Delta, Northwest Airlines Treat Merger As a Done Deal

CEOs, analysts expect the meger to close by year's end.

April 17, 2008 -- To hear old buddies Richard Anderson and Doug Steenland talk, the proposed merger of Delta daland Northwest nwa airlines not only will sail through the usually tough antitrust review process, it'll usher in a new era of airline prosperity and easy consumer access to the world.

Anderson, Delta's CEO, and Steenland, Northwest's, touted their vision in glowing terms Tuesday as a public relations campaign to promote the merger began in earnest.

In reality, the merger announced Monday night already is facing challenges, ranging from lawmakers and consumers worried about reduced competition, abandoned hubs and higher prices for both domestic and international flights, to distrustful employees and some industry veterans who have seen past proposals crater before consummation.

The stock market signaled its concerns Tuesday. Both carriers' shares tumbled on a day when the Dow Jones industrial average rose 60 points.

Northwest shares fell 8.4%, or 94 cents, to $10.28. Delta's stock price fell 12.6%, or $1.32 a share, to $9.16. That drops the value of stock Delta will give current Northwest shareholders in exchange for their Northwest shares to about $2.7 billion, from the $3.1 billion it was worth Monday.

Still, the early betting in and around the airline industry, on Wall Street and in Washington, D.C., is that the Justice Department's antitrust division will sign off on the deal by year's end.

That's partly because the carriers just last week received grants of antitrust immunity from regulators in both the USA and the European Union for their four-way trans-Atlantic alliance with Air France and its sister airline, KLM. Now, Delta and Northwest leaders figure getting antitrust clearance for the combination of two carriers that compete head-to-head on just 12 domestic routes should be a cinch.

Anderson told analysts Tuesday that it's a case of perfect timing for winning antitrust approval for the merger.

Lawyer Roger Fones, who headed the Justice Department's antitrust division until 2005, more or less agrees. "The industry looks a lot different than when I was in government" and directed the review that led to the Justice Department's 2001 decision to block a proposed merger between United and US Airways, he said.

Unlike the situation seven years ago, "When the government looks at individual markets, it will see that the market shares of low-cost carriers are higher," he said.

Low-cost airlines such as Southwest Airlines now carry about a third of all U.S. travelers, up from less than 15% of the domestic market in the mid-1990s.

Fones, now a partner at Morrison Foerster in Washington, also said the carriers' expectation that the Justice Department's review could be completed before year's end is realistic so long as the parties promptly provide all the data and information that Justice Department lawyers request. Delta and Northwest want a decision before next year's change in administrations. But such a quick review would be remarkable, given the length of past airline antitrust review cases not involving failing carriers in the past 20 years.

The airlines' merger announcement has set off speculation about other possible airline mergers behind it. Continental, which has previously held discussions with United Airlines, told employees Tuesday that it has to reconsider staying independent and "make sure we remain a strong long-term competitor."

The Delta-Northwest merger would create a global juggernaut that would appeal to large global corporations eager to negotiate bulk travel deals with a carrier that can meet nearly all of their travel needs around the world.

"This gives us the opportunity to have the No. 1 or No. 2 market share in every market in the world," said Anderson, who used to run Northwest with Steenland as his top lieutenant.

Not only would Delta rank as the largest carrier in the USA's domestic market, it would be the top U.S. carrier providing service across the Pacific, to Europe, to Africa and the Middle East, and it would be the No. 2 U.S. carrier to Latin America and the Caribbean.

Not everyone is thrilled with that prospect.

Phoenix-based industry consultant Hubert Horan, who in the early and mid-1990s ran Northwest's international division as it developed its successful trans-Atlantic alliance with KLM, says he doesn't believe the $1 billion in annual revenue improvements and cost savings touted by Anderson and Steenland is enough to offset the huge financial risks associated with trying to integrate two vastly different companies.

Northwest is heavily unionized; Delta's pilots are its only significant labor group in a union. The airlines' fleets differ significantly.

But Horan says his biggest concern is the potential for steep increases in international fares.

