Delta and Northwest Airlines have finally announced a long-awaited multi-billion-dollar merger, that is expected to generate more than $1 billion in annual revenue and cost savings. By Sourya Biswas

The third and seventh largest airlines in the world combine to overtake the No 1.

That, in a nutshell, is the result of the Delta-Northwest merger, poised to overtake American Airlines as the largest global airline with combined annual revenue of $31.7 billion, a fleet size of 800-plus aircraft and employing more than 75,000 people who service over 390 destinations in 67 countries, including more than 140 small destinations across the US. (Also see: Delta, Northwest merger decision to create world's largest airline)

That is, if the deal goes through the regulators.

The two protagonists in this corporate saga, Delta Airlines and Northwest Airlines, have a lot in common, besides the obvious one of being US-based carriers. Both declared bankruptcy in September 2005, and came out of Chapter 11 protection within one month of each other – Delta in April 2007, and Northwest in May 2007.

Both are members of the global alliance SkyTeam, and had been led by the same person at different points of time – former Northwest CEO and current Delta CEO Richard Anderson.

The losses caused by the slowdown in the the industry after September 11, the relentless rise in fuel bills and the threat of competitive challenges from carriers from low-cost countries, mainly East European and Asian, have been weighing in favour of mergers to cut overlaps and costs..

Accordingly analysts expect the Delta - Northwest merger to trigger a renewed attempt at consolidation among global carriers, which have been under pressure to cut costs.

Anderson has been one of the prime movers behind this deal, speculated ever since he joined Delta as CEO in August 2007, after having led Northwest from 2001 to 2004.

At that point of time, he had tried to scoff such rumours by that he believed in Delta's standalone plan and that "he was not coming in as CEO to facilitate a merger with Northwest." However, eight months later, that's exactly what Anderson is doing, and many analysts believe he didn't have a choice amid plummeting airline market values and soaring fuel prices that have kept crude steadily above the $100- mark.

The merged entity will maintain the Delta name, be headquartered at its hub in Atlanta, incidentally the world's biggest, and be led by Richard Anderson, with Delta's Ed Bastian maintaining his role as president and CFO.  Northwest Chairman Roy Bostock will become vice chairman. The company's 13-member board will have seven members from Delta, five from Northwest and a pilot from the Delta chapter of the pilots' union.

If the share-swap becomes final, Delta shareholders will get a bigger company, while Northwest shareholders would get a 16.8-per cent premium over Monday's closing stock prices.

The transaction calls for Northwest shareholders to get 1.25 Delta shares for each Northwest share. That values Northwest at almost $3.63 billion based on 277 million Northwest shares that the companies said are outstanding, although the final value will shift with the share prices until the day the deal closes.

The merger is expected to generate more than $1 billion in annual revenue and cost savings. One-time integration costs are pegged at $1 billion, and combined liquidity will be nearly $7 billion when the transaction closes.

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," adding that both the managements are " confident the transaction will go forward and be approved. "

"In the past, we have said that we were not interested in doing a deal for the sake of doing a deal," said Delta CEO Richard Anderson, in a letter to employees. "Our need to respond to the pressures of dramatically rising fuel costs and a softening US economy drove us to take a closer look at all options to strengthen our future."

He added that "consolidation in the airline industry is inevitable, and we want to control our future. Combining our companies creates an airline with the size, scale and global presence to weather economic downturns and compete long-term in the global marketplace."

Hurdles to be crossed
Of course, the deal is a long distance from being finalised. The four groups who would need to be convinced of the business justification and legality of the transaction are the shareholders, employee unions, politicians and antitrust regulators. Let us approach the issues associated with these four pressure groups one by one.

First, opposition from the shareholders of both the companies appears unlikely, considering that the merger will create the largest airline in the world with high operating efficiencies, at a time when four US airlines have gone bankrupt citing high fuel costs. However, if Northwest shares appreciably rise before the conclusion of the merger, the current premium of 16.8 per cent may be negated and have to be renegotiated.

Thought to be near completion early this year, the deal was delayed as the carriers sought pilot approval before moving forward. They were only partly successful. Delta pilots reached a tentative agreement on a post-merger contract that includes a 3.5-per cent stake in the company and a seat on the board. If ratified, it would extend through 2012. However, it still needs ratification from the rank and file.

However, Northwest pilots have not been so accommodative of a deal, which in their view, tries to ''disadvantage the Northwest pilots economically and with respect to seniority''. "The risk to Northwest Airlines and to the Northwest pilot group from letting this merger proceed, as it is now structured, is simply too great," said Dave Stevens, chairman of the Northwest chapter of the Air Line Pilots Association, in a statement. He struck a warning note by adding, "No pilot group is going to put up with this. No amount of money can sustain a carrier which creates this level of discord."

