Why US Air Shunned Northwest for Delta

Route overlap and Doug Parker's future are just part of the reason Northwest wasn't the target.
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A merger between US Airways (LCC) and Delta Air Lines (DALRQ) would seem to cry out for regulatory review, while a deal for another bankrupt carrier, Northwest (NWACQ) , probably wouldn't attract nearly the same scrutiny.

Nevertheless, US Airways seems to be telling the world that it's not afraid to face a challenge. Last week the Arizona-based airline said it wanted to take over Delta for $8 billion. Thus far, Delta hasn't been very welcoming of the overture.

Just what was it about Delta that made US Airways choose it rather than Northwest -- the carrier that in some ways is the more compatible of the two? The question of "why Delta and not Northwest" was the second thing asked on the Nov. 15 conference call when US Airways unveiled its plan to analysts. Doug Parker was prepared.

"This transaction, we think, is a unique opportunity to do some stuff that results in higher synergies than we would see in any other combination," said Parker, the chief executive of US Airways. "We have looked at a number of other possibilities and have come to the conclusion that this opportunity is the most compelling and the one that creates the most value for our shareholders."

Much of the $1.65 billion in synergies that US Airways expects from the Delta merger would, in essence, come from reducing duplicative capacity between two carriers with largely overlapping route systems. Provided, that is, that regulators don't mind.

In that respect, a merger between US Airways and Delta bears little resemblance to the 2005 merger between US Airways and America West Airlines, which Parker headed. That merger created what became the industry's leading performer in terms of revenue gains. Because it joined two networks with little overlap, it was quickly approved by the Justice Department.

"If

America West was going to do that deal again, they would acquire Northwest," said an industry executive who asked not to be named. "The two mergers are two different animals."

The Delta deal is attractive for US Airways precisely because it provides a chance to eliminate duplicated service, but it presents obstacles never even contemplated in the first merger. "US Airways-Delta has overlap," said consultant Mike Boyd. "You cannot with a straight face tell the world that it will not limit competition."

As a result, "there is going to be a very extensive and lengthy antitrust review," said Mark Schechter, an antitrust attorney with Howrey LLP in Washington and a veteran of 18 years in the DOJ's antitrust division. The antitrust division "is very demanding," Schechter added. "I'm not sure that Delta and US Airways will be able to make arguments that will be sufficient to overcome DOJ concerns."

Delta and US Airways have significant overlap in the Southeast, where they operate competing hubs in Charlotte and Atlanta, and in the Northeast, where they have competing hubs in New York and Philadelphia. Both also run Northeast shuttles, but Parker said one of shuttles would be divested. Northwest, by contrast, operates hubs in the central U.S. and across the Pacific.

But the risk of regulatory rejection no doubt pales in comparison to the appeal of potentially creating the world's largest airline. And several additional factors also appear to make Delta more attractive to US Airways than Northwest would be.

One is probably particularly satisfying. Adding Delta's hub at New York's Kennedy Airport means that US Airways won't have to rely mainly on Philadelphia as its primary trans-Atlantic hub. Last month, Parker said the airline was having problems convincing Philadelphia airport officials to provide more gate space for added international flights, an opportunity that most airports would embrace.

Perhaps ironically, Parker said that airport officials appeared to be "planning for a world without US Airways."

Not to suggest that US Airways would leave Philadelphia, but if the merger occurs it would not have to count on the City of Brotherly Love. "If I was Doug, I might do the deal just to

say 'we don't care about Philly,'" Boyd said.

Then, of course, there is the leadership issue. Parker has said he would be chief executive of the new company. That seems plausible at Delta, where CEO Gerald Grinstein has said he had plans to retire, much as Bruce Lakefield made clear that he would eagerly leave his post as US Airways CEO after succeeding in his effort to save the jobs of most of his company's employees.

"I am guessing that Parker looked over there and said 'those folks need me, and I bet I can convince the creditors of that,'" said Michael Levine, a former senior executive at Northwest, Continental and New York Air who is now a research scholar at the New York University School of Law. "I think that would be harder to do at Northwest."

Although both Northwest and Delta filed for bankruptcy on Sept. 15, 2005, Northwest is further along in its reorganization than Delta is. "They are 90% done," said Boyd. "They are just wrapping up the details."

Added Levine: "Delta is making progress, but is behind Northwest." Still, both carriers expect to emerge from bankruptcy in the first half of 2007.

Like Northwest, US Airways is heavily unionized. Of the four legacy airlines that have sought bankruptcy protection since 2001, Northwest has had the most difficulty in reaching contract agreements with its workers. It has signed contracts with pilots, agents and ramp workers, but endured a mechanics' strike and remains locked in battle with its flight attendants.

"Maybe US Airways is under the impression that Northwest has so much labor strife that they don't want to be part of it," said Ricky Thornton, spokesman for the Northwest chapter of the Association of Flight Attendants. Around Northwest, there has been plenty of speculation about a merger, Thornton said. "Everyone has surmised that it would be Delta and Northwest," he said.