Northwester and Delta merger?
Shares of both companies fall in early trading
By RUSSELL GRANTHAM, JIM THARPE
The Atlanta Journal-Constitution
Published on: 04/14/08
Delta and Northwest airlines announced a $17.7 billion merger Monday night that will create the world’s largest carrier — headquartered in Atlanta with major hubs across the globe, including Asia and Europe.
The mega-airline, which will be called Delta, will have more than $35 billion in combined revenue and about 75,000 employees.
Officials with both airlines said there will be no layoffs of front-line employees nor immediate hub closings.
Shares of both companies fell in morning trading Tuesday after rising on premarket dealings. Northwest shares fell 59 cents, or 5.3 percent, to $10.63 in morning trading while Delta shares lost 98 cents, or 9.4 percent, to $9.50.
It is likely that the all-stock deal will unleash a series of other airline mergers that could be even larger, including a possible deal between United and Continental airlines.
“We believe that consolidation in the airline industry is inevitable, and we want to control our future,” Delta Chief Executive Richard Anderson said in a memo to employees. “Combining our companies creates an airline with the size, scale and global presence to weather economic downturns and compete long-term in the global marketplace.”
Anderson, who was CEO of Northwest from 2001 to 2004, will remain CEO of the combined companies. Other top executives of Delta also will hold key positions in the combined carrier, which still must win federal regulatory approval before it becomes a reality. Officials hope to conclude the deal before the end of the year.
Northwest CEO Doug Steenland, who will be on the new carrier’s board of directors, said he expects regulators to view the Delta-Northwest merger favorably in light of current economic conditions buffeting the industry. Four discount carriers have either shut down or declared bankruptcy in the last few weeks.
“With fuel at $110 a barrel, the airline industry looks a little different than it did a year ago,” Steenland said in an interview with The Atlanta Journal-Constitution.
Monday night, the merger already was drawing howls of protests from Northwest pilots, who were left on the sidelines after they could not agree with Delta pilots over combining their seniority lists. Seniority determines everything from who gets the most desirable routes to who gets to fly the biggest jets for the highest pay. The thorny issue will have to be resolved as the merger progresses.
“This agreement clearly disadvantages NWA [Northwest] pilots, both with respect to economic issues and seniority list integration,” Dave Stevens, chairman of the pilots unit based near Northwest’s headquarters in suburban Minneapolis, said in a statement.
The long-expected merger was propelled by growing pressure from record jet-fuel prices and a looming recession. Atlanta-based Delta and Eagan, Minn.-based Northwest painted the deal as combination of two of the industry’s strongest carriers that will move their international ambitions ahead by a decade in a single leap.
“You cannot replicate either of us,” Anderson said Monday in the AJC interview. “Northwest cannot replace Delta in South and Central America. And we cannot replace Northwest in Asia and Japan.”
The new airline will have domestic hubs in Atlanta, Minneapolis, Cincinnati, Salt Lake City, Detroit, Memphis and New York City. It will have international hubs in Amsterdam and Tokyo.
There are no immediate plans to close any hubs, a fact that could aid the new carrier when it is brought before federal regulators for approval.
However, the likelihood that the combination — the largest ever proposed among U.S. airlines — could prompt link-ups among other carriers may prompt regulators to take a close look at Delta and Northwest’s plans.
The deal will face close scrutiny by U.S. Department of Justice antitrust regulators and opposition from powerful politicians, communities and possibly employee groups. U.S. Rep. James Oberstar (D-Minn.), who heads the House transportation committee and whose district could see the brunt of any job losses, has vowed to fight all major airline mergers as harmful to consumers and airline employees. Delta and Northwest still could be forced to abort their deal, or throw substantial assets overboard to get it approved.
The merger, which could bring capacity cuts and higher fares for customers, is also likely to be a boon for some competitors. AirTran Airways, Delta’s biggest rival in Atlanta, probably will try to snap up Northwest’s three gates at the Atlanta airport.
“We think it is a positive for the industry,” said AirTran spokesman Tad Hutcheson. “We’ll compete very effectively with the new Delta.”
The deal came after the boards of Delta and Northwest held separate meetings Monday.
It followed months of on-again, off-again talks. The carriers came close to announcing a deal in February that was later stalled when pilots unions at the two carriers failed to reach a related agreement on how to merge members’ seniority lists.
Monday, the carriers said they had instead reached a deal solely with Delta’s pilots union changing their contract to ease the merging of the two airlines. Pilots will get a 3.5 percent equity stake in the new company and a seat on the board under the pact, which will need to be ratified by the 6,000-member union. Non-pilot employees at both airlines will also share in a 4 percent equity stake, have job seniority protection and keep their existing pension plans, the companies said.
That leaves Northwest’s pilots union as the only employee group without a piece of the deal. Delta said it will also use “best efforts” to reach a deal with Northwest’s pilots union as well before the deal is finalized.
“A merger built on this unstable foundation is likely to put the combined airline in a position similar to that of US Airways,” said Stevens, the Northwest union chairman. US Airways and AmericaWest did not get pre-merger agreements from their pilots before they combined in 2005, and their pilots still are working under separate seniority lists and contracts, weighing down operational integration.
The merger won’t be final until the Justice Department signs off. That process could take months, and the outcome is far from certain.
“We are going to be running Delta as Delta for the rest of this year,” CEO Anderson said.
The companies said they will eliminate an unspecified number of redundant administrative positions. They also will have to meld flight schedules, similar computer systems and dissimilar aircraft fleets.
Delta President Ed Bastian said the carriers ultimately hope to realize $1 billion in annual gains through the merger, including about $700 million in additional revenue and $300 million to $400 million in cost savings. Delta said the combinations is expected to give a boost to its earnings in the first year — “excluding one-time costs” that could total $1 billion in cash.
The deal will be subject to approval by the two companies’ shareholders. Northwest’s shareholders will receive 1.25 shares in the new company for each old share, while Delta’s will receive one new share for each old share. The deal represents a nearly 17 percent premium for Northwest shareholders.
Notably absent from the agreement was Air France-KLM, an alliance partners with both carriers that until recently was expected to invest $750 million in the new company. All four carriers are key partners in the SkyTeam alliance, a agreement among several airlines to share routes and passenger privileges.
The Delta and Northwest executives said they no longer needed Air France-KLM’s participation because the airlines have adequate cash reserves.
“The combined entity is going to have $7 billion in liquidity at closing,” Anderson said.
However, some people familiar with the negotiations have said Delta’s and Northwest’s investors objected to their holdings being diluted by an Air France investment after the shares of both airlines plunged in recent weeks.
— Staff writers Dan Chapman and Rachel Tobin Ramos contributed to this article.