Northwest Airlines CEO Doug Steenland reassured local business leaders Monday that the vast majority of the airline's Minnesota jobs would be preserved under a merger with Delta Air Lines, but he warned that Northwest expects to reduce jobs and flights in the short-term in response to the "meteoric" rise in fuel costs.

Steenland, speaking at a St. Paul Area Chamber of Commerce lunch, emphasized that record oil prices will push fares even higher in the coming weeks and months.

"As fares go up, [passenger] demand is going to come down," Steenland said. "As demand comes down, the airline is going to have to shrink."

In his remarks, Steenland stressed that high fuel costs -- not the proposed merger -- pose the greatest threat to Northwest workers and consumers.

Oil was about $65 a barrel when Northwest emerged from bankruptcy a year ago, but it recently hit $126. When the merger was proposed a month ago, oil was around $112.

Steenland noted that Northwest's fuel bill rose about $450 million in the first quarter. "That can only go on for so long," he said, adding the carrier would be prudent in bringing its costs into closer alignment with its revenue.

Northwest plans to take 15 to 20 airplanes out of service this year, with most flight reductions coming after the busy summer travel season. Related to that capacity reduction, management previously said it hopes to reduce jobs through attrition.

Steenland projected Monday that oil prices will remain high, and that Northwest and its competitors will keep trying to pass along a greater portion of their increased fuel costs to consumers.

Last week, Northwest matched a $20 fuel surcharge originated by Delta. Tom Parsons of reports that the six large U.S. network carriers have raised fares 11 times in the past five months.

Multiple business groups, including the St. Paul Chamber, are supporting the Delta-Northwest merger because they see it as a means to preserve extensive domestic and international air service in Minnesota.

The merger, which still needs federal regulatory approval, could close before the end of the year. But Steenland said Northwest would continue to operate on its own through much of 2009 and possibly into early 2010 as the carriers prepare to blend businesses.

Gov. Tim Pawlenty and leaders of the Metropolitan Airports Commission (MAC) also have a strong interest in keeping a high level of air service in the state. Northwest has contracts with the MAC that require the airline to maintain a headquarters and hub in the Twin Cities area. Steenland pledged that the merged carrier -- to be called Delta -- would retain a "robust, vibrant hub" here, but that the headquarters would be in Atlanta.

Renegotiation sought

The MAC could penalize Northwest by requiring it to pay more than $200 million in bond debt when Northwest's Eagan headquarters closes. Steenland said the merged airline is "prepared to pay off that obligation."

However, he said that Northwest and Delta executives want to renegotiate the terms of Northwest's loan deal with the MAC.

Steenland said there is a public good to revising that agreement because it would allow public officials to maintain some leverage over the new Delta, such as requiring Delta to maintain certain flight service levels in the Twin Cities.

"Before we can get to any renegotiation of anything," the MAC needs to learn more about the type and level of jobs that the new Delta will keep in the Twin Cities, said Jack Lanners, MAC chairman, in an interview after the speech.

"What we need to do is concentrate on the future of not only the hub and air service at MSP and across greater Minnesota, but the jobs and the specifics of those jobs that they are talking about," Lanners said. He added he's concerned about airline jobs that will be lost later this year when both Northwest and Delta cut their flight capacity in response to high fuel prices.

Delta CEO Richard Anderson, who will lead the merged carrier, and Steenland have said that the merger would not cause job cuts among front-line employees, but job cuts would occur in the corporate headquarters. About 1,000 people work in Northwest's Eagan headquarters.

Steenland pledged that the merged airline would retain employees in two other Eagan facilities -- the flight training center and the data center.

Eagan Mayor Mike Maguire, who attended Steenland's speech, said community leaders have been intent on saving the jobs in the flight training and data centers and what he heard from Steenland Monday was the "clearest" message that those positions will be preserved in Minnesota.

Liz Fedor • 612-673-7709