Airline merger faces hurdles
Delta Air Lines and Northwest Airlines announced a proposed merger Monday night that would create the world’s largest carrier and possibly spur an industry-wide round of restructuring that could vastly change air travel for millions of Americans.
The proposal, which was months in the making, would create a global airline with seven domestic hubs and international destinations stretching from Asia to South America to Europe. It comes as new international agreements have reduced barriers to competition, fuel prices have skyrocketed and the economy has weakened. In the past month, four discount airlines have sought bankruptcy protection.
The merger of the two carriers is far from a certainty, however. It would need to pass regulatory muster, and Northwest has yet to reach an agreement with its pilots, an employee group that could complicate integrating the airlines. Concerns about industry consolidation have been raised on Capitol Hill, where lawmakers have expressed extreme frustration in recent weeks at declining airline customer service, increasing flight delays and questions over the industry’s maintenance practices.
Many analysts said the deal could spark a round of mergers between other U.S. carriers so they could more effectively compete with the combined Delta-Northwest, which would keep Delta’s name and its Atlanta headquarters. The next possible combination, according to many inside the industry and those who observe it closely: United and Continental airlines, which would then leapfrog the new Delta as the world’s largest carrier. The two airlines have talked about merging in the past.
The proposed Delta-Northwest merger would not affect the carriers’ frequent fliers, who are already members of the same international Sky Team alliance.
Delta’s top executive, Richard Anderson, who would retain his post in the new airline, said in a statement released Monday night that the deal was a good one because it would lead to an “airline that is financially secure, able to invest in our employees and our customers and built to thrive in an increasingly competitive marketplace.” Northwest’s chief executive, Doug Steenland, would step aside but would gain a seat on the new carrier’s board.
In the proposed carrier’s first news release, executives pledged to retain all of their hubs and not reduce jobs through layoffs – a tough promise to keep in today’s environment and one that comes just a few weeks after Delta announced that it was seeking to reduce about 2,000 jobs from its 50,000-person workforce.
The deal is an all-stock transaction in which Northwest shareholders would receive 1.25 Delta shares for each Northwest share. The statement said the transactions give Northwest shareholders a 16.8 percent premium, based on Monday’s closing stock prices. Delta shares closed Monday at $10.48 and Northwest at $11.22.
Delta, the nation’s third-largest carrier by traffic, and Northwest, the fifth-largest, could potentially carry more than 175 million passengers a year, according to federal data. Executives said they expect a combined company to generate more than $35 billion in annual revenue. They also said they expect the merger to cut some costs.
Despite their enthusiasm, executives face hurdles before they can finalize any deal.
Although President Bush’s top transportation official has said she supports airline consolidation, the Justice Department is expected to take a critical look at the deal for potential antitrust problems. Top Democrats have promised hearings on what mergers would mean to communities and passengers.
The airline will also have to dance delicately around labor issues.
Delta took a major step in reducing that friction Monday night by reaching an agreement with the union leaders of its 6,000 pilots, an action expected to ease transition issues. Northwest has not reached such a deal with its 4,500 pilots. Two months ago, executives from both carriers worked hard to win over their pilots to ease transition and reduce the chances for labor rifts – problems that have complicated similar deals. However, after Delta and Northwest pilots could not reach a consensus on seniority lists and other matters, the merger plan dissolved.
Analysts say the economic environment for airlines has deteriorated since then, so much so that the carriers are willing to go ahead without the Northwest pilots on board. They said in the news statement that they would attempt to deal with integration issues in coming months.
It is not known how a completed merger and other proposed transactions would affect customers. Analysts generally agree that fares would increase, especially in markets not served by low-cost carriers. However, with the U.S. airline industry in such rough shape, passengers might be better off if carriers consolidate into three or four larger and stronger entities, the analysts said.
“The industry could quickly go from six major network carriers to as few as three,” said Robert Mann, an airline analyst in New York. “We have an industry that is slowly but surely going out of business. That is an unfortunate fact. We need an industry that functions and actually makes money and can reinvest in more efficient fleets.”
But others said industry-wide consolidation is not a foregone conclusion. Northwest and Delta are already part of the same international alliance and are essentially marketing partners already. After studying the deal, other carriers might realize that the combined carrier is not so different from the two airlines’ current operations, the analysts said.
“This won’t be some juggernaut,” said Mike Boyd, an aviation analyst and consultant. “They are essentially together already. … It is a merger that is not going to be some sort steamroller over the rest of the industry.”