On the eve of their first merger hearing on Capitol Hill, Northwest Airlines and Delta Air Lines on Wednesday offered a new reason for approving their deal -- a combined first-quarter net loss of $10.5 billion.
While that staggering figure largely reflected accounting charges to show the lower values of their businesses, it also demonstrated how Northwest and Delta are being battered by record fuel prices.
During the first quarter, Northwest paid 49.7 percent more per gallon for jet fuel compared with 2007.
"Our first-quarter total fuel expense increased by $445 million," said Northwest CEO Doug Steenland. "The sustained high fuel prices represent an extraordinary challenge to Northwest and the entire airline industry."
The larger Delta's quarterly fuel bill was even worse, climbing by nearly $600 million.
Northwest's net loss of $4.1 billion included a "non-cash goodwill impairment charge" of $3.9 billion, which the company said was required for accounting purposes. Delta's charge was $6.1 billion.
When unusual items were excluded, Northwest's first-quarter net loss was $191 million, compared with $73 million in net income a year earlier. Delta's loss, excluding special items, was $274 million, down from a $6 million loss a year earlier.
High fuel prices and the slowing U.S. economy are two of the reasons why Steenland and Delta CEO Richard Anderson finally pulled the trigger on their merger proposal this month.
They will begin to formally defend it this morning before a House Judiciary Committee panel.
Steenland and Anderson will argue that the blending of their domestic and international networks would build a global carrier that is better equipped to withstand shocks in the economy.
But members of Congress also will hear from opponents today. An official with the International Association of Machinists and Aerospace Workers, which represents Northwest ground workers, will testify against the merger before the House task force, arguing that it would be harmful to employees and passengers.
Kevin Mitchell, who leads the Business Travel Coalition, is expected to raise similar objections this afternoon when he appears before a Senate Judiciary subcommittee examining the merger.
Bill Swelbar, an airline expert at the Massachusetts Institute of Technology, said these initial hearings will be an "appetizer" for the debate that will unfold this year on the Delta-Northwest merger.
Swelbar and Bill Hochmuth, a senior research analyst for Thrivent Investment Management in Minneapolis, said fares will continue to increase with or without a merger.
Executives at both carriers have said they don't plan to close any hubs after a merger.
But Hochmuth noted that both airlines will substantially reduce domestic seats on the market later this year because of high fuel prices.
Steenland said that Northwest's domestic capacity will shrink by 12.6 percent in the fourth quarter. For the full year, domestic flying done by Northwest pilots will be 7.5 to 8.5 percent lower than last year.
Delta is cutting its domestic operations by about 10 percent in the second half of this year.
When they unveiled their merger April 14, Anderson and Steenland said that the combination would achieve about $1 billion in synergies.
That estimate was "conservative," Anderson said Wednesday, and he and Steenland added in separate conference calls that the cost savings will grow after Delta and Northwest executives develop a merger transition plan.
Liz Fedor • 612-673-7709
