Delta and Northwest in $3 Billion Deal

15.04.2008 (13:15) | Internaitional Herald Tribune

Delta Air Lines and Northwest Airlines agreed to merge late Monday, in a $3.1 billion deal that would create the world's biggest airline and could prompt other airlines to pursue mergers of their own.

The deal could be followed quickly by another, airline executives and industry analysts said. A leading candidate is a combination of United Airlines and Continental Airlines, which have explored the idea. The airlines now may try to get the deal wrapped up within the next 30 days, a person with direct knowledge of the negotiations said Monday night. He spoke on condition of anonymity because the talks are private.

The Delta-Northwest agreement came despite failed efforts to get pilots at both airlines to agree on how to combine their own ranks, an issue that could lead to labor unrest and disruptions to flight operations in the coming years. Northwest pilots immediately said they would oppose the deal.

That was not a surprise to management. The threat of rising fuel prices — and the idea that a merger would bring huge cost savings — overcame the concerns about pilots in recent weeks

Northwest shareholders would receive 1.25 Delta shares for each of 236.4 million Northwest shares outstanding.

Seven board members from Delta and five from Northwest would join the board of the new airline, to be known as Delta. The Air Line Pilots Association, which represents pilots at both airlines, would receive a board seat.

Richard Anderson, Delta's chief executive, would run the new airline and Delta's chairman, Daniel Carp, would retain that role. Roy Bostock, a Northwest board member who also sits on Morgan Stanley's board, would become vice chairman. Douglas Steenland, Northwest's chief executive, would have a seat on the board but would not have a role in day-to-day operations.

Delta and Northwest are betting that cost cuts and the benefits of a bigger route network would outweigh the potential operating chaos and labor unrest that can result from airline mergers.

Other airlines may rush to merge. One reason for the urgency is that airlines want to get their deals approved by the Justice Department under the Bush administration, rather than risk seeing them stall until a new president takes office.

Glenn Tilton, United's chief executive, has been eager for a merger, but Continental has resisted, saying it wanted to wait to see if the combination of Delta and Northwest came about. The chief executive of Continental, Lawrence Kellner, called it "good news" last month when it appeared that the Delta-Northwest talks had cooled.

At the end of 2007, Delta and Northwest employed a combined 89,000 workers. American Airlines, currently the largest carrier, had 85,500. Delta said the combined airline would employ 75,000 people. That number excludes 6,000 people who work at Delta's regional airline and Delta said earlier that it would reduce employment by 2,000.

Executives worked hard in recent months to win the support of the 6,300 Delta pilots and the 4,500 Northwest pilots.

That effort was not successful. The two pilot groups could not agree on a merger of their seniority lists, which are important in determining pay, schedules and the type of plane they fly.

Anderson of Delta faced the choice of either abandoning the deal or pushing ahead and risking hostilities from pilots that could cripple his efforts to quickly combine the two carriers' operations and make them run more smoothly.

Anderson appears to have pursued a divide-and-conquer strategy with the pilots. He entered into a new contract with Delta pilots, which gives them a raise and a 3.5 percent stake in the new company, and gives him more flexible work rules with which to run a combined airline. The Northwest pilots were left out. Their union chief, Dave Stevens, said the group "will use all resources available to aggressively oppose the merger."

Steenland, the Northwest chief, said in a brief interview Monday night that he planned to continue talking with pilots there to negotiate a contract that would, over time, bring them up to the Delta pilots' rate of pay. He also wants the two pilot groups to work again on a shared seniority list.

Another 4 percent stake in the combined company is to be handed out to domestic nonpilot workers at both companies. Delta said no hubs would be closed, though it did not say what level of operations it would maintain at its hubs. The company expects $1 billion in annual savings. And it expects to spend $1 billion on transition costs to integrate the two companies.

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