-- Delta Air Lines and Northwest Airlines on Monday night announced plans to merge their vast domestic and international networks, creating the world's largest airline.
The proposed merger would be the largest U.S. airline deal ever, creating a global giant with more than 800 jets, 6,400 daily flights and nearly $32 billion in annual revenue. The carriers estimate the value of the new company at $17.7 billion dollars, far above their current market value.
The proposal could also be a catalyst for further consolidation among the big airlines at a time when the industry is threatened by steep losses from high fuel prices and a weakening economy.
If the merger closes, the new airline will be named Delta and headquartered in Atlanta, where Delta DAL is based. Delta CEO Richard Anderson will be its CEO.
"Delta and Northwest are a perfect fit," Anderson said Monday. He said the proposal "combines end-to-end networks that open a world of opportunities for our customers and employees."
Under the plan, shareholders in Delta and Northwest would exchange their shares for stock in the merged company. Northwest NWA shareholders would get 1.25 shares in the new Delta for each Northwest share.
The merger needs the approval of the Department of Justice, which will determine whether it violates antitrust laws. That review will take months.
The deal would join two big airlines with complementary route networks. Delta is the leading U.S. airline in the trans-Atlantic market and has strong domestic routes, especially in the Northeast, South and West. Northwest — once known as Northwest Orient — has been one of the leading U.S.-Asia carriers for more than half a century, and it's a formidable domestic presence in the upper Midwest. The new Delta would have major hubs in Atlanta, Detroit, Minneapolis/St. Paul, New York, Amsterdam and Tokyo.
The airlines' announcement drew immediate opposition from Northwest's pilots because it does not guarantee them immediate benefits if the deal closes. Delta reached an agreement with its pilot union's leadership that will give pilots a 3.5% stake in the combined airline and other benefits, while giving management the flexibility to boost revenue.
The merger also faces opposition from some powerful members of Congress and other labor groups.
However, executives at both carriers felt pressured to proceed. Jet fuel prices have risen more than 60% in a year.
Since Christmas, five small airlines have shut down. Last week, Denver-based Frontier Airlines sought Chapter 11 bankruptcy protection.
Analysts predict Delta and Northwest will post first-quarter losses.
Could Delta-Northwest spur other mergers?
A marriage of Delta Air Lines and Northwest Airlines would be the biggest merger in the U.S. airline industry, but it might be only the starting gun for a final round of consolidation 30 years after deregulation.
"There's no doubt that all their big competitors will have to respond," with deals of their own, says industry analyst and consultant Darryl Jenkins, who worked on the Delta-Northwest merger as a consultant to a third party involved in the negotiations.
Delta-Northwest "will have such a huge global reach that all the other guys will have to do something to match them, and do it pretty quickly," says Jenkins, author of the Handbook of Airline Economics. "The merged Delta will have such reach, from Asia to Europe, and all over the USA, that they will be very close to being the first truly global airline."
Northwest CEO Doug Steenland agrees. "This gives us a head start on our competitors," he said Monday night in an interview.
United, which operates what Jenkins says is the best global service network, will be the competitor most directly affected, he says. But it will fall behind Delta unless it responds.
As a result, United is widely expected to cut a deal with No. 4 Continental, with which it has been holding extensive merger talks while the Delta-Northwest negotiations played out over the last three months.
The announcement of the Delta-Northwest merger plans releases Continental to negotiate its own merger. Previously Northwest held so-called golden share rights that let it block any Continental merger. Those rights came from a late 1990s deal in which investor David Bonderman and his partners — who led Continental's comeback from a second Chapter 11 bankruptcy in the early 1990s — sold most of their holdings to a group that, for a while, included Northwest.