Northwest, Delta to join forces

ATLANTA — Delta Air Lines and Northwest Airlines, squeezed by record high fuel prices and a slowing economy, are combining in a stock-swap deal that would create the world's biggest carrier.

The boards of both companies gave the go-ahead Monday.

The announcement could spur other airline combinations. The most likely scenario is a potential deal between United and Continental airlines.

Delta said the combined airline, called Delta, would have an enterprise value of $17.7 billion, which includes the combined market values of the two companies and combined net debt. It would be based in Atlanta, and Delta CEO Richard Anderson would head it.

"We are confident the transaction will go forward and be approved," said Northwest CEO Doug Steenland.

There would be an unspecified number of job cuts or transfers through consolidation, Delta said.

The two airlines employ more than 80,000 people combined. The company expects no involuntary furloughs of front-line employees and said pension plans for both companies' employees will be protected.

Delta doesn't plan to close any of the airlines' hubs.

Delta also said that it has agreed with its pilot leadership to extend its existing collective bargaining agreement through the end of 2012. The agreement, which is subject to pilot ratification, would allow the combined company to realize the revenue synergies of the transaction, Delta said.

It also calls for Delta pilots getting a 3.5 percent stake in the new company and other enhancements to their current contract.

The agreement does not cover Northwest pilots.

Delta said it will use its best efforts to reach a combined Delta-Northwest pilot agreement, including resolution of pilot seniority integration, before the merge closes.

U.S.-based non-pilot employees of both companies would get a 4 percent stake in the new airline.

Northwest pilots and the union representing most of Northwest's ground workers immediately announced they would fight the combination.

Dave Stevens, chairman of the Northwest branch of the Air Line Pilots Association, said in a statement, "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."

Northwest didn't consult with the union that represents its baggage handlers, ramp workers and ticket agents, said Joseph Tiberi, a spokesman for the International Association of Machinists and Aerospace Workers. "If the airline wanted the support of their employees, they should have brought us in and discussed it with us earlier," he said.

Lee Moak, head of Delta's pilots union, said Delta hopes cooler heads will prevail.

"It takes two to fight," Moak said. "We don't see a fight here. We see a cooperative relationship with the Northwest pilots to bring everybody to parity as soon as possible."

The two pilots unions were unable to agree on integrating seniority lists before the combination was announced. A joint contract they had reached was never approved.

The announcement comes a year after the two carriers emerged from Chapter 11 bankruptcy protection. Both carriers are losing money again but are in much better shape than the four much-smaller airlines that have filed for bankruptcy or gone out of business in recent weeks.

The deal will need antitrust approval, and integrating the work forces of fully unionized Northwest and Delta, where pilots are the only major unionized group, will be tricky.

The joining of Atlanta-based Delta and Eagan, Minn.-based Northwest, if approved by regulators and shareholders of both companies, will result in combined annual revenue of $31.7 billion, vaulting it ahead of Fort Worth, Texas-based American Airlines for the top spot in the U.S.

It would be the biggest carrier in the world in terms of traffic, before any further domestic capacity cuts and any divestitures that might be required by antitrust regulators. Delta and Northwest combined fly about 12 percent of passengers at Seattle-Tacoma International Airport.

The agreement comes after months of merger discussions between Delta and Northwest and at one time between Delta and United Airlines.

Analysts believe a Delta-Northwest combination will stand up better to regulatory scrutiny because the two carriers have less overlap, even though a Delta-United combination could create more scale.

Years of mounting losses forced Delta and Northwest to file for bankruptcy protection on Sept. 14, 2005. Both emerged from bankruptcy as leaner carriers last spring, after shedding billions in costs during their reorganizations.

While in bankruptcy, Delta fended off a hostile takeover bid by US Airways Group. Delta said its plan to remain on its own would create more value than US Airways' $9.8 billion bid, which Delta argued would not pass regulatory hurdles.

The value argument never materialized, as Delta's post-emergence market capitalization started out $1 billion less than US Airways' bid and less than the $9.4 billion to $12 billion Delta projected.

Its market value has fallen precipitously in the months since amid airline industry woes, including high fuel prices and a general inability to gain traction raising ticket prices.

Many analysts predicted an eventual Delta-Northwest merger after Anderson, a former Northwest CEO, was named in August to be Delta CEO.

Anderson, who was Northwest's CEO from 2001 to 2004, immediately sought to quiet those suggestions, telling the leader of Delta's pilots union that he believed in Delta's standalone plan and that "he was not coming in as CEO to facilitate a merger with Northwest."

Eight months later, that's what Anderson is doing, and many analysts believe he didn't have a choice amid plummeting airline market values and soaring fuel prices.

Wall Street and some airline executives have pushed for consolidation for years, arguing that too many seats are chasing too few passengers. The resulting discounting has made it hard for airlines to cover their expenses.

However, Northwest and Delta overlap relatively little in the U.S., which could help them gain antitrust approval.

Delta's routes are strongest in the eastern U.S. and to Latin America and Europe. Northwest would complement that with its near-lock in the Midwest along with flights to its Tokyo hub and other points in Asia.

Northwest's Asian routes have been one of its main appeals to other carriers. It and United are the only two U.S. carriers with the rights to pick up new passengers in Japan and fly them farther into Asia.

Delta and Northwest also complement each other internationally because they are both part of a marketing alliance that includes Air France-KLM.

Air France-KLM had said previously it would consider investing in the combined company, but that did not play out. Delta said Air France-KLM supports the deal because it would solidify the alliance.

U.S. airlines get the majority of their revenue from domestic service, though that