NWA-Delta: It’s a go for world's largest airline

  • Article by: LIZ FEDOR , Star Tribune
  • Updated: April 15, 2008 - 10:45 AM

Delta CEO Richard Anderson and Northwest CEO Doug Steenland said in a joint interview with the Star Tribune that the merged carrier would preserve a strong presence in Minnesota.

Northwest Airlines and Delta Air Lines late Monday announced their plan to merge, a deal meant to create the world's largest airline and the boldest attempt yet to set a new course for U.S. aviation.

Delta, the nation's third-largest carrier, is betting that in acquiring No. 5 Northwest it can fashion an airline of such reach and financial staying power that it can break free of the instability that has marked the industry for decades.

For Minnesota, the price of creating that larger carrier would be the loss of the airline that has connected it to the rest of the world for decades. However, Delta CEO Richard Anderson and Northwest CEO Doug Steenland said in a joint interview with the Star Tribune that the merged carrier would preserve a strong presence in Minnesota.

"The commitment starts with maintaining the hub and creating a global network that will allow the hub to thrive and grow," Steenland said.

Northwest employs about 11,500 people in Minnesota, with about 1,050 of them based at the Eagan headquarters. The combined company would be named Delta, Anderson would be CEO and the airline's headquarters would be in Atlanta, though it would have some executive offices in the Twin Cities. It was unclear what levels of management would operate from here.

Under a current agreement with the Metropolitan Airports Commission, the new Delta could be forced to immediately pay off $245 million in bond debt if the Northwest headquarters in Minnesota is closed.

However, Anderson said, "We think we can fulfill the spirit of those [MAC] covenants." He anticipated that airline executives will meet with the MAC over the next 18 months to renegotiate Northwest's agreement with the MAC.

The two executives said they expect the regulatory review of the merger to take six to eight months. If the federal government gives its OK, the two companies would still operate separately for a year afterward as they plan their transition.

Steenland, who would be a board member, said that future air service in Minnesota will be enhanced by joining together with another carrier to build a powerful global enterprise.

The combined airline would redefine what it means to be a major U.S. carrier. Together, Delta and Northwest would be half again the size of American Airlines, the largest U.S. carrier. However, the Justice Department could require the merged carrier to divest itself of some assets, such as gates at certain airports.

The merger would marry Delta's route network to Europe and Latin America with Northwest's major presence in Asia. On the domestic front, Northwest's hubs, including the Twin Cites and Detroit, would complement Delta's operations, including those based in Atlanta, New York and Salt Lake City. The merger does not contemplate closure of any hubs.

The two airlines are submitting the deal for antitrust review now in the hope that it can be completed before a new president takes office. U.S. Rep. Jim Oberstar, D-Minn., intends to fight the merger by holding hearings in the House Transportation and Infrastructure Committee, which he leads.

Sen. Amy Klobuchar, D-Minn., said Monday night that she would hold the executives' "feet to the fire" to ensure that consumers, airline employees and communities are protected. Sen. Norm Coleman, R-Minn., expressed similar concerns and stressed that he would look out for the "best long-term interests of Minnesota."

Gov. Tim Pawlenty said Monday that he "will be closely scrutinizing the impact of the merger and will strongly stand up for Minnesota's interests."

If the merged carrier doesn't live up to prior commitments to the state, "they either are going to owe us a substantial amount of money, or we will expect them to renegotiate those commitments in a way that's favorable to Minnesota for jobs, for flight operations and for hub status," Pawlenty said.

Selling the merger to many

Randy Babbitt, an aviation consultant and former national president of the Air Line Pilots Association, and attorney J. Steven Hart, who worked in the Reagan administration, expect the Justice Department to endorse the merger because it involves few overlapping routes.

The Justice Department could give the merger clearance if it determines that it wouldn't pose an anticompetitive threat. Congress will also weigh in, though its members can seek only to uncover information and guide regulators to certain conclusions.

In a recent interview, Oberstar said he opposes "the cascade of mergers that would likely follow" the Delta-Northwest deal. He argues that consumers would be hurt by consolidation, with fewer flight choices and higher fares.

