Delta, Northwest on verge of a merger
Delta and Northwest are close to a deal that would create the world’s largest airline and jump start what is expected to be the industry’s biggest consolidation wave in decades.
The long-awaited pact between Delta Air Lines Inc., the nation’s third-largest airline, and No. 5 Northwest Airlines Corp. could come as early as today if there is an agreement by the pilots union for a common contract.
The marriage, which would require regulatory approval, would create a new and expanded Delta with a fleet of 1,115 planes and 85,000 employees. It would fly more than 130 million passengers annually to more than 1,100 cities worldwide.
The combination also would bring together two airlines that each emerged from Bankruptcy Court protection only a year ago.
While the combination could result in higher fares in some markets, widespread or prolonged hikes are less likely because the two airlines have few routes that overlap, analysts said. Also, the new carrier could face increased competition as low-cost airlines expand into markets it cuts back service in.
Locally, the effect is expected to be minimal because the two airlines together account for about 11% of the market share at Los Angeles International Airport.
Neither Delta nor Northwest has extensive service to other Southern California airports.
“The impact on fares will be neutral,” said Terry Trippler, an aviation consultant who runs travel advice website TripplerTravel.com. “I can’t find too many places where these two airlines combining would create a monopoly.”
A deal could still be delayed or even scuttled, particularly if the two airlines’ pilots are unable to come to an agreement on meshing their seniority lists and other work-related issues. Delta and Northwest don’t want to repeat the expensive labor issues that have hindered the merger of US Airways and America West.
On Tuesday, U.S. Sen. Amy Klobuchar (D-Minn) said in an interview with Reuters that she had spoken with Delta Chief Executive Richard Anderson earlier in the day and was told that a deal had not yet been struck.
But Anderson told the senator that they were working toward a deal and were looking at getting support from the pilots’ unions.
If a deal is struck, the new airline would retain the Delta name and have its headquarters in Atlanta, where Delta currently has its largest airport hub. In hopes of winning political support in Minneapolis, Northwest’s home base, the combined airline is likely to keep a major presence there, including maintaining Minneapolis-St. Paul International Airport as a major hub.
The deal is expected to encounter significant scrutiny from regulators, but the airlines anticipate that it would be less under the current Republican administration, which is seen as being business friendly.
Big airlines are in a hurry to merge this year to avoid the possibility of tighter restrictions if a Democrat was to capture the White House in November.
Analysts believe the next possible combination could involve United Airlines owner UAL Corp., the nation’s fourth largest, and No. 6 Continental Airlines Inc. Southwest Airlines Co. reportedly is considering a merger with US Airways Group Inc., leaving only AMR Corp.’s American Airlines without a major merger partner.
“The orchestra is playing and the dance is beginning so you better pick a partner or you’ll lose out,” Trippler said.
The latest move to consolidate comes less than a year after several major airlines emerged from bankruptcy reorganization and began posting profits for the first time since the Sept. 11, 2001, terrorist attacks. Airlines such as Delta, Northwest and United got hammered by a dramatic drop in air travel in the aftermath of the attacks, losing billions of dollars in revenue.
A Delta-Northwest deal would mark the latest attempt at mergers that have otherwise been unsuccessful, including last year’s hostile bid for Delta by US Airways as well as an attempt by United and Continental to tie the knot in 2001.
Analysts contend that the current environment is ripe for mergers. After six quarters of profits, U.S. carriers reported their first quarterly losses after being hit hard by high fuel prices, which are not expected to drop significantly any time soon.
International carriers also have stepped up competition for overseas travel and low-cost carriers such as JetBlue Airways Corp. and Virgin America have been snatching away domestic passengers.
“They’re squeezed from both sides so they’re looking for a way to survive,” said George Hamlin, managing director of ACA Associates, an aviation consulting firm. “They believe there are too many carriers and too much capacity.”
The merger also has been fueled in part by investors who have argued that the airlines need to slash costs and the best way to do that is to cut redundant routes, reduce operations at hub airports and pare down capacity so that planes operate with fewer empty seats.
One investor group estimated that the Delta-Northwest merger could result in a cost savings of $1.5 billion a year. The airlines together had more than $31 billion in revenues last year.
Several legislators have said they would oppose the merger, including Rep. Jim Oberstar (D-Minn), chairman of the House Transportation and Infrastructure Committee, who has said the combination would lead to higher fares and fewer jobs.
But merger advocates say that Delta and Northwest have relatively few overlapping domestic routes and their international networks are complementary -- Delta has extensive service to Europe and Northwest’s overseas focus is Asia.
American, the largest single carrier at LAX, has about 15% of the market, compared with Delta and Northwest’s combined 11%. The merger could result in the combined airline looking to expand at LAX, one of the busiest U.S. airports for international flights, which are considered more profitable than domestic service.
But Hamlin cautioned that mergers have not always worked out well, pointing to the continuing struggle to integrate the operations of US Airways with those of the former America West. That combination, more than two years old, pales in size compared to the Delta-Northwest merger.
Cost savings also might be hampered by fleet differences: Delta and Northwest operate different aircraft types, which require different pilot training and maintenance crews. Delta operates mostly Boeing jetliners while Northwest flies a mix of Airbus and Boeing aircraft.
“We’ve never seen mergers on the scale that’s being proposed,” Hamlin said.
“Most mergers so far have been larger carriers acquiring smaller one. We’re now talking about the giant’s getting together.”
Shares of Delta fell 55 cents Tuesday to $16.77 and Northwest sank 23 cents to $16.97.
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(BEGIN TEXT OF INFOBOX)
Major U.S. airlines
Passengers in 2006:
1. American... 98.1 million
2. Southwest... 96.3 million
3. Delta... 73.5 million
4. United... 69.3 million
5. Northwest... 54.8 million
6. Continental...46.7 million
7. US Airways... 36.5 million
8. America West... 21.2 million
9. AirTran... 20.0 million
10. SkyWest ...19.5 million
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Top carriers at LAX
Passengers in 2007:
1. American... 9.4 million
2. United... 9.2 million
3. Southwest... 7.7 million
4. Delta... 4.8 million
5. Alaska... 2.9 million
6. SkyWest ...2.8 million
7. Continental... 2.3 million
8. Northwest... 2.2 million
9. US Airways...1.7 million
10. Qantas... 1.2 million
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Source: Bureau of Transportation Statistics, LAX