Delta, Northwest Agree to Combine

ATLANTA — Delta Air Lines Inc. and Northwest Airlines Corp., squeezed by record high fuel prices and a slowing economy, are combining in a stock-swap deal that would create the world's biggest carrier. The boards of both companies gave the deal the go-ahead Monday.

The announcement could spur other airline combinations. The most likely scenario that has been talked about is a potential deal between United and Continental airlines.

Under the terms of the Delta transaction, Northwest shareholders will receive 1.25 Delta shares for each Northwest share they own. The exchange ratio represents a premium to Northwest shareholders of 16.8 percent based on Monday's closing stock prices.

That currently values Northwest at almost $3.63 billion based on 277 million Northwest shares that the companies said are outstanding.

Delta said the combined airline, which will be called Delta, will have an enterprise value of $17.7 billion, which includes the combined market values of the two companies and combined net debt. It will be based in Atlanta, and Delta CEO Richard Anderson will head the combined company.

Delta Chairman Daniel Carp will become chairman of the new board of directors and Northwest Chairman Roy Bostock will become vice chairman. Delta President and Chief Financial Officer Ed Bastian will retain his titles.

The new board will be made up of 13 members, seven of whom will come from Delta's board, including Anderson, and five of whom will come from Northwest's board, including Bostock and Doug Steenland, the current Northwest CEO. One director will come from the Air Line Pilots Association, the union that represents pilots from both carriers. Anderson told reporters on a conference call it will be a Delta pilot holding the voting seat.

"We are confident the transaction will go forward and be approved," Steenland said.

There will be an unspecified number of job cuts or transfers through the consolidation of overlapping corporate and administrative functions, Delta said. The two airlines employ more than 80,000 people combined. The company expects no involuntary furloughs of front-line employees and said the existing pension plans for both companies' employees will be protected.

Delta doesn't plan to close any of the two airlines' hubs.

Delta also said that it has agreed with its pilot leadership to extend its existing collective bargaining agreement through the end of 2012. The agreement, which is subject to pilot ratification, will allow the combined company to realize the revenue synergies of the transaction, Delta said. It also provides the Delta pilots a 3.5 percent equity stake in the new company and other enhancements to their current contract.

The agreement does not cover Northwest pilots.

Delta said it will use its best efforts to reach a combined Delta-Northwest pilot agreement, including resolution of pilot seniority integration, prior to the closing of the merger.

U.S.-based non-pilot employees of both companies will get a 4 percent equity stake in the new airline when the deal closes, Delta said.

Northwest pilots and the union representing most of Northwest's ground workers immediately announced they would fight the combination.

Dave Stevens, chairman of the Northwest branch of the Air Line Pilots Association, said in a prepared statement, "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."

Northwest didn't consult with the union that represents its baggage handlers, ramp workers and ticket agents, said Joseph Tiberi, a spokesman for the International Association of Machinists and Aerospace Workers.

"If the airline wanted the support of their employees they should have brought us in and discussed it with us earlier," he said.

Lee Moak, head of Delta's pilots union, said Delta hopes cooler heads will prevail.

"It takes two to fight," Moak told The Associated Press. "We don't see a fight here. We see a cooperative relationship with the Northwest pilots to bring everybody to parity as soon as possible."

The two pilots unions were unable to agree on integrating seniority lists before the combination was announced. A joint contract they had reached was never consummated.

The announcement comes a year after the two carriers emerged from Chapter 11 bankruptcy protection. Both carriers are losing money again but are in much better shape than the four much-smaller airlines that have filed for bankruptcy or gone out of business in recent weeks.

The deal will need antitrust approval, and integrating the work forces of fully unionized Northwest and Delta, where pilots are currently the only major unionized work group, will be tricky.

The joining of Atlanta-based Delta and Eagan, Minn.-based Northwest, if approved by regulators and shareholders of both companies, will result in combined annual revenue of $31.7 billion, vaulting it ahead of Fort Worth, Texas-based AMR Corp.'s American Airlines for the top spot in the U.S.

It would be the biggest carrier in the world in terms of traffic, before any further domestic capacity cuts and any divestitures that might be required by antitrust regulators.

The agreement comes after several months of merger discussions between Delta and Northwest and at one time between Delta and Chicago-based UAL Corp.'s United Airlines. Analysts believe a Delta-Northwest combination will stand up better to regulatory scrutiny because the two carriers have less overlap, even though a Delta-United combination could create more scale and have greater synergies.

Years of mounting losses forced Delta and Northwest to file for bankruptcy protection in New York on Sept. 14, 2005. Both emerged from bankruptcy as leaner carriers last spring, after shedding billions in costs during their reorganizations.

While in bankruptcy, Delta fended off a hostile takeover bid by Tempe, Ariz.-based US Airways Group Inc.

Delta said its plan to remain on its own would create more value than US Airways' $9.8 billion bid, which Delta argued would not pass regulatory hurdles. The value argument never materialized, as Delta's post-emergence market capitalization started out $1 billion less than US Airways' bid and less than the $9.4 billion to $12 billion Delta projected. Its market value has fallen precipitously in the months since amid airline industry woes, including high fuel prices and a general inability to gain traction raising ticket prices.

Many analysts predicted an eventual Delta-Northwest merger after Anderson, a former Northwest CEO, was named last August to be the chief executive officer of Delta.

Anderson, who was Northwest's CEO from 2001 to 2004, immediately sought to quiet those suggestions, telling Delta's pilots union chairman the morning his appointment was announced that he believed in Delta's standalone plan and that "he was not coming in as CEO to facilitate a merger with Northwest."

But eight months later, that's what Anderson is doing, and many analysts believe he didn't have a choice amid plummeting airline market values and soaring fuel prices.

