Skip to main content

Delta Aims for a Merger That Works

Past airline deals haven't exactly been smooth transactions or produced models of efficiency.
  • Author:
  • Publish date:

CHARLOTTE, N.C. -- Historically, airline mergers haven't been pretty, but


(DAL) - Get Delta Air Lines Inc. Report

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


); 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.

Scroll to Continue

TheStreet Recommends

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) - Get Alpha Metallurgical Resources Inc. Report

, 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.

Most airline experts believer there is little reason for the regulators to disapprove the deal on antitrust grounds. Steenland noted that of 1,000 city pairs in the two carriers' combined networks, there is overlap on only 12, and "there is virtually no overlap between nonstops on overseas routes."

However, it is possible to envision that the merger could become a race against the clock, as Delta and Northwest seek to ensure that it is completed before the Bush administration leaves office, while opponents seek to postpone its closing. Additional mergers could complicate the picture.

The likelihood of additional mergers rose Tuesday, when


(CAL) - Get Caleres Inc. Report

declared that it will redeem the "golden share" held by Northwest. The share, which gave Northwest a veto on a merger involving Continental, became redeemable when Northwest itself entered into a consolidation agreement.

Speculation in recent months has been that if Delta and Northwest pursued a transaction, Continental and



United might be interested in joining forces.

Continental said it will also review whether to remain in Skyteam. "As Continental considers its strategic alternatives, we will do what we need to do to continue our success and to protect

our future," the carrier said.

Shares of Delta and Northwest started the session higher, but by the end of trading, both had fallen. Delta was down more than 12% to $9.16, and Northwest lost 8% to $10.28. UAL, AMR and Continental also retreated.