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Delta, Northwest Finally Reach Merger Deal

A long-awaited agreement between the two will create the world's largest carrier. It will require regulatory and shareholder approval, and would produce a company with annual revenue exceeding $35 billion.
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Updated from 8:20 a.m. EDT

Delta Air Lines

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Northwest Airlines


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?

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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,

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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

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Air France KLM


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."

Northwest CEO Doug Steenland declined to say whether there was a deadline to complete the deal, but he acknowledged it is important to allow time for a review by the outgoing Bush administration.

"We wanted to get it done so it could be reviewed in a timely way," he said. "If you waited much longer, you might get caught up in the switch in administrations, and it would take longer to get it reviewed."

The carriers said that they compete directly on just 12 of more than 1,000 city pair routes they fly, and they expect regulatory approval this year.

As for leadership, the new Delta will bear a strong resemblance to the old Delta. Anderson, President and CFO Ed Bastian and Chairman Daniel Carp will all retain their titles at the joined carrier. Northwest Chairman Roy Bostock will become vice chairman. The company's 13-member board will have seven members from Delta, five from Northwest and a pilot from the Delta chapter of ALPA.

The merger is expected to generate more than $1 billion in annual revenue and cost savings. One-time integration costs are pegged at $1 billion, and combined liquidity will be nearly $7 billion when the transaction closes.

Meanwhile, non-pilot employees will receive 4% of the equity in the new company. No involuntary furloughs are anticipated. "It is the goal of Delta to harmonize the pay and benefits of all of the workgroups over time," the company said. That would mean increasing pay and benefits for many Northwest employees, it said.

Additional industry consolidation may follow. In particular, Northwest's agreement to enter into a transaction enables


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to buy back a "golden share" that was granted in 2000. That had allowed Northwest to block any merger efforts by Continental, which has already talked with



, the owner of United, sources have said.

Currently, the world's biggest carrier is American Airlines, a unit of


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. If Delta and Northwest close their pact, and Continental and United also merge, it could slip to No. 3.

Although Delta and Northwest have been considered potential merger partners ever since both sought bankruptcy protection in September 2005, the path to their agreement has not been a direct one.

In the interim,

US Airways


tried and failed to acquire Delta. Subsequently, Delta emerged from bankruptcy in April 2007 with a reconstituted board more supportive of mergers. Northwest left from bankruptcy protection in May 2007.

While Wall Street, its analysts and hedge funds, along with a few airline executives, have strongly advocated consolidation, many in the airline industry remain unconvinced.

"Like any merger at this level, this one will be difficult to implement and pull off due to the disparate fleets, the union vs. non-union workforces, and probably some cultural issues as well," says consultant George Hamlin of Airline Capital Associates.

"But it will flush out the route systems, and if your object is to consolidate and find ways to flush out capacity, it's a step in that direction," Hamlin said. "And you've got to applaud Delta and Northwest for being willing to step up and get out in front of it."

The transaction will likely draw investor attention to the airline industry's efforts to reduce capacity, partially through consolidation, according to a report issued Tuesday by Avondale Partners analyst Bob McAdoo. "We expect shares of all six legacy airlines to outperform the market in coming weeks and months, as adjustments are made to existing networks to cope with record fuel prices," McAdoo said.