Delta Aims for a Merger That Works

CHARLOTTE, N.C. -- Historically, airline mergers haven't been pretty, but Delta(DAL - Cramer's Take - Stockpickr) thinks it can beat the odds.

"Not all mergers are created equal," CEO Richard Anderson said Tuesday on a conference call with analysts, the morning after Delta and Northwest announced a plan to combine. "Those mergers since deregulation and even before involved carriers, one or the other of which were in distress," he said. "In this case, you have two carriers who just came off strong performances in 2007."

The deal comes 30 years after the deregulation of the airline industry, which in 1978 was made up entirely of regional carriers that subsequently engaged in a series of mergers intended to expand their reach.

"This really is the first time that we have a carrier in the United States that has a complete route network," Anderson said. "When you think about what deregulation did, this is really the culmination of that."

Most airline deals have led to negative results such as intense cultural clashes (at US Air and Piedmont); harsh union battles (at America West and US Airways(LCC - Cramer's Take - Stockpickr)); and minimal financial benefit (at TWA and American.)

Besides combining two strong carriers, made so by massive cost-cutting that both achieved in bankruptcy, the Delta and Northwest deal is unique. That's because Delta, thanks to an unusually positive relationship with its pilots, sought to gain pilot approval before signing a transaction. That effort led to a tentative contract agreement with Delta pilots, but failed to gain support from Northwest pilots. Still, Delta says it went where no airline merger effort has gone before.

"Think of all the all mergers in the past," said Northwest CEO Doug Steenland, who will join the new carrier's board of directors. "If we had followed that traditional approach, there would have been no discussions. Substantial progress was made on both fronts, [although] the finish line wasn't crossed."

If there can be an agreement with the Northwest pilots before the merger closes, "that will be a milestone that no other airline merger has come close to accomplishing," Steenland said.

Still another strength of the transaction is that Delta and Northwest are already closely allied by a domestic code-share pact and the international Skyteam alliance. "We are well ahead of the game by having this merger take place within an existing alliance relationship," Steenland said.

Nevertheless, the merger effort will face challenges from several outspoken opponents. While none have the ability to stop a deal, their collective efforts could shape opinion and cause delays.

Northwest pilots have said they will oppose the deal as it is now structured. The International Association of Machinists, the largest airline union, is against it. And some Democratic congressmen promise firm resistance.

The combination "will be probably the worst development in aviation history in the aftermath of deregulation in 1978," said Rep. James Oberstar, D.-Minn., and chairman of the House Transportation Committee, at a news conference Tuesday.

"If this merger goes forward, other carriers will follow," he said. "Other airlines will not be able to withstand the power of the largest carrier in the world. And you'll have three global network carriers."

Should the Delta and Northwest proposal be completed, the new airline would replace American, a unit of AMR (AMR - Cramer's Take - Stockpickr), as the world's largest.

The result would be more hub concentration, higher fares, lost jobs and a diminished ability for low-fare carriers to compete, said Oberstar, who promised at least one hearing on the merger.

While Congress does oversee aviation mergers, Oberstar said the committee would "compile a record of factual information" of the negative impact of acquisitions and insist that the Justice Department review it.