European partners could help shape NWA-Delta deal

Two European airlines that merged in 2004 might help Delta Air Lines and Northwest Airlines blend their resources to become the world's largest airline.

Air France and KLM Royal Dutch Airlines, which have close business ties to the two U.S. carriers, could buy a minority stake in a newly merged airline, providing it with key financial support.

"The logic of that really is driven by Air France-KLM's desire to keep both of its U.S. partners in the SkyTeam alliance," said Bill Warlick, lead airline analyst for Fitch Ratings.

SkyTeam partners jointly market travel on member carriers, thus funneling more passengers into the network systems of all of the airlines in the alliance.

Eagan-based Northwest joined SkyTeam in 2004, and the alliance now has 11 partners worldwide.

United Airlines, which also has been considered a merger partner for Delta, belongs to the Star Alliance, so a Delta-United merger could force one of the carriers to disentangle itself from an international alliance.

If Air France-KLM invested in a combined Delta-Northwest, it would strengthen the financial position of the newly merged U.S. carrier. But it also would bind the four airlines more closely together in their common pursuit of expanding international passenger traffic in a global economy.

"Northwest and KLM taught the industry about the positive effects of an alliance combination," said William Swelbar, an aviation expert at the Massachusetts Institute of Technology.

"They became the blueprint for the industry to follow," he said.

Northwest recently celebrated the 10-year anniversary of its joint venture with KLM, which allows the two airlines to operate as one business. They coordinate their schedules and pricing in the transatlantic market.

"We said we'd put all of the revenues of all flying into a pot," said Jan Willem Smeulers, a KLM vice president who has worked out of Northwest's Eagan headquarters for eight years. "We stir the pot a bit and divide the profits 50-50."

Revenue from the joint venture is about $4 billion a year.

Last fall, Atlanta-based Delta signed its own joint-venture agreement with Air France.

On Wednesday, Delta CEO Richard Anderson told Wall Street analysts that the joint venture between Air France and Delta gives Delta the No. 1 position in the Atlantic market.

"The first phase of the joint venture will begin in April and will include a combined 19 daily flights and more than 4,500 seats per day, giving customers more travel choices across the Atlantic," Anderson said.

Delta, Northwest, Air France and KLM asked the U.S. Department of Transportation last year to exempt them from antitrust regulations so they could operate in a four-way joint venture for transatlantic flying. In effect, Northwest and Delta want federal regulators to extend the antitrust immunity each has with a European partner so that all four airlines can cooperate.

Swelbar said the four-way joint-venture request is getting thorough scrutiny by the Transportation Department, and a decision is expected early this year.

Carriers still silent

While U.S. Rep. Jim Oberstar, D-Minn., has confirmed that Northwest and Delta are in formal merger talks, executives at the two carriers have not acknowledged that negotiations are occurring, much less whether Air France-KLM might get a financial interest in the deal.

Lufthansa, based in Germany, recently acquired a 19 percent stake in low-fare JetBlue Airways for about $300 million. Federal law restricts foreign ownership in U.S. carriers to 25 percent.

Anderson noted that JetBlue and Lufthansa lack a code-sharing or joint-venture agreement. "To create real value for shareholders from these relationships," Anderson said, an airline needs a joint venture agreement with antitrust immunity to "really get committed to locking the networks together."

Andrea Fischer Newman, Northwest's senior vice president of government affairs, said in an interview last year that competition in the current business environment is largely among three international alliances --SkyTeam, Star and Oneworld, which includes American Airlines.

If the SkyTeam application for antitrust immunity is approved, Newman said, passengers would see "improved flight schedules, a reduction in travel time, new service and lower fares."

Adding to the balance sheet

Analysts have suggested that a Delta-Northwest merger deal would be structured as a stock swap. If Air France-KLM contributed capital to the deal, Fitch's Warlick said, "It could be meaningful in strengthening the balance sheet, improving the liquidity position of the merged carrier at a time of great stress in the airline operating environment."

Air France acquired KLM in 2004. The carriers operate as separate airlines but are managed by a common holding company.

High oil prices and a ticking regulatory clock are two of the reasons Swelbar thinks a Delta-Northwest merger would need to be submitted to the U.S. Department of Justice by some time in February. Many airline industry observers argue that it's pragmatic to propose a large merger in the final year of the Bush administration instead of gambling with a potentially stiffer review when a new president takes office in 2009.

Swelbar noted that an investment by Air France-KLM potentially improves the combined balance sheet of Delta and Northwest. But, he added, "It could be capital that might also flow to shareholders of Northwest and Delta today that are obviously going to be looking for an enticing reason to approve a merger."

Liz Fedor • 612-673-7709