Following months of speculation and reported false starts, Delta Air Lines and Northwest Airlines last night proposed joining up to create the world's largest airline. The all-stock deal, valued at $17.7 billion, requires shareholder and regulatory approval, which the carriers expect to be completed within six to eight months.
The merged airline will maintain the Delta name, be headquartered in Atlanta and be helmed by former Northwest CEO and current Delta CEO Richard Anderson, with Delta's Ed Bastian maintaining his role as president and CFO.
"Until the transaction receives required approvals, there will be no changes to either airline's flight schedule, frequent flyer program, customer service, or corporate structure as a result of the transaction," the carriers said in a statement.
The industry has awaited a merger between the two carriers for months, with analysts and shareholders claiming a Delta-Northwest agreement would prompt other major domestic carriers to follow suit. "We believe if Delta and Northwest get together United and Continental will follow shortly thereafter," UBS analyst Kevin Crissey said in a research note last week, prior to the announcement. Crissey said Continental and United would have to announce a deal within three weeks of a Delta-Northwest filing for simultaneous review from the U.S. Department of Justice.
As the industry expects air travel demand to soften and fuel expenses to continue a staggering trajectory, mergers were viewed as a way to rationalize capacity, gain cost synergies and stay afloat in the bust cycle. Delta and Northwest contend a merger "is the most effective way to offset higher fuel prices and improve efficiencies, increase international presence and fund long-term investment in the business."
Though Wall Street had salivated at such a deal to improve industry fundamentals, last week Crissey said, "Consolidation, if announced and approved, is a 2009 event and won't help earnings this year."
The ongoing merger buzz this year also led some corporate travel buyers to brace themselves for capacity reductions, accelerated fare growth and further degradation of service
(BTNonline, Jan. 22).
Though Delta and Northwest are hoping for approval this year, it's likely longer before corporate travel buyers feel a direct impact, said Mitch Cwanger, American Express Advisory Services senior practice leader for air. "It's sort of too soon to know for sure what's going to happen," Cwanger said. "There aren't going to be any changes until the DOJ approves and until the unions, particularly Northwest's, buy into it. They're going to want something in return. From a buyer standpoint, there's not a whole lot they can do right now. Any change that will happen to corporate agreements is at least 12 months away."
A National Business Travel Association survey, conducted prior to last night's announcement and released today, showed only 22 percent of 207 U.S. travel buyers respondents viewed consolidation as "a positive development for the business travel community." Regarding a Delta-Northwest paring, 54 percent of the respondents said customer service would decline and only 6 percent said it would improve. Forty percent expected the deal to deteriorate account management for corporations, with only 10 percent expecting it to improve. However, 53 percent of the buyers said a Delta-Northwest merger would bolster access to international routes and 46 percent agreed the deal would make for a more financially stable carrier.
"Travel buyers know that airline consolidation, such as the Delta-Northwest merger, can create more financially stable airlines with stronger networks, but they are concerned about the prospects of declining customer service and changes in their travel management relationships with new, merged airlines," NBTA president and CEO Kevin Maguire said in a statement today.
Northwest on its Web site said the combined entity would "maintain its agreements with valued corporate partners of both airlines" after the merger is approved, while honoring "existing sales agreements, including fares, commissions and terms and conditions as established with our travel agencies and other major customers."
Delta's Anderson in a statement called the carriers "a perfect fit," while Northwest CEO Doug Steenland said the deal will suit the merged entity for overcoming "the industry's boom-and-bust cycles."
Delta and Northwest describe their networks as "complementary," with Delta's strongholds in the South, Mountain West, Northeast, Europe and Latin America, and Northwest's positions in the Midwest, Canada and Asia. The carriers said the combination is "pro-competitive" with "direct competitive service on only 12 of more than 1,000 nonstop city pair routes currently flown by both airlines." A merged entity would bring together a mainline fleet of 800 aircraft that serve 390 destinations in 67 countries. Delta and Northwest combined would have $35 billion in aggregate annual revenues, the carriers said.
The carriers in a joint statement said they do not intend to close hubs, maintaining Delta's in Atlanta, Cincinnati, New York-JFK and Salt Lake City, and Northwest's in Detroit, Memphis, Minneapolis/St. Paul, Amsterdam and Tokyo-Narita. "The lack of detail regarding capacity cuts is to be expected since DAL/NWA still need regulatory approval," Crissey said in a research note today. "We have little doubt that smaller hubs will be deemphasized."
The carriers, both members of SkyTeam, said a combined global footprint and further cooperation in the alliance would bolster presence in global business markets "with improved prospects for growing corporate business globally."
Delta and Northwest said their participation in SkyTeam should ease integration, as they already participate in a joint frequent flyer program, share airport lounges, and a common IT platform "which has already been partially integrated through the existing alliance between Delta and Northwest."
The carriers last week gained tentative Department of Transportation approval for a four-way transatlantic joint venture that would merge the long-held Northwest-KLM joint venture and the newly instituted Delta-Air France venture. Through the four-way venture, the carriers would jointly plan routes and share a common bottom line on transatlantic operations
(BTNonline, April 10). The carriers last night said a merger would accelerate four-way joint venture integration with Air France and KLM.
Though both carriers said they would not immediately eliminate any management positions, the deal's closing "will result in some job reductions or company-paid transfers" as the carriers deal with administrative overlap. "Involuntary reductions for management and administrative employees will be minimized by normal attrition," the carriers said. The carriers combined would employ a 75,000-person workforce.
Once formed, the new Delta expects to gain $1 billion in annual revenue and cost synergies "from more effective aircraft utilization, a more comprehensive and diversified route system and cost synergies from reduced overhead and improved operational efficiency." Meanwhile, the combined company expects to incur costs up to $1 billion to integrate the two carriers.
The carriers propose Northwest shareholders to gain 1.25 Delta shares for every Northwest share, representing a 16.8 percent premium on Monday's closing price. The 13-member board will comprise seven from Delta's board and five from Northwest's, including Northwest's Steenland and Northwest chairman Roy Bostock. One director will be a representative of the Air Line Pilots Association.
The Delta-Northwest agreement comes after widespread reports of difficulty in gaining Delta pilot support. Delta, however, this week reached a post-merger agreement with pilot leadership, though the deal requires ratification from the rank-and-file. "Delta 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," the carriers said in a statement.