Delta, Northwest Finally Reach Merger Deal

Updated from 8:20 a.m. EDT

Delta Air Lines(DAL) and Northwest Airlines (NWA) plan to combine to create the world's largest airline, one with a strong presence in most of the world's major travel markets.

The long-awaited deal, announced late Monday, will require regulatory and shareholder approval, and would produce a company with annual revenue exceeding $35 billion. It would be called Delta and have its world headquarters in Atlanta. The carrier's top three executives and the majority of its board would come from the existing Delta.

Northwest shareholders will receive 1.25 Delta shares for each Northwest share they own, representing a premium of 16.8% based on Monday's closing price. That values Northwest shares at $3.6 billion.

Delta-Northwest: Happily Ever After?

The new Delta would serve almost 400 destinations in 67 countries, employ approximately 75,000 people, and operate a fleet of nearly 800 aircraft.

Recently, shares of Delta were up 6% at $11.10 in premarket trading, and Northwest was gaining 10.5% to $12.40. Other airline stocks were up, as well. (For info on staying aloft amid the airline industry's turbulence, read this story.)

The new carrier's primary assets would include the world's biggest hub in Atlanta, a hub in Tokyo and strong positions in New York, the Midwest and across the Atlantic. It would be the No. 1 U.S. airline to Japan, Africa, the Middle East and India, first across the Atlantic, and the second-largest in Asia and in Latin America.

Additionally, partnerships with Air France KLM (AKH) would provide access to hubs in Paris and Amsterdam, and the two carriers' joint membership in the Skyteam alliance would smooth the transition on international routes.

"In the past, we have said that we were not interested in doing a deal for the sake of doing a deal," said Delta CEO Richard Anderson, in a letter to employees. "Our need to respond to the pressures of dramatically rising fuel costs and a softening U.S. economy drove us to take a closer look at all options to strengthen our future."

He continued by saying that "consolidation in the airline industry is inevitable, and we want to control our future. Combining our companies creates an airline with the size, scale and global presence to weather economic downturns and compete long-term in the global marketplace."

The carriers said no hubs will close. The future of the Northwest hub in Memphis had been considered a question mark. Hubs in Cincinnati, Detroit, Minneapolis and Salt Lake City will also remain. Additionally, Delta said it is "committed to retaining significant jobs, operations and facilities in Minnesota."

Thought to be near completion early this year, the arrangement was delayed as the carriers sought pilot approval before moving forward. They were only partly successful. Delta pilots reached a tentative agreement on a post-merger contract that includes a 3.5% stake in the company and a seat on the board. If ratified, it would extend through 2012.

But Northwest pilots, who fear their seniority may diminish in an integration with Delta pilots, appear likely to become opponents. "The risk to Northwest Airlines and to the Northwest pilot group from letting this merger proceed, as it is now structured, is simply too great," said Dave Stevens, chairman of the Northwest chapter of the Air Line Pilots Association, in a prepared statement.

They would not be alone. Other powerful opponents are Rep. James Oberstar, (D., Minn.), chairman of the House Transportation Committee, and the International Association of Machinists, the largest airline union, which represents about 11,000 agents and ground service workers at Northwest.

In a conference call with reporters, Anderson said the Northwest pilot contract "is already set up to allow us to capture revenue synergies by being able to code-share."

But, he said, "our real goal is to conclude negotiations with [Northwest] pilots to bring them under [a] seniority agreement and to resolve the seniority list. You want to have a combined pilot workforce all pulling together to make the airline successful."