NWA-Delta merger 'on life support'

  • Article by: LIZ FEDOR , Star Tribune
  • Updated: March 19, 2008 - 8:52 PM

Even though the airlines' pilots can't agree on a seniority list, airline observers say a merger could simply be placed on hold.

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Analysts question whether either airline could thrive on its own and say a consolidated carrier could operate more efficiently. A potential Delta-Northwest merger is waiting on an agreement from the airlines’ pilots unions, which are struggling to integrate their seniority lists.

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The chairman of the Delta Air Lines pilots union on Wednesday rejected an offer by Northwest Airlines pilot leaders to settle their seniority integration conflict through arbitration, making it unlikely that a Delta-Northwest merger will be proposed in the coming weeks.

Lee Moak, who leads the Delta branch of the Air Line Pilots Association, said in a statement to the Star Tribune that "there will be no binding arbitration."

His response came hours after the arbitration option was raised by Northwest pilot leaders in a memo to their pilots. A month ago, an agreement to blend pilot seniority lists was the only obstacle to the announcement of a merger in which Delta would acquire Northwest.

But the world has changed in those four weeks. Oil shot above $110 a barrel. The U.S. economy has slowed. And financial markets have grown even more unstable.

"I think the [merger] deal is on life support," said Bill Swelbar, an airline expert at the Massachusetts Institute of Technology.

Ralph Strangis, a Minneapolis attorney who represented US Airways in a 2001 proposed merger with United, agreed.

But he doesn't expect the boards of Delta or Northwest to take any definitive action to kill the deal. "I think it's going to sit for a while," Strangis said. If he were serving on the Delta or Northwest boards, Strangis said, he would favor placing the deal on indefinite hold.

"There are so many moving parts," Strangis said. One is the volatility of oil prices.

Another is the uncertainty of how the U.S. economy will affect passenger demand over the coming months, he said.

Strangis and Swelbar both argued that Delta and Northwest need to re-examine the elements of the merger deal in light of new financial realities.

When the airline executives started negotiating a four-year labor deal with the Delta and Northwest pilots, oil was closer to $90 a barrel than $110 a barrel, Swelbar said. The tentative agreement that management reached with the pilots would provide raises of more than 30 percent over the life of the contract for Northwest pilots.

"It seems to me that it's a little pricey, particularly in such a volatile cost environment," Swelbar said.

That labor deal "was premised on there being a seniority integration agreement, which would allow the airlines to realize the synergies of combining the fleets and the workforces on Day 1," said a person familiar with the talks.

Both companies have viewed consolidation favorably because a Delta-Northwest combination would allow the new carrier to market a global network to passengers. But the boards now must look at their merger options in light of the fact that the pilots could not reach agreement and economic conditions have changed.

Strangis said that Delta could revisit the topic of industry consolidation months from now and still conclude that Northwest is its best partner.

Right now, he said, "They have to make a decision that they are going to be a standalone carrier and hope they aren't making decisions that would impede a transaction if one becomes possible later."

Delta CEO Richard Anderson and President Ed Bastian sent a strong message Tuesday that they are focused on revamping Delta's business to survive the onslaught of bad financial news.

They announced that they will grow Delta's international capacity by 15 percent this year, and they don't have U.S. competitors on some of the routes they are introducing. In the domestic market, where they compete with many low-fare airlines, they've decided to slash their schedule by 10 percent and they are parking 15 to 20 mainline jets and 20 to 25 regional jets.

They also are offering severance packages and not filling open positions, with the goal of cutting 2,000 jobs, or less than 4 percent of Delta's workforce.

"We must act quickly and decisively, as speed in execution leads to success," Anderson and Bastian told employees.

Liz Fedor • 612-673-7709

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