The Deal: Delta Drops as Airline Exits Memphis Hub

NEW YORK ( TheDeal) -- Delta Air Lines ( DAL) is unraveling the Memphis hub it acquired as part of its 2008 deal for Northwest Airlines Corp., going back on pledges made at the time of the deal and adding fodder to those who oppose further airline consolidation.

Executives at Atlanta-based Delta said in 2008 that the $3.6 billion deal for Northwest would not result in any hub closures, and initially maintained a Memphis schedule of as many as 240 daily flights. But the company in a memo to employees said that high fuel prices and weak demand, coupled with Memphis' close proximity to Delta's massive Atlanta operation, has made a hub there unsustainable.

Delta shares were falling for the fourth day in five, dropping 2.7% to $17.08. Delta has gain 44% in 2013 compared to a 12% advance for the S&P 500.

The airline said that it will offer only 60 flights from Memphis by September, and as part of the move will offer about 230 Memphis-based workers early retirement or relocation to other stations.

Delta sources said that the move is tied to the airline's reduced use of smaller, less fuel-efficient 50-seat regional jets, saying that the Memphis operation is too small to justify replacing those small planes with larger ones.

The decision prompted a rebuke from Rep. Steve Cohen, a Tennessee Democrat who has been a vocal critic of Delta's deal for Northwest and other airline mergers. Cohen in a statement said that he was "extremely disappointed and disheartened" with Delta's move, noting that he has already approached the U.S. Department of Justice to discuss whether Delta has violated promises the airline made when seeking deal approval.

"This decision by Delta puts the flying public at a disadvantage," Cohen said. "I am also concerned for the employees who will lose their jobs and the concessionaires who will suffer from decreased sales and possible closure."

Though regulators are highly unlikely to step in, Delta's move could create headaches for executives at merger partners AMR Corp. and US Airways Group Inc. Tempe, Ariz.-based US Airways in February announced plans to combine with AMR, parent of American Airlines Inc., with the deal now pending regulatory and other approvals.

Cohen was one of a number of lawmakers to speak out about the AMR-US Airways deal at a U.S. House of Representative hearing in February. And although the deal does not need congressional approval, lawmakers could use reports of hub closures stemming from past consolidation to pressure the Justice Department into taking a hard line when reviewing this latest merger.

In the Senate, Antitrust Subcommittee Chairwoman Amy Klobuchar, D-Minn., has asked the DOJ to analyze the AMR-US Airways deal in part by putting the mergers between Delta and Northwest as well as UAL Corp. and Continental Airlines Inc. in context, examining how those mergers affected prices, fees and airline service.

But while Delta's action might increase the scrutiny on AMR and US Airways, it has done little to change the conventional wisdom that the deal will eventually win approval.

"It is still a matter of when the deal goes through, not if," one transportation source said. "The Delta headlines help make the argument against consolidation, but it does not change the outcome of the debate."

Written by Lou Whiteman in New York