But the airlines likely will sell the merger as the solution to meeting the needs of investors, workers and passengers. They will argue that a merger would allow them to run an airline that can make money and satisfy passengers, an elusive combination as of late.

To investors, Delta and Northwest will pledge that by pooling their strengths they can build a steadily profitable company. To workers, the deal will be pitched as requiring no significant layoffs and promising some rebound in wages from heavy cuts of the past -- in some cases 40 percent.

And to passengers, Delta and Northwest are pledging a seamless route network with unmatched service across the Atlantic and Pacific.

Shareholders have been pressing for the two airlines to do a deal for months, but the recent spike in oil prices added momentum to the merger talks. Since January, when the two carriers began intensive discussions, the price of oil has jumped from about $90 a barrel to $110.

"The rising oil prices have certainly changed the equation," Babbitt said.

High oil prices forced ATA Airlines, Aloha Airlines and Skybus Airlines to halt operations in recent weeks. Champion Air, a charter carrier, intends to go out of business May 31, and Frontier Airlines sought bankruptcy protection Friday.

NWA pilots oppose deal 'as it stands'

Delta and Northwest had been poised to announce the merger in February, but complications involving their pilots delayed the decision until now.

Executives gave the Northwest and Delta chapters of the Air Line Pilots Association weeks to find common ground on integrating their seniority lists, which would have allowed the merged airline to avoid the potential of years of acrimony between the two groups. But the pilot groups remain sharply at odds on seniority issues, and the Northwest pilots said Monday night that they are opposing the merger "as it stands."

Delta pilot leaders said Monday that they approved a contract with pay raises for their members and that they expressed support for the merger.

Anderson pledged to address the Northwest pilots' concerns. "We were working very hard in a very unusual way to try to bring the two groups together. Through no fault of anyone, [a joint pilots' seniority agreement] didn't happen," he said.

"We had the regulatory window beginning to close," Anderson added, so Delta worked with its pilot group on a new contract and proposed the deal.

In a statement Monday, Dave Stevens, chairman of the Northwest pilots union, said, "This agreement clearly disadvantages Northwest pilots both with respect to economic issues and seniority list integration." He compared the Delta-Northwest scenario to US Airways, where pilots are bitterly divided following a 2005 merger.

Ray Neidl, an airline analyst for Calyon Securities, said mergers allow the surviving carriers to attract more high-paying business customers. In a Friday report, Neidl said that many experts believe the United States "will need larger, more economically stable airlines to compete" with the large foreign carriers.

Consequently, Neidl wrote, "Pilots have to decide if they are going to be part of the problem or a part of the solution. They have a real interest in trying to make this work and should not be acting as obstacles to a successful integration."

The largest union at Northwest, the International Association of Machinists and Aerospace Workers, is opposing the merger on behalf of ground workers. The union said Monday that the combination would hurt employees, consumers and communities.

The Association of Flight Attendants, which represents Northwest attendants, has been conducting an organizing campaign at Delta. Northwest AFA President Kevin Griffin said his union's top priority is preserving union representation for his members and negotiating a contract with raises and other improvements.

The vast majority of Northwest's 32,000 employees are represented by unions, but most of Delta's 55,000 employees are not unionized.

Blending those two cultures will be up to Anderson, who formerly was Northwest CEO and is familiar with both companies' finances and personalities.

"I wouldn't downplay the importance of Richard Anderson as the agent of change," Bill Warlick, a senior director with Fitch Ratings, said in an interview.

While both airlines restructured in bankruptcies that concluded last year, they still have about $15 billion in debt, Warlick said. They recently announced cuts in their domestic networks, but both also have introduced new international service. A week ago, Northwest launched nonstop service from the Twin Cities to Paris. In late March, Northwest and Delta initiated service to London's Heathrow Airport.

Under the merger transaction, Northwest stockholders would receive 1.25 Delta shares for every Northwest share they own, a 16.8 percent premium. The all-stock transaction has a combined enterprise value of $17.7 billion.

Delta and Northwest have a long-standing code-sharing agreement, which gives them a head start on integrating their systems.

Staff writer Sarah Lemagie contributed to this report. Liz Fedor • 612-673-7709

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