Dec. 14 -- The more airline merger proposals that pop up, the more likely Northwest Airlines is to jump in the game.
At least that's what industry experts think.
Two U.S. airline merger proposals are on the table and a third appears to be in the works, as AirTran Holdings said Wednesday it would continue to pursue a previously rebuffed deal with Midwest Air. More deals put more pressure on Northwest and other carriers to look at their options for a possible partner, analysts said.
Think of it as a puzzle, with airlines as the pieces trying to fit themselves together in an ever-changing picture of the industry.
Eagan-based Northwest, which is in bankruptcy reorganization, is keeping quiet. Company spokesman Roman Blahoski wouldn't say whether Northwest is talking with another carrier. Last week, the airline said it plans to hire investment bank Evercore Group to explore "broad strategic alternatives," including a merger or acquisition.
The merger pace has picked up since US Airways' $8.7 billion hostile bid for Delta Air Lines last month. United Airlines also is said to be in preliminary merger talks with Continental Airlines. In the race to cut costs, no one wants to be left behind.
Analysts see the industry as ripe for consolidation: Airlines must cut their operating overhead and reduce overcapacity to become more competitive global players. Analysts also say mergers would help improve profit margins. For example, AirTran said its deal would generate more than $60 million in cost savings, while US Airways said its merger would save $1.65 billion a year. The U.S. airline industry is expected to post a modest profit this year after years of cost cutting and losses.
"I think what Northwest has done is shown they can't just sit on the sidelines," said Brian Nelson, an airline analyst for Morningstar Inc. in Chicago. "Obviously, there's still a lot of uncertainty as to who they'd be interested in. I really wouldn't be able to rule out any carrier at this point."
Even airlines named in other deals are fair game, because no pairing is a sure thing. Delta, which also is in bankruptcy court, is fighting US Airways. A code-share partnership with Continental allows Northwest to block certain merger transactions involving that airline and could complicate any potential deal.
Roger King, an airline analyst at CreditSights, sees Northwest's and United's lucrative Asian routes as key attractions. He thinks Northwest could partner with American Airlines, Continental or Delta. If Continental's merger with United goes through, it would force American to look at Northwest. Continental, which is strong in Europe and Latin America, also could pursue a deal with Northwest, he said.
Northwest's bankruptcy status also makes it an attractive acquisition target because the company has more leeway to renegotiate contracts and aircraft leases and cut unprofitable routes. US Airways CEO Doug Parker has said that half of the expected cost savings from its bid for Delta would disappear outside of bankruptcy. Both Northwest and Delta plan to emerge from bankruptcy by mid-2007.
Analysts say Northwest could survive on its own -- though details of its bankruptcy reorganization plan and its new cost structure have yet to be seen -- but merging might make more financial and strategic sense.
In a recorded message to employees on Tuesday, Northwest CEODougSteenland tried to downplay a possible merger: "We need to be prepared because of the current industry environment ... things can change quickly and it's important that we have ongoing access to advisers who are experienced in these sorts of things," he said. "Evercore will help us evaluate the entire industry and developments affecting other carriers and if there's anything that affects us."
But some of Northwest's labor groups are getting ready, just in case. This summer, the pilots union at Northwest set up a merger committee to negotiate the integration of pilot seniority lists if a deal occurs. The flight attendants union is considering a similar move.
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