NWA and Delta merge to form world's largest airline

[Jack and Barbara 0]

New York Times

April 14, 2008

Delta to Join Northwest to Form World’s Largest Airline

By JEFF BAILEY and MICHELINE MAYNARD

Delta Air Lines and Northwest Airlines agreed to merge late Monday, in a $3.1 billion deal that would create the world’s biggest carrier and could trigger other airlines to pursue mergers of their own.

The agreement came despite failed efforts to get pilots at both airlines to agree on how to combine their ranks, an issue that could lead to labor unrest and disruptions to flight operations.

But the threat of rising fuel prices — and a belief that a merger would bring huge cost savings — overcame those concerns.

Northwest shareholders would receive 1.25 Delta shares for each of 236.4 million Northwest shares outstanding. That represents a premium of 17 percent based on Monday’s closing prices. Delta closed 48 cents higher at $10.48; Northwest closed up 26 cents, to $11.22.

Seven directors from Delta and five from Northwest would join the board of the new airline, to be known as Delta. The Air Line Pilots Association, which represents pilots at both airlines, would receive a seat.

Delta’s chief executive Richard H. Anderson would run the new airline and Delta’s chairman Daniel A. Carp would retain that role, with Roy J. Bostock, a Northwest director who also sits on the board at Morgan Stanley, as vice chairman. Northwest’s chief executive, Douglas M. Steenland, would have a seat on the board but would not have a role in day-to-day operations.

The two companies persevered because of the rising cost of fuel, which has destroyed the bright financial prospects of the carriers since they emerged from bankruptcy a year ago.

Delta and Northwest filed for Chapter 11 on Sept. 14, 2005. Both ran into cash shortages that were worsened when oil prices spiked in the wake of Hurricane Katrina. Many people in the airline industry expected that the two airlines, which already had a marketing arrangement, would join forces once they emerged from bankruptcy protection.

Mr. Anderson became Delta’s chief executive in September, succeeding Gerald Grinstein, who led the airline through its restructuring. He was a surprise choice: Delta had been expected to name one of two younger executives to the post, but directors pushed for Mr. Anderson. He ran Northwest before being succeeded by Mr. Steenland in 2004.

Delta and Northwest are betting that cost cuts and the benefits of a bigger route network will outweigh the potential operating chaos and labor unrest that can result from airline mergers.

The long-expected Northwest-Delta deal could be quickly followed by another merger, airline executives and industry analysts said.

The leading candidates are United and Continental Airlines, which have explored the idea. The airlines may now try to get the deal wrapped up within the next 30 days, a person with direct knowledge of the negotiations said Monday night. He spoke on condition of anonymity because the talks are private.

One reason for the urgency is that airlines want to get their deals approved by the Justice Department under the Bush administration, rather than risk seeing them stall until a new president takes office.

United’s chief executive, Glenn F. Tilton, has been eager for a merger, but Continental had resisted, saying it wanted to wait to see if the combination between Delta and Northwest came about. The chief executive of Continental, Lawrence W. Kellner, called it “good news†last month when it appeared that the Delta-Northwest talks had cooled. But Mr. Kellner could end up running the combined Continental-United, should an agreement take place, this person said.

Such deals would put pressure on others to explore combinations or consider restructuring, analysts said. American Airlines, which avoided Chapter 11 bankruptcy earlier in the decade, may be forced to explore that possibility so that it can rid itself of aging aircraft leases, and reduce its labor costs. Or, American could seek a deal with a smaller airline such as JetBlue Airways, in order to gain access to JetBlue’s younger fleet.

Meanwhile, Southwest Airlines, which has been the healthiest of the American carriers, may be forced to explore a deal with a low-fare carrier like AirTran, so that it can maintain its hold on the market for bargain minded travelers.

At the end of 2007, Delta and Northwest employed a combined 89,000 workers. American Airlines, currently the largest carrier, had 85,500. Delta said the combined airline would employ 75,000.

But the 6,300 Delta pilots and the 4,500 Northwest pilots were the two groups that executives worked so assiduously to win support from in recent months.

That effort was not successful. The two pilot groups could not agree on a merger of their seniority lists, which are important in determining pay, schedules and the type of plane they fly.

Delta’s Mr. Anderson faced the choice of either abandoning the deal or pushing ahead and risking fallout from pilots that could cripple his efforts to quickly combine the two carriers’ operations and make them run more smoothly.

The chairman of the Northwest chapter of the Air Line Pilots Association, Dave Stevens, said in a statement Sunday that any deal not in the best interest of his members would meet “vigorous opposition.†Beyond enlisting members of Congress and the Justice Department to oppose the deal, pilots have little opportunity to prevent a merger.