"I think this is one of the most horribly, crudely anti-competitive developments in this industry ever," he says. "Everyone talks about the need to consolidate and reduce capacity on the domestic side because of high fuel prices," he says. "But they're justifying this merger all on the international side. They're planning to stick it to international travelers."

"Once all these mergers and alliances get done, you won't be able to undo them. Travelers will be" defenseless against the carriers' pricing power across the Atlantic, Horan said. "Permanently."

Business travelers' doubts

Some consumers also are not yet convinced the Delta-Northwest merger would be such a good thing.

According to a survey by the National Business Travel Association prior to the deal's announcement, 54% of its members — corporate travel managers — believe that customer service on a merged Delta will be poorer, while 41% said flight schedules and frequencies will worsen.

Only 22% of the NBTA's members said further airline consolidation will be a "positive development," even though 80% considered it "inevitable."

Delta and Northwest officials insist that no hubs would be closed after their merger, but they left open the possibility of further shrinkage and route changes. Both carriers have announced significant schedule cutbacks that will begin later this year in response to oil prices that hit an all-time high of almost $114 on Tuesday.

"Can they really support all these hubs?" asked John Steinberg of Baltimore, who has earned nearly 4 million miles in both carriers' frequent-flier programs.

A merger would let him maximize the miles he could earn by traveling on a single airline. But the proximity of the hubs is a concern.

"You're looking at Minneapolis, Detroit, Cincinnati, Memphis and Atlanta. They're awfully close. Atlanta and Memphis are drivable," he says.

Labor's concerns

To no one's surprise, Northwest's pilots and ground workers already are strongly opposing the deal.

The pilots, members of the Air Line Pilots Association, couldn't reach a merger integration deal with their counterparts at Delta during talks in February and March. They feared that the seniority integration plan preferred by Delta's ALPA members would have severely reduced the career earnings of most Northwest pilots.

That situation hasn't changed, and now Delta's pilots have cut a deal with their management that assures them that they won't lose any position or money in a merger integration. The agreement provides for annual pay raises starting in 2009 and a 3.5% equity stake in the company if the merger goes through. The pilots would get the increased pay and benefits in exchange for letting Delta adjust their flying to integrate the carriers.

Dave Stevens, head of the ALPA unit at Northwest, has vowed to "use all resources available to aggressively oppose the merger.

"The risk to Northwest Airlines and to the Northwest pilots group from letting this merger proceed, as it is now structured, is simply too great," he said.

The International Association of Machinists union, which represents Northwest's bag handlers and agents, also is strongly opposed to the merger. That is partly because they are outnumbered by their non-union counterparts at Delta who could win a vote to keep the union out at Delta after the merger.

"Airline industry consolidation will come at tremendous public expense," Robert Roach Jr., the IAM's general vice president, said in a statement.

Steenland and Anderson sought to calm fears of a pilots' revolt.

"There's plenty of time for us to sit down with all the parties and negotiate a contract for all the new Delta employees going forward," Anderson said.

Critics on Capitol Hill

Delta and Northwest also are likely to find the merger to be a tough sell in Congress, where the list of those who either are opposed to the deal or not yet convinced is growing.

Sen. Herb Kohl, D-Wis., is worrying publicly about the possible loss or reduction of service to small towns.

Leading the opposition in Congress is Minnesota Rep. James Oberstar, the powerful Democratic chairman of the House Transportation Committee, from the state where Northwest is headquartered and who is closely allied with organized labor.

He said Tuesday he'll call Anderson and Steenland to testify before his committee and said the merger would create a "globe-straddling megacarrier" that would be bad for passengers.

"Faced with that economic power, the low-cost carriers will not be able to compete.

Rep. Jerry Costello, D-Ill., added that he is skeptical about the executives' claims that the merged Delta would retain all the two carriers' existing hubs.

"We've heard that before, from American Airlines when it acquired TWA," he said. American executives testified they would keep St. Louis as a hub, but cut flights there in half less than two years later.

Contributing: Barbara De Lollis, Roger Yu