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Northwest May Be Best Merger Partner for Delta

Reuters
Friday, 11 Jan 2008 | 2:11 PM ET

Delta Air Lines is gearing up to pick a merger partner and Northwest Airlines may be the best option, or perhaps the easiest.

Delta , the No. 3 U.S. airline, is expected to start merger talks with both United Airlines parent UAL and Northwest .

Formal merger talks would likely kick off a long-awaited wave of consolidation in the volatile U.S. airline industry, whose fledgling recovery from a five-year slump is threatened by surging fuel prices and a softening U.S. economy.

Delta Airlines
AP
Delta Airlines

While either combination would give Delta the presence in Asia it sorely lacks, Delta and Northwest already cooperate through the SkyTeam global airline alliance.

Also, Delta Chief Executive Richard Anderson, who was previously CEO at Northwest, is well acquainted with his former employer, as well as his counterpart, Northwest CEO Doug Steenland -- a key intangible for complex airline mergers.

"I would give Northwest an edge," said Bill Warlick, an airlines analyst with credit rating agency Fitch.

"There are major attributes to a combination with United, but the question is whether those attributes outweigh the major surgery involved," said Bill Swelbar, a research engineer at MIT's International Center for Air Transportation.

The Wall Street Journal reported Thursday that Delta is expected to ask its board for permission to starts talks with both United and Northwest, with the aim of choosing a partner.

None of the airlines have commented on the report.

A deal with either United or Northwest would likely be an all-stock transaction because of the need for airlines to conserve cash amid market uncertainty.

Either deal would make Delta, which has said it wants to be a buyer if the industry consolidates, the largest airline in the world, overtaking AMR Corp's American Airlines.

Delta has a market value of more than $4.3 billion, higher than UAL and Northwest, which both have market values of about $3.7 billion.

Relationship Baggage

A United-Delta deal would be complicated by United's existing partnership agreements with US Airways Group and Germany's Lufthansa, which are both members of Star Alliance along with United and could be cumbersome to unravel, said MIT's Swelbar.

On the labor front, Delta and Northwest may also have an advantage due to similar wage levels. All three airlines have recently restructured in Chapter 11 and have cut labor costs to the bone. In either merger scenario, unions would want to recover concessions made during the industry's long slump.

"My assumption is that unions will have to be offered some carrots to go along," said Warlick.

Anti-trust concerns, which have thwarted past industry tie-ups, could cause either deal to stumble, but there may be more issues in a United-Delta deal.

"The opposition in Washington could be fierce due to concerns about upward pressure on fares," said Joe Schwieterman, transportation expert at DePaul University and a former marketing analyst at UAL.

He said government regulators could raise an eyebrow at a United-Delta merger because the two carriers have hubs in close proximity to one another -- United in Denver; Delta in Salt Lake City.

Also, Delta's Cincinnati operation, which competes with United's Chicago hub and Northwest's Detroit operations, would likely be cut in either merger, said MIT's Swelbar.

Fleets, Costs a Wash

Combining Delta's fleet with either carrier would be a headache and have limited short-term advantages, Warlick said.

Both United and Northwest have mixed fleets, which include Airbus and Boeing aircraft, while Delta operates a mostly Boeing fleet along with over 100 MD-88s, which are no longer made.

Meanwhile, the cost savings resulting from either deal would be similar. Goldman Sachs estimates the savings from a Northwest-Delta deal would be $819 million, while a United-Delta merger would generate $891 million in savings.

If a merger between Delta and either Northwest or UAL does come to pass, it would involve two healthy carriers -- a rare event in the U.S. airline industry, where deals typically involve at least one of carriers being in or near bankruptcy.

The carriers' shares, which all soared more than 20 percent Thursday following speculation of pending talks, were down in afternoon trading Friday.

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