But they can go a long way toward keeping a completed merger from being successful. At US Airways, the product of a 2005 merger with America West Airlines, pilots are still litigating over a combined seniority list and executives have been forced to continue operating the two carriers with separate squads of pilots. That makes the airline less efficient.

Pilots can also engage in legal work slowdowns, sometimes known as flying to the contract, which can cause late and canceled flights to swell and costs to rise. United suffered that fate in the summer of 2000, when its operations melted down.

It is clear that the airline industry is headed into a steep downturn. Analysts now expect losses for the year. And the industry is highly vulnerable to further increases in the price of jet fuel — incurring $200 million in annual costs for every penny a gallon that fuel rises.

Michael Linenberg, an analyst at Merrill Lynch, noted Monday in a report that jet fuel in some markets had surged to as high as $3.50 a gallon, reflecting both higher oil prices and a steeper premium charged by refiners. Mr. Linenberg had expected fuel costs of $3.00 a gallon this year to produce an industry loss of $2 billion.

But if fuel prices moved industry-wide to $3.50 and stayed there, he said losses could soar to $12 billion this year. Before that happened, airlines would probably ground huge parts of their fleets, lay off workers and otherwise retrench.

Either way, without a remarkable increase in fares, the handful of smaller airline bankruptcies in recent weeks could grow to include some bigger carriers.

The deal comes nearly 30 years after the domestic airline industry was deregulated. But deregulation did not bring forth a flood of new and innovative airlines pushing aside the old guard, as some had envisioned. Instead, the industry since 1978 has been dominated by familiar names — Delta and Northwest among them.

Through bankruptcies, strikes and a broad decline in service, the old-line carriers have hung onto most of the market. And the merger, the largest ever among domestic carriers, is but the latest effort by old-line airlines to protect their businesses from low-cost rivals like Southwest, JetBlue and AirTran.

“The staying power of the legacy carriers is a source of continual amazement,†said Steve Morrison, chairman of the economics department at Northeastern University and author of a book on airline deregulation.

Indeed, since deregulation, the old-line airlines built what are known as fortress hubs — such as Delta’s in Cincinnati and Northwest’s in Minneapolis and Detroit — with such overwhelming market share that there is relatively little competition and fares in those markets are high.

Then they introduced frequent flier programs — a boon, to be sure, with free travel — that made it harder for regular travelers to stray from the dominant airline in their region.

Having pulled those two competitive rabbits out of their hat, will old-line carriers produce a third miracle with mergers?

“No,†Mr. Morrison said, combinations will not affect the industry as dramatically. He and some other experts said the Delta-Northwest combination — and a possible merger between Continental and United — could bolster profits at old-line carriers in the near term through cost cutting. But that will not stop the steady advance of low-cost airlines, which now account for about a third of domestic air travel.

The growth of low-cost airlines and the ability of consumers to shop for cheaper fares on the Internet have kept old-line carriers on the defensive. Then, beginning last fall, oil prices shot past $100 a barrel. That effectively snuffed out an industry recovery that had barely begun, with Delta and Northwest having emerged from bankruptcy only months earlier.

Their survival again threatened, Delta, Northwest and others began merger discussions.

For consumers, one or more mergers could result in more crowded planes. Jets are already flying fuller than ever before because the domestic fleet shrank after the terrorist attacks on Sept. 11, 2001. And airlines merging are now expected to ground more planes and cancel more flights.

But even the companies’ admirers expect over time that costs will be cut deeply. It is just not politic to say so. “Note that while it’s O.K. to downsize in other industries,†Daniel McKenzie, an analyst at Credit Suisse, said in a report in Feb, in airlines “a merger announcement accompanied by 1-2 hub closings and the layoff of thousands won’t get far, in our view.â€

Pardus Capital Management, an investment firm, estimated in November that a combination of Delta and Northwest could reduce costs by about $1.5 billion a year, in large part by combining hubs. Delta’s hub in Cincinnati is close to Northwest’s in Detroit. And Northwest’s hub in Memphis is close to Delta’s in Atlanta.

In announcing the merger, the two airlines said that they had no plans to close any hubs, and that the transaction would generate more than $1 billion in annual revenue and cost savings. The two airlines also expect to incur one-time cash costs to not exceed $1 billion to integrate.

The headquarters of the combined airline will be in Atlanta, with executive offices in the Minneapolis/St. Paul area.

“I would call this a defensive act,†said Fred Reid, who was the first chief executive of Virgin America, the start-up low-cost airline backed by British entrepreneur Richard Branson. Mr. Reid watched old-line carriers file protests with the Transportation Department, seeking, ultimately unsuccessfully, to stop Virgin.

And though he is a former chief operating officer at Delta, Mr. Reid believes that within six-to-eight years low-cost carriers will have captured more than half the domestic market in the United States and will then go after the international business.

