Northwest and Delta Talk Merger?

MINNEAPOLIS - Northwest Airlines and Delta Air Lines have held preliminary merger discussions, and the formerly private talks are now part of the high-stakes public battle over the future of Delta and the U.S. airline industry.

The Northwest-Delta connection was first reported Wednesday afternoon, only hours after US Airways increased its hostile takeover offer for Delta by some 20 percent, to $10 billion. By upping the bid, US Airways CEO Doug Parker put Delta management on the defensive as he rejuvenated his quest to combine the two carriers into a new mega-airline.

The subsequent disclosure of the Delta-Northwest merger talks by The Wall Street Journal on its Web site struck many analysts as a deliberate attempt by Delta to shift the debate.

"It appears that the release of this information may be a means to undermine the US Airways bid," said Merrill Lynch analyst Michael Linenberg.

Darryl Jenkins, an aviation consultant based in Virginia, said he thinks that Delta management or its financial advisers spoke to the Journal about the conversations with Eagan-based Northwest in an attempt to tell Delta's creditors - who will ultimately decide which plan to back - that they could have more lucrative options than the US Airways offer.

It's not surprising that Delta and Northwest have engaged in some merger conversations, said analyst Helane Becker of the Benchmark Co., adding that she thinks that Delta also has talked to United and Continental.

However, the talks underscore the importance of the Delta-US Airways battle in determining the next steps for all the major U.S. airlines. If Delta can fight off the takeover, the status quo could remain. If the merger goes through, or Delta pairs up with another carrier in order to thwart US Airways, others could decide they have little choice but to get bigger, too.

Parker has "set the stage for industry consolidation," said Julius Maldutis, president of New York-based Aviation Dynamics.

That's especially true if Delta and Northwest combine, in the view of one analyst.

In a Wednesday report, Merrill Lynch's Linenberg argued that a combined Delta-US Airways "would not create a large enough network where the remaining players would feel compelled to merge." But a Northwest-Delta merger would be "big enough" that American, Continental, United and US Airways "might have no choice but to seriously consider" mergers, Linenberg wrote.

Northwest told its employees Wednesday that it would not comment on "rumors and speculation" about a merger with Delta, and that the carrier still plans to emerge from bankruptcy by June.

"Northwest is monitoring developments in the airline industry and is committed to acting in the best interest of all of its constituents," the airline said.

Northwest and Delta long have been considered merger candidates.

"The combination of Delta and Northwest is a strategically sound fit," said Ray Neidl, an airline analyst for Calyon Securities.

The airlines have complementary route systems, he said, with Northwest's hubs in the Twin Cities, Detroit and Memphis and Asia-Pacific routes matched by Delta's hubs in Atlanta and New York and major presence in Latin America.

Northwest hired Evercore, a New York-based investment banking firm, last month to advise it on mergers and acquisitions. Executives of Northwest have declined interview requests to discuss their interest in combining with Delta or any other carrier.

American Airlines and Continental Airlines, both based in Texas, have also been discussed as potential partners for Northwest.

Delta's management has been fighting the US Airways bid from the moment it was revealed in mid-November. The new, enriched offer made Wednesday will expire Feb. 1.

Northwest and Delta entered bankruptcy on the same day - Sept. 14, 2005 - and the fact that they are both in Chapter 11 would make the structuring of a merger between the two complicated, though it's possible that Northwest could emerge first from bankruptcy and then acquire Delta before it leaves court protection.

Northwest spokesman Bill Mellon said Wednesday that Northwest will file a plan of reorganization with the U.S. Bankruptcy Court in New York by Tuesday.

Becker, the Benchmark analyst, predicted that Northwest's court filing "will be a general plan with a lot of meat left out." Becker said the company will likely wait a while longer before releasing details about the "new Northwest."

Northwest has proved in recent weeks that it's not impossible for two bankrupt carriers to agree to a merger. It has been working to finalize a deal to acquire Mesaba Airlines, a regional carrier. However, that deal is far simpler than a combination with Delta would be, since Northwest is Mesaba's only customer and Mesaba's creditors can be paid in full by Northwest.

Opportunities to consolidate and prevent a repeat of the 2001-2005 experience - when the U.S. airline industry lost a combined $35 billion - are likely to remain paramount in the minds of airline executives. Many big carriers want to shrink the number of seats on the market - especially on domestic routes where they compete with low-fare airlines - so they can keep boosting fares and profitability.

Industry insiders view Northwest CEO Doug Steenland, CFO Neal Cohen and board chairman Gary Wilson as determined to shape their own destiny. They expect Northwest to initiate a merger, rather than wait to be courted.

"One way or another Delta is going to have a dance partner," Jenkins said, but it's still too early to tell whether it will be US Airways, Northwest or someone else.

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(c) 2007, Star Tribune



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