Delta and Northwest Merge

123jump.com Staff
15 Apr, 2008
New York City

Delta and Northwest agreed to merge after months of discussions that almost floundered on opposition from pilots and other unions at Northwest. The merger of two airlines with few routes overlapping is likely to pass regulatory approval as industry consolidates in the face of rising oil prices and weak pricing power. The merged airlines will operate as Delta have global headquarter in Atlanta and current Delta executives will dominate the board and executive positions after the merger.

[R]9:30AM New York – Northwest and Delta agree to merge despite pilot and machinists unions.[/R]

Delta Air Lines Inc. and Northwest Airlines Corp, after months of tortuous negotiations agreed to merge despite resistance from unions of pilots and baggage handlers at Northwest.

The two carriers with combined market cap of $17.7 billion will operate under Delta name, retain its global headquarters in Atlanta and proposed a board with a majority of Delta representative. The merger is essentially a purchase of Northwest at $3.6 billion.

Northwest shareholders will receive 1.25 Delta shares in exchange of each Northwest share which is 17% premium from closing price of Northwest stock on April 14.

The transaction is expected to generate cost savings and revenue gains totaling $1 billion and the combined company expects to incur one-time costs not to exceed $1 billion and will have liquidity of $7 billion.

Delta chief executive Richard Anderson will become the chief at the merged company, Delta chairman Daniel Carp will the chairman and Northwest chairman Roy Bostock will become the vice chairman after the merger. The board of the Delta after the merger will have 13 members, seven appointed by Delta, five from Northwest and one representing the Airline Pilots Association. Chief executive of Northwest Doug Steenland will be one of the five board members representing Northwest Airlines. Ed Bastian, the current Delta chief financial officer will be president and chief financial officer after the merger.

Since 2001, U.S. airlines industry has lost more than 150,000 jobs and $29 billion. The merger between two airlines with very little route overlap is likely to have a better chance at sustained profitability. The industry still operates under difficult conditions and record high crude oil prices and the U.S. economic slowdown have forced four smaller carriers this year to file for bankruptcy protection.

Not everyone is happy with the proposed merger. Northwest Airlines Pilot Union with nearly 5,000 members has expressed its desire to block the merger till seniority and job securities issues are resolved. Delta, at least for now, is enjoying a better relationship with its pilot union, was looking for a merger and a deal with the pilots at Northwest. However, two pilot unions failed to reach a compromise.

The merged airline Delta will have revenue of $35 billion and employ 75,000 people and operate 800 aircrafts, fly to more than 390 destinations. At least for now Delta says that it will retain most of the employees at Northwest headquarters in Minneapolis but that can change after the regulatory approvals and if oil prices remain at elevated levels.

A long drawn out battle between the merged airlines, if regulatory approvals are received in the next six to eight months and pilots union is expected. Machinists union at Northwest is also not happy with the terms of the deal. The union representing baggage handlers and grounds staff has also voiced its displeasure at the deal.

Industry consolidation is expected to accelerate now that Delta and Northwest merger has been agreed. The merger also releases ‘golden share’ held by Northwest that prevents Continental Air from seeking other merger partners. Industry analysts expect United Airlines and Continental to accelerate their merger plans now that Delta has picked its partner.

Northwest ((NWA)) stock fell 28 cents to $10.94 and Delta ((DAL)) stock declined 88 cents to $9.60.