Delta, Northwest to create world's largest airline

Delta Air Lines will buy Northwest Airlines in the United States for more than $3-billion under a proposal unveiled on Monday to create the world’s biggest airline, as carriers seek to counter skyrocketing fuel prices and a weak economy.

After racking up $35-billion in losses and finally emerging from a five-year slump in 2006, US airlines are hoping mergers could lead to higher fares as combined carriers reduce flights and use their increased market power to raise prices.

The all-share deal will give Northwest shareholders 1,25 Delta shares for each Northwest share they own, a 17% premium to Northwest’s closing price of $11,22 on the New York Stock Exchange. Delta shares closed up 4,7% at $10,48.

“It’s a very optimistic view on an industry that’s been very dismal for the last couple of weeks,” said airline consultant Robert Mann.

The airlines also face a renewed sense of urgency to consolidate and cut costs amid the relentless upward march of fuel prices, a weakening economy and a growing competitive threat from European carriers. Jet-fuel prices have more than doubled since the start of last year.

If given regulatory approval, the new airline, led by Delta chief executive Richard Anderson, will be headquartered in Atlanta and will operate under Delta’s flag with more than $35-billion in annual revenue and about 75 000 employees.

“Together, we are creating America’s leading airline—an airline that is financially secure, able to invest in our employees and our customers, and built to thrive in an increasingly competitive marketplace,” Anderson said in a statement.

Industry consolidation

Delta and Northwest both exited bankruptcy last year, and merger speculation surfaced after Anderson, a former Northwest CEO, took the helm at Delta.

A Delta-Northwest deal could also accelerate another tie-up—that of Continental Airlines and United Airlines, whose parent is UAL.

Those two carriers have laid most of the groundwork for a merger, two people briefed on the matter said, and could have a deal ready “pretty quickly” following the Delta and Northwest announcement, one of them said earlier on Monday.

Four small airlines have ceased flying in recent weeks and another, Frontier Airlines, filed for Chapter 11 bankruptcy on Friday.
Major airlines are expected to report quarterly losses in the coming weeks.

Delta and Northwest said the deal promises to generate $1-billion in annual revenue and cost benefits. Anderson said cost savings will be derived from a reduction in operating expenses, more efficient use of technologies, cutting administrative costs, and bargaining power with vendors.

Initially, the deal will remove no capacity from the system because Delta and Northwest currently have very little overlap in their routes. But Anderson declined to say there would not be capacity cuts, if the deal moved forward.

Market concentration will be the central focus of US Justice Department antitrust officials, who must clear the deal. A review could take months, but experts see few roadblocks.

Delta pilots will get a 3,5% equity stake in the new airline and expressed support for the proposal on Monday. But the leadership of Northwest pilots said it would use “all resources available to aggressively oppose” the deal after the two unions could not agree on how to work under one seniority umbrella—which determines when pilots work, what they fly and how much they get paid.

Anderson said Delta aims to integrate fully its two pilots’ groups as soon as possible.

The big carrier

In addition to pilots, US-based non-pilot employees of both airlines will be given a 4% equity stake.

The deal will combine Delta’s strong Atlanta hub and its transatlantic route network with Northwest’s extensive Asian presence, including a hub in Tokyo. There will be no hub closures, Delta said.

Mann said it would be tricky for Delta to deliver on its promise to retain all hubs. “It would be nice if it were true,” he said.

Northwest CEO Doug Steenland will have a seat on Delta’s board. The new Delta will overtake American Airlines, a unit of AMR’s, as the largest US airline.

The last big airline merger created US Airways Group from the combination of old US Airways and America West Airlines in 2005.

US Airways CEO Doug Parker predicted that wider US airline consolidation would not occur unless Delta took the first step. Delta fended off a hostile bid by US Airways last year.—Reuters

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