Delta, Northwest face challenge of merging fleets, employees

By: AP
By: AP

Delta and Northwest executives want to smoothly complete their deal to create the world's largest airline by the end of the year. But investors reacted negatively Tuesday, amid word there are no plans for further domestic flight cuts as well as the challenges of integrating companies with contrasting cultures, planes and labor relations.

The two airlines have very different relationships between management and workers, which was reflected as soon as Delta's acquisition of Northwest was announced Monday. Delta pilots support it. Northwest pilots oppose it. Fifteen minutes after the announcement, the union representing many Northwest ground workers pledged to fight it.

Northwest is heavily unionized, while Delta's pilots are the only major work group at Delta to be part of a union. Delta flight attendants begin voting April 23 whether to join a union.

"Sometimes, they're a little overly optimistic," industry expert Terry Trippler said of the airlines' executives.

Airline consultant Darryl Jenkins acknowledged that there will be challenges, but he believes the deal will go through.

"For all practical purposes, this deal is done," Jenkins said. "The things that would derail this deal are all regulatory, and I think this is one of the easier deals to sign off on that I've ever seen."

The unions can't kill the deal, but they can put pressure on other groups that have a say - like shareholders and regulators - to stop it.

Investors already appeared nervous, punishing the stocks of both airlines Tuesday and shaving $400 million off the value to Northwest shareholders if the agreement to be acquired by Delta were to close now. Oil prices hit yet another record Tuesday, nearing $114 a barrel, and investors were disappointed that the deal may not yield as much in cost savings or higher revenue as Wall Street expected.

The carriers said they have no current plans to cut more U.S. flights beyond what they have disclosed separately - something analysts see as limiting the cost savings or higher fares the airlines could reap from the deal. Delta and Northwest also don't plan to close any of their hubs. They didn't rule out further capacity cuts in the future if fuel prices continue to rise.

Executives said they are confident they will be able to consummate the deal and integrate the two carriers.

"Bottom line is, we think it's a really good fit," Delta Chief Executive Richard Anderson, who will head the combined airline, said Tuesday.

Delta and Northwest executives said they would like to close the deal by the end of this year, which would be before the end of the merger-friendly Bush administration. They are trying to avoid repeating what happened in 2001, when an attempted merger of United Airlines and US Airways fell apart amid antitrust concerns.

Several lawmakers have already railed against a Northwest-Delta combination, arguing that the deal will decrease competition and lead to higher fares. But Congress has little power to stop a transaction, and most experts believe the Justice Department will approve it.

As for union support, the airlines tried something novel: They attempted to get pilots to agree on a joint contract and seniority beforehand. That failed over seniority disputes.

Delta made a deal with its pilots over the weekend, leaving the Northwest pilots to work something out later. On Monday, Northwest pilots declared their opposition to the combination "as it stands," perhaps leaving room for a deal later.

The Delta pilot agreement, which still needs rank-and-file ratification, extends the current contract through 2012 and gives Delta pilots 3.5 percent of the new company.

Pilots at Northwest said the new airline won't be able to shift planes onto new routes without changing their contract - and until they do, the combined airline can't be profitable.

Northwest CEO Doug Steenland acknowledged that it'll take a combined pilot contract to make the new airline most efficient.

It's "not black-and-white, but to get to the full benefit of it, you would like to have a combined contract and a merged seniority list," he said.

Anderson has promised to protect worker seniority. Northwest's Steenland said a deal must protect worker interests but never made specific promises.

Still, the companies have been trying not to antagonize Northwest pilots. Ed Bastian, Delta's chief financial officer, said the lack of a deal was "notwithstanding everybody's best efforts," and said they'd aim for a combined pilot agreement, including resolving the seniority question, before the deal closes.

That would still be a big advancement over other airline mergers where the contract is worked out afterward, often acrimoniously.

Delta hasn't had a labor strike since 1947, according to the National Mediation Board, the federal agency that handles airline labor disputes. Northwest mechanics struck in 2005, however, and its pilots in 1998.

In 1982, Delta workers contributed $30 million of their own money to buy that airline's first Boeing 767, named "The Spirit of Delta." That same year, machinists at Northwest struck for 35 days.

Combined, the airline will have more than 1,400 planes, including regional jets. It includes 12 mainline jet types - something airlines have often seen as a disadvantage since each kind of plane requires unique maintenance and crew training. Southwest, for instance, flies only the 737.

Delta and Northwest executives said the fleet was a benefit, since it will give them a range of planes to match specifically with routes. Northwest also has some bigger planes than Delta, and can patch a hole in the midsize range.

Richard Aboulafia, an aerospace consultant at the Teal Group, doesn't buy the executives' argument on fleet diversity.

"If that's a factual statement, why is every single carrier moving in the opposite direction?" Aboulafia said.

The share-swap agreement announced Monday calls for the combined airline to be named Delta, remain based in Atlanta, and be run by Anderson. If the deal goes through, Delta shareholders will get a bigger company, while Northwest shareholders would get a 16.8 percent premium over Monday's closing stock prices.

Based on those prices, the agreement valued Northwest at more than $3.6 billion. However, shares of both companies fell Tuesday, reducing the deal's value of Northwest to $3.2 billion. Northwest Airlines Corp. shares fell 94 cents, or 8.4 percent, to $10.28, while Delta Air Lines Inc. lost $1.32, or 12.6 percent, to $9.16.

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