Delta said it would use its best efforts to reach a combined Delta-Northwest pilot agreement, including resolution of pilot seniority integration, before the merger closes. Anderson said, "our real goal is to conclude negotiations with pilots to bring them under seniority agreement and to resolve the seniority list. You want to have a combined pilot workforce all pulling together to make the airline successful."

Another prominent opponent is the International Association of Machinists, the largest airline union, which represents about 11,000 agents and ground service workers at Northwest. A spokesman for the union said that it hadn't been consulted on the merger and was opposed to the deal in its current form.

Political approval is absolutely necessary for a deal which affects the livelihoods of more than 75,000 people directly, and several thousands more in an indirect manner. The merger announcement has already tried to gain political support by saying that none of the hubs of the two airlines would be closed, even the ones that had been considered vulnerable due to increasing costs and declining revenue. These included Delta's Cincinnati hub and Northwest's operations in Memphis. However, this may change post-merger as the airline may try to reduce capacity to prune costs.

Also, job cuts would be restricted to a minimum, the announcement said. 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.

Executives at Delta and Northwest said they are aiming to close their deal by the end of this year, which would be before the end of the merger-friendly Bush administration. "We wanted to get it done so it could be reviewed in a timely way," Northwest CEO Steenland said. "If you waited much longer, you might get caught up in the switch in administrations, and it would take longer to get it reviewed."

Approval from politicians is compulsory for any merger deal to fructify. This especially assumes importance in the light of the fact that an attempted merger of United Airlines and US Airways in 2001 had fallen apart amid antitrust concerns.

However, in this case, analysts opine that the current deal stands on firmer ground as Delta and Northwest hardly overlap in the US. 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.

In fact, the airlines described the combination as "pro-competitive" with "direct competitive service on only 12 of more than 1,000 nonstop city pair routes currently flown by both airlines."

The two airlines have set up a website http://www.newglobalairline.com in which the following timeline has been proposed:

Who gains?
Additional industry consolidation may follow. In particular, Northwest's agreement to enter into a transaction enables Continental to buy back a "golden share" that was granted in 2000. That had allowed Northwest to block any merger efforts by Continental, which has already talked with United Airlines.

Continental Airlines is the fourth largest airline in the US and the fifth largest in the world by revenue passenger miles, while United Airlines ranks just below American Airlines. A combined entity would be just above a Delta-Northwest combine in revenue, pushing the current leader American Airlines to the third spot.

A press release says that customers and communities will benefit from an expanded global route system and a more competitive, financially secure airline. The Delta and Northwest merger will offer customers and communities direct service between the United States and the world's major business centers.  Specific benefits include:

• Customers will be able to fly to more destinations, have more schedule options and more opportunities to earn and redeem frequent flyer miles in what will become the world's largest frequent flyer programme.
  
• The merged airline will maintain all hubs at Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, Salt Lake City, Amsterdam and Tokyo-Narita – each of which will benefit from improved global connectivity.
  
• Delta customers will benefit from Northwest's extensive service to Asian markets and Northwest's customers will have access to Delta's strengths across the Caribbean, Latin America, Europe, the Middle East and Africa.
  
• Both airlines' customers will benefit from a strengthened SkyTeam alliance that more closely aligns the combined airline with its respective trans-Atlantic partners Air France and KLM.

As per the statement released to the media, customers also will benefit from the combined carrier's financial stability. The merger creates one of the strongest balance sheets among major US airlines, permitting the combined airline to invest in its fleet and services to enhance the customer experience. For instance:

• The combination will accelerate the upgrading of existing international aircraft with lie-flat seats and personal on-demand entertainment.
  
• The combined company will have the opportunity to exercise options for delivery of up to 20 widebody jets between 2010 and 2013 to provide more international service than ever before.
  
• The combined company also will be able to improve customers' travel experience through new products and services, including enhanced self-service tools, better bag-tracking technology, new seats and refurbished cabin interiors.

At the same time, with added convenience, customers may also have to pay higher ticket prices as the industry consolidates further and takes steps to cut costs.

Consolidation in the airline industry is something that has become necessary in the light of higher operating costs and lower operating margins. In fact, India has seen two such mergers in the recent past – Jet Airways taking over Air Sahara, and Kingfisher Airlines buying a controlling stake in Air Deccan.

The last big airline merger had created US Airways Group Inc from the combination of the old US Airways and America West Airlines in 2005. This deal stands a good chance of going through and may well spark the revival of the airline industry in general, and American aviation in particular.