Wall Street and some airline executives have pushed for consolidation for years, arguing that too many seats are chasing too few passengers. The resulting discounting has made it hard for airlines to cover their expenses.

However, Northwest and Delta overlap relatively little in the U.S. _ which could actually help them gain antitrust approval. Delta's routes are strongest in the eastern U.S. and to Latin America and Europe. Northwest would complement that with its near-lock in the Midwest along with flights to its Tokyo hub and other points in Asia.

Northwest's Asian routes have been one of its main appeals to other carriers. It and United are the only two U.S. carriers with the rights to pick up new passengers in Japan and fly them farther into Asia. Delta and Northwest also complement each other internationally because they are both part of a marketing alliance that includes Air France-KLM.

Air France-KLM had said previously it would consider making an investment in the combined company, but that did not play out. Delta said Air France-KLM supports the deal because it would solidify the joint venture involving Delta, Northwest and Air France-KLM.

U.S. airlines get the majority of their revenue from domestic service, though that trend has shifted in recent years as more carriers, particularly Delta and Northwest, have sought to increase international service.

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AP Business Writer Joshua Freed in Minneapolis contributed to this report.

Comments

[ramal]

After a 45 minute wait in the "cattle pens" at the Atlanta Airport last week, I boarded a Delta flight with no beverage service, a malfunctioning air conditioning system and every seat sold. Flying was once enjoyable, now it is hell. This merger will truly create a "Greyhound of the Skies" at premium prices for those foolish or unlucky enough to purchase the wildly overpriced tickets. I'll stay home, thank you.

[greencrazed]

Wildly overpriced tickets??? Hardly. The airlines rarely turn a profit. It costs them loads of money to fly that airplane. Don't kid yourself. With the Walmartization of America people now expect to get something for below cost. Airplanes must be maintained and flown by qualified individuals. Aviation fuel now costs well over $4/gallon, not to mention the aviation industry is the most heavily taxed industry in America. Hardcore competition has driven nearly all the airlines to the brink of bankruptcy. If airlines actually charged you what it cost to fly the airplane, you would be paying significantly more.

[Honza]

Was I dreaming when I acidently cliked on Fox News Dish network, yesterday Monday, and there was a commentator going on and on about the Billion Barrel find in one of the Dakotas, and under a lake? More oil than in Saudia Arabia? As of today theres not a word on the news, about it only about flying, the Pope,and Bush lollygagging in the White House. So it salvation at last if this is true, now cut the price of a gallon aof gas for our working people, and lower the price of food for the poor and elderly.

[wedgie]

Oh good. Something big and obsolete. Maybe we can bail it out in a few years.

**

[DIERIGJ]

Try living in Cincinnati with Delta...........HIGHEST FARES ANYWHERE!!!!!!!!!! This is going to be a monoply that the government better stop sooner than later!

[cBc]

What we need in this country , as consumers, is for the US to allow foreign airlines to compete in our marketplace. May the cheapest, safest, most efficiently run airline win.

[greencrazed]

Under no circumstances should we allow this. Outsourcing our airlines would be a national security disaster, similar to selling our ports to Dubai Ports World. Outsourcing our domestic flying to China and India would be paved with the blood of hundreds of thousands of American workers. Would these workers have green cards? Security clearances? The idea is ludicrous.

[AdultFilmLegend]

I sure they'll find synergy and be able to make the service suck more than double.

[xcrunner77]

Northwest is one of the worst airlines -- always late, always having mechnical issues. Whenever I saw a crowd of people stacked up in front of a gate waiting to board a late plane I could be sure it was from Northwest.

I gave up on Northwest 10 years ago, and have not considered them since, no matter how low the price. Now that they are merging, I have to avoid Delta too. It's too bad NW will infect Delta with its awfulness.

If you want a GREAT airline at the same or lower price, try Virgin America. They don't fly to a lot of places yet, but for the long east coast-west coast flights they are the best. Their prices are competitive, their planes are new, the people who work there are great --- the whole experience is top notch, even if you fly coach.

[Driver125]

Total shame. Delta used to be a first-rate airline in the 1980's. On time, clean and efficient--usually a pleasure to fly on, even if you did have to go to Atlanta all the time. Northworst might have been good at one time--I leave it to others with more experience with them to say. All I know is that two years ago I had my worst airline flight EVER with them. What this merger might achieve is pretty questionable, in my opinion.

[falco]

The monopoly on the airlines begins...want to go somewhere special, better do it soon. Once they all merge they will triple the price and only special people will fly. Just one more control mechanism for the NWO gang.

[WIpatriot]

And wouldn't you know it, falco, they'd be too big too fail.

[leftbehind2000]

The worst flying experience I ever had was with Northwest Airlines coming out of Minneapolis several years ago.

My second worst experience was with Delta coming back from Atlanta.

Both were bad situations, made worse by surly flight attendants, flight delays, and overbookings at my connecting airports that caused me to be stranded far from home for several hours. Out of the hundred times I've flown, these two incidents stand out as by far the worst.

So it looks from my vantage point like this merger is an excellent fit.

[PatCroft]

You could not pay me to board their planes. Flying at one time used to be fun but it is not anymore nor will it ever be in the far future predictably, because this is an industry that relishes the abuse of their clientele, from the minute you have to slip off your shoes and submit to a search to the possibility of sitting on a tar mac for hours and then to have to track down your luggage in some far off terminal. My quality travel time is important to me but not to these people. I hope they all go under! And while I am at it stop their government subsidies.

[londubh]

They did not form the world's largest airline. They formed the world's largest worst airline. Both Delta and Northwest suck.

[peachyfuture]

Just great, higher airfare prices for people flying out of Atlanta. Delta's prices are already ridicules. I guess I'll be traveling on Spirit and AirTran way more often.