INSIDE Delta, Northwest still have obstacles

By Joshua Freed and Harry R. Weber

Associated Press

If Delta and Northwest are going to create the world’s largest airline, they’ll first have unions to cajole, politicians to placate, and antitrust regulators to convince.

Two of Northwest’s largest unions immediately declared their opposition.

Most importantly, the airlines will need antitrust approval from federal regulators. In 2001, an attempted merger of United Airlines and US Airways fell apart amid antitrust concerns. Executives at Delta and Northwest said they are aiming to close their deal by the end of this year, which would be before the end of the merger-friendly Bush administration.

The takeover announced Monday calls for the combined airline to be named Delta, remain based in Atlanta, and be run by Delta CEO Richard Anderson. If the share-swap becomes final, Delta shareholders will get a bigger company, while Northwest shareholders would get a 16.8 percent premium over Monday’s closing stock prices. Based on those prices, the deal values Northwest at more than $3.6 billion.

"We are confident the transaction will go forward and be approved," Northwest CEO Doug Steenland said.

As for the unions, the airlines tried something novel: They tried to get their pilots to agree on a joint contract and seniority beforehand. They failed to get an accord on seniority, though.

Delta made a deal with its pilots over the weekend, leaving the Northwest pilots to work out something later. On Monday, Northwest pilots declared their opposition to the combination "as it stands," perhaps leaving room for a deal later.

The Delta pilot agreement, which still needs rank-and-file ratification, extends its existing collective bargaining agreement through 2012 and gives Delta pilots 3.5 percent of the new company.

That was good for Delta. But Northwest pilots concluded it was an arrangement to "try to disadvantage the Northwest pilots economically and with respect to our seniority," Northwest pilot chairman Dave Stevens wrote in a memo late Monday.

"No pilot group is going to put up with this. No amount of money can sustain a carrier which creates this level of discord," he wrote.

Delta said it will use its best efforts to reach a combined Delta-Northwest pilot agreement, including resolution of pilot seniority integration, before the merger closes.

Northwest didn’t consult with the union that represents its baggage handlers, ramp workers and ticket agents, said Joseph Tiberi, a spokesman for the International Association of Machinists and Aerospace Workers.

Lee Moak, head of Delta’s pilots union, said Delta hopes cooler heads will prevail.

"It takes two to fight," Moak told The Associated Press . "We don’t see a fight here. We see a cooperative relationship with the Northwest pilots to bring everybody to parity as soon as possible."

The announcement Monday includes some details that should help build political support. The airlines said they would close none of their hubs. (Northwest’s Memphis, Tenn., operation and Delta’s Cincinnati hub were thought to be vulnerable.) And they said they would try to limit job cuts. The two airlines employ more than 80,000 people.

"They’re facing a bit of a delicate balancing act there, because in order to build labor and political support for the deal they would not want to have any layoffs or close or shrink hubs," said Standard & Poor’s analyst Philip Baggaley. "On the other hand almost everyone agrees that one of the few ways that U.S. airlines can return to profitability would be to reduce the amount of capacity" in the U.S. market.

Minnesota Gov. Tim Pawlenty called a news conference late Monday to point out that Northwest could face financial penalties under its Minneapolis airport lease if it fails to keep a headquarters there, as it has done since the 1930s.

Eagan, Minn.-based Northwest could give up $215 million in rebates and discounts and be forced into early repayment of a $245 million bond.

"I would hope a few hundred million dollars, even to them, would give them pause," the Republican governor said, adding, "In my view, the documents are very clearly written."

The transaction calls for Northwest shareholders to get 1.25 Delta shares for each Northwest share. That values Northwest at almost $3.63 billion based on 277 million Northwest shares that the companies said are outstanding, although the final value will shift with the share prices until the day the deal closes.

Shareholders at both carriers must approve the deal.

The announcement comes a year after the two carriers emerged from Chapter 11 bankruptcy protection. Both are losing money again but are in much better shape than the four much-smaller airlines that have filed for bankruptcy or gone out of business in recent weeks. The joined Delta and Northwest would have combined annual revenue of $31.7 billion, vaulting it ahead of Fort Worth, Texas-based AMR Corp.’s American Airlines for the top spot in the U.S.

The combined carrier would be the biggest in the world in terms of traffic, before any capacity cuts and divestitures that might be required by antitrust regulators.

The agreement comes after several months of discussions between Delta and Northwest and at one time between Delta and Chicago-based UAL Corp.’s United Airlines. Analysts believe a Delta-Northwest combination will stand up better to regulatory scrutiny because the two carriers have less overlap.

Years of mounting losses forced Delta and Northwest to file for bankruptcy protection in New York on Sept. 14, 2005. Both emerged from bankruptcy as leaner carriers last spring, after shedding billions in costs.

Many analysts predicted an eventual Delta-Northwest tie-up after Anderson, a former Northwest CEO, was named last August to be the chief executive officer of Delta.

Anderson, who was Northwest’s CEO from 2001 to 2004, immediately sought to quiet those suggestions, telling Delta’s pilots union chairman the morning his appointment was announced that he believed in Delta’s standalone plan and that "he was not coming in as CEO to facilitate a merger with Northwest."

But eight months later, that’s what Anderson is doing, and many analysts believe he didn’t have a choice amid plummeting airline market values and soaring fuel prices.

Wall Street and some airline executives have pushed for consolidation for years, arguing that too many seats are chasing too few passengers. The resulting discounting has made it hard for airlines to cover their expenses.

However, Northwest and Delta overlap relatively little in the U.S. — which could actually help them gain antitrust approval. Delta’s routes are strongest in the eastern U.S. and to Latin America and Europe. Northwest would complement that with its near-lock in the Midwest along with flights to its Tokyo hub and other points in Asia.