DOT Approves Northwest-Republic Deal

The Department of Transportation, acting despite the objections of the Justice Department, gave unconditional approval Thursday to the merger of Northwest Airlines and Republic Airlines, creating one of the nation’s largest carriers.

Northwest said late Thursday that its $884-million purchase of Republic is expected to be made final by mid-August.

Republic shareholders will get $17 per common share from Northwest. A Northwest spokesman, William Wren, said Republic would cease to exist as a separate entity once the merger is complete.

“We will begin immediate preparation of a joint flight schedule that will take advantage of each carrier’s strengths,” said Steven G. Rothmeier, president and chief executive of NWA Inc.. The new schedule will be implemented in October, he added. “The merger approval,” Rothmeier said, “is good news for air travelers worldwide and for stockholders and employees of the two airlines.”

In terms of revenue passenger miles (one paying passenger traveling one mile) Northwest would become the nation’s third-largest airline behind United Airlines and American Airlines. However, a pending merger of Eastern Airlines and Texas Air Corp. (which already owns Continental Airlines and New York Air) would overshadow all three in terms of revenue passenger miles.

The combined Northwest-Republic would have 298 aircraft, 30,000 employees and a route system of 110 domestic and 25 overseas cities, including 11 in the Asia-Pacific area.

Most observers praised the Transportation Department’s approval of the merger and said a strong company would evolve.

“It’s a good deal,” said Scott J. Drysdale, airline analyst in the Seattle office of Birr, Wilson & Co., a San Francisco-based brokerage house. “It creates a major competitor for United and American. The stronger the competitors, the stronger the competition.”

But Drysdale said he had one reservation about the deal.

Both Northwest and Republic are headquartered in Minneapolis, and competition there will be lessened, he noted. Minneapolis is “a huge market, and I hope another airline comes in,” he said. “Prices tend to come down if others come in.”

The DOT decision must still be approved by President Reagan, who could reject it only on foreign policy or national security grounds. The transfer of the international route authority certificates held by Republic must be reviewed by the President. The review is required by law when authority to operate is transferred from one airline to another. Republic operates routes to Montreal and Toronto and to Grand Cayman Island in the British West Indies.

The Justice Department had opposed the merger, announced in January, on grounds that it would suppress competition. But the Department of Transportation said Justice’s arguments “were not supported by the record in this case. A thorough analysis . . . showed that many of the markets at issue here could be effectively disciplined by other carriers’ services.”

The DOT said it agreed with its own administrative law judge, who said in June that the transaction “would not significantly reduce competition.” But the DOT said it “strongly disagreed” with the law judge’s assertion that “under regulation, there is a theoretical presumption of unlimited entry, which makes it nearly impossible for opponents of an airline merger to show that the merger would substantially reduce competition.”

The department said that no such presumption exists and that it decides each proposed merger on the specific facts of the case.

AIRLINE INDUSTRY CONSOLIDATES

Effect of Recent and Proposed Mergers and Acquisitions

Revenue Number of Revenue* Passenger Cities Number of Carrier (billions of Miles* Served Major Hubs dollars) (billions) Texas Air Corp. 6.8 50.9 157 6 Continental +New York Air +Eastern United 6.0 48.2 159 5 +Pan Am’s Pacific div. American 5.9 44.1 119 5 Delta 4.7 30.1 90 3 Northwest 4.4 33.7 135 4 +Republic Trans World 4.2 35.1 96 2 +Ozark Pan Am 2.7 20.8 78 3 (without Pacific div.) USAir 1.8 10.0 72 1 People Express 1.6 15.3 145 2 +Frontier +Britt +PBA Piedmont 1.5 8.2 84 5 +Empire Western 1.3 10.4 68 2

* Based on 1985 data

Acquisitions in italics are proposed but not final.

Source: Airline Quarterly