“The legacy airlines tend to have high levels of dissatisfaction†among customers, he said.

Despite the agreement, it is not certain that the merger will ultimately be completed. Previous combinations — notably United and US Airways in 2000 — were abandoned in the face of antitrust scrutiny and opposition from unions.

James L. Oberstar, chairman of the House Transportation and Infrastructure Committee, opposed that 2000 merger and “is generally opposed to any further consolidation,†said a spokesman, James Berard. The House cannot technically block a merger, but it can hold hearings and encourage the Justice Department to scrutinize deals.

Edited April 15, 2008 by Jack and Barbara

[JeroenAndMichelle 28]

I'm not that scared for prices and stuff atm.. I'm more concerned about quality... I've heard too many bad stories about Delta and usually fly NWA so I'm not rly happy about this merge.

[Mags 112]

Actually, Delta is one of the safer airlines. I've always flown with them and had excellent service.

[*JG* 2]

I think Delta is the best airline I've flown on. Never any issues. I've probably been on 10 different delta trips.

All the rest, different story. I think NW is the worst ever!

[Mr. Big Dog 10,747]

I've flown DL multiple times - domestically and internationally and must say that they have not once managed to get me and/or my luggage to my destination on time. Not once. And I am not talking minor delays.

[Mags 112]

I think Delta is the best airline I've flown on. Never any issues. I've probably been on 10 different delta trips.

All the rest, different story. I think NW is the worst ever!

I agree.

Always left on time, excellent in flight service, baggage never lost, nice staff and they treated my cats wonderfully.

[Mr. Big Dog 10,747]

I think Delta is the best airline I've flown on. Never any issues. I've probably been on 10 different delta trips.

All the rest, different story. I think NW is the worst ever!

I agree.

Always left on time, excellent in flight service, baggage never lost, nice staff and they treated my cats wonderfully.

So, now I feel singled out for bad service by Delta. Wonder if I can find some shyster of a lawyer who'd turn that into a profitable law suit.

[Jack and Barbara 0]

I flew Delta to Brazil and was disappointed with onboard entertainment and food selection (I know, it's all bad). Whereas with United, I was used to individual tv screens so I could watch or listen to a variety of things, Delta had old tvs in the aisles and could only play PG movies since kids would be onboard of course.

Maybe that's another reason why I didn't enjoy the flight.

There were at least 20 kids on the flight with more babies than I've ever seen...figures.

Edited April 15, 2008 by Jack and Barbara

[w¡n9Nµ7 §£@¥€r 123]

I think Delta is the best airline I've flown on. Never any issues. I've probably been on 10 different delta trips.

All the rest, different story. I think NW is the worst ever!

I agree.

Always left on time, excellent in flight service, baggage never lost, nice staff and they treated my cats wonderfully.

So, now I feel singled out for bad service by Delta. Wonder if I can find some shyster of a lawyer who'd turn that into a profitable law suit.

This reminds me of this scene from Rush Hour....

"Because they don't give a damn about you! They don't like you! I don't like you! The girl don't like you! Nobody likes you!"

[Trumplestiltskin 5,791]

The wife uses Delta a lot and doesn't have many problems with it - though she prefers Continental as she's built up a fantastic number of airmiles with them.

Luckily she's not had the Continental Sewage Express.

[Trompe le Monde 1,107]

Delta is okay, but I hate Northwest with an all consuming passion and will never fly them again. And they are the only airline that flies direct to visit my family in Detroit

[w¡n9Nµ7 §£@¥€r 123]

I've never had trouble with either NWA or Delta....

[churipu 4]

As I posted this elsewhere as well...US Airways has always been the WORST in my personal experience

Edited April 15, 2008 by churipu

[Mags 112]

I think Delta is the best airline I've flown on. Never any issues. I've probably been on 10 different delta trips.

All the rest, different story. I think NW is the worst ever!

I agree.

Always left on time, excellent in flight service, baggage never lost, nice staff and they treated my cats wonderfully.

So, now I feel singled out for bad service by Delta. Wonder if I can find some shyster of a lawyer who'd turn that into a profitable law suit.

The sad thing is that you probably could find someone to start a lawsuit for you.

[DeadPoolX 9]

For travel within the United States, I generally fly with Continental or United. I have lots of miles with Continental, since their main hub is at IAH, but sometimes going with United works best as they're parterned with Air Canada. My brother really likes Delta and I've flown with them before (back in the 80s, though) and they seemed okay.

I don't think any one particular airline is necessarily bad per se. It might just be the flight itself (i.e. the crew, the aircraft, the time, the airport, etc). There are numerous factors that could lead to you having an absolutely horrible flight and overall experience one time and a great one the next.