the Delta name, and be based in Atlanta.

Delta said the carrier will maintain the nine hubs of both airlines in the United States, Europe and Asia, serving more than 390 destinations in 67 countries. The combined carrier will have USD35 billion in annual revenue, more than 800 airplanes and 75,000 employees, according to Delta.

But many of the employee unions at Northwest were quick to voice opposition to the deal, even though Delta said it is not looking to cut non-office staff.

The deal could lead to less competition and higher fares on some routes where the two carriers now compete. But there is relatively little overlap between the current Delta (DAL, Fortune 500) and Northwest (NWA, Fortune 500) systems.

The greater impact on competition and fares could come if other major carriers follow suit and negotiate their own deals in response. Some experts have suggested that several deals could eventually leave three mega-carriers handling about 80% of the nation’s air traffic. Delta Air Lines announced a long-speculated deal to acquire Northwest Airlines for about USD3.1 billion Monday, a combination that will create the world's largest airline and could lead to a series of other deals to reshape the U.S. airline industry.

The new carrier will operate under the Delta name, and be based in Atlanta.

Delta said the carrier will maintain the nine hubs of both airlines in the United States, Europe and Asia, serving more than 390 destinations in 67 countries. The combined carrier will have USD35 billion in annual revenue, more than 800 airplanes and 75,000 employees, according to Delta.

But many of the employee unions at Northwest were quick to voice opposition to the deal, even though Delta said it is not looking to cut non-office staff.

The deal could lead to less competition and higher fares on some routes where the two carriers now compete. But there is relatively little overlap between the current Delta (DAL, Fortune 500) and Northwest (NWA, Fortune 500) systems.

The greater impact on competition and fares could come if other major carriers follow suit and negotiate their own deals in response. Some experts have suggested that several deals could eventually leave three mega-carriers handling about 80% of the nation's air traffic.

A deal announcement could open the way for No. 4 Continental Airlines (CAL, Fortune 500) to hold its own merger discussions. Northwest has held a so-called "golden share" of Continental, which allows it to block a deal for Continental. But it loses that veto by entering its own combination. There has been talk that United Airlines parent UAL Corp. (UAUA, Fortune 500) and Continental are eyeing their own combination.

Tough times
Consolidation would come at a tumultuous time for the industry. Earlier this month, low-cost airline ATA filed for bankruptcy and said it would cease operations. Aloha Airlines ceased scheduled flights last month. Last week, Frontier Airlines also filed for bankruptcy protection but said it would continue flying during its reorganization.

Also this past week, American Airlines, the unit of AMR Corp. (AMR, Fortune 500) that is the world's largest airline, was forced to cancel thousands of flights due to safety inspections of its MD-80 jets.

A possible Delta-Northwest deal has been rumored since late last year amid widespread talk that a round of airline mergers were needed to deal with rising fuel costs and a tougher outlook for earnings.

While figures from the Air Transport Association show the average fares are up nearly 6% in the first two months of this year compared to a year earlier, Energy Department figures show average jet fuel prices were up 55% during the same period. And fuel prices shot up another 20% in March compared to the first two months of this year.

But a Delta-Northwest deal, even if agreed to by both managements, won't bring any cost savings from a combination until late this year at the earliest and probably not until 2009.

Still needs approval
In fact, it is not certain Delta and Northwest will be able to complete this deal.

United Airlines parent UAL Corp. failed in its attempt to complete its purchase of US Airways that was announced in 2000. Concerns about the impact on passengers and airfares is likely to bring intense scrutiny of this deal from both Congress and antitrust regulators here and in Europe.

While the pilots union at Delta voiced support of the deal, the proposed combination has already brought objections from the Northwest pilots and flight attendants. Objections from the pilots' unions helped hold up the deal that was first said to be imminent as long ago as January. While the airlines do not necessarily need their unions' approval of the deal, labor strife could cause operational problems for both the airlines and their passengers.

As part of the deal, Delta announced that it has agreed with leaders of its pilots to extend the existing collective bargaining agreement through the end of 2012. The airline also said it will work toward a combined Delta-Northwest pilot agreement, including resolution of pilot seniority issues that troubled the unions of the two carriers, before the merger goes into effect.

The governing body of the Air Line Pilots Association at Delta said it unanimously approved the deal and will present it to the full membership for ratification.

"The merged Delta will be a more stable, financially durable and investable airline that will provide benefit to Delta and Northwest employees, the communities we serve and, more importantly, the traveling public," the association said in a statement. The pilots are the only major union at Delta.

But the ALPA unit at Northwest said concerns over the combined seniority lists and the financial problems in the industry led them to oppose a deal. It argues that Northwest and its employees are better positioned to ride out the current recession and fuel price spike as an independent carrier, rather than by joining with Delta.

"One can only conclude that the Delta pilot leadership and Delta management have made an arrangement to try to disadvantage the Northwest pilots economically and with respect to our seniority," said the Northwest ALPA statement. "No pilot group is going to put up with this. No amount of money can sustain a carrier which creates this level of discord."

The Association of Flight Attendants, a unit of the Communication Workers of America union that represents those workers at Northwest, said it would hold negotiations with the airlines on a contract, but it would also push to organize the non-union flight attendants at Delta. It also said it would seek higher wages as part of any agreement to support the deal.

"Your union leaders are poised to fight to restore in consolidation what was lost in the bankruptcy era," said the union's statement to membership.

Delta said it expects no involuntary furloughs of "frontline" non-pilot employees, who will also receive a 4% equity stake in the carrier. It expects to reach agreement on merging seniority lists as the airlines are combined.

Working in favor of approval of the deal by both regulators and the unions is the financial woe faced by both airlines and by the industry as a whole. Delta and Northwest both filed for bankruptcy court protection at almost the same moment in September 2005, and used that process to significantly reduce their capacity and labor costs.

Delta had to fend off a hostile takeover attempt by US Airways in late 2006 and early 2007, just before it emerged from bankruptcy in April 2007. But since that battle, its management has said it was open to the right combination.

Delta posted 5% growth in the number of miles flown by paying passengers last year, which is better than the industry average. It is the No. 3 carrier by that measure, behind only United and AMR Corp.'s American Airlines.

Still, after making money in its first six months out of bankruptcy, it returned to a loss of USD70 million in the fourth quarter in the face of high fuel prices, and has said it expects to lose money in its recently completed first quarter as well.

Northwest, which emerged from bankruptcy in May 2007, had flat traffic last year and essentially broke even in the fourth quarter, posting an USD8 million net loss after two quarters of profit. It is forecast to see a bigger loss in the first quarter.

Northwest was the No. 4 airline in the country when it entered bankruptcy, but it has shaved capacity enough to fall to No. 5. It is just barely ahead of Southwest Airlines (LUV, Fortune 500), the carrier that has helped reshape the industry by devising a lower-cost business model than the traditional hub-and-spoke system used by more established carriers.

Delta said the carrier will have an "enterprise value" of USD17.7 billion. Under terms of the all-stock deal, each Northwest shareholder will receive 1.25 Delta shares for each share held. Based on Monday's closing prices, that would value the Northwest shares at USD13.10 each, a 16.8% premium.

The combined airline is expected to generate USD1 billion a year in cost efficiencies, according to Delta, which also said it expects to incur USD1 billion in one-time cash costs to integrate the airlines.

Delta said its CEO, Richard Anderson, will be the CEO of the new company. Delta chairman Daniel Carp and president Ed Bastian will hold the same titles in the new company, while Northwest chairman Roy Bostock becomes vice chairman.

The new carrier's 13 member board will include 7 representatives from Delta, 5 from Northwest – including current CEO Doug Steenland – and one from the Air Line Pilots Association.

"We said we would only enter into a consolidation transaction if it was right for all of our constituencies," Anderson said in a statement. "Delta and Northwest are a perfect fit."

In an interview on CNN's "American Morning" Tuesday, Anderson and Steenland said they hoped to continue to work with the Northwest unions to reach new labor deals before the merger is completed.

"The long-term best interest of the employees of both of these airlines is for these airlines to be healthy," Anderson told CNN. "That's the truest job security in the airline industry. The combination of these two airlines makes for the strongest airline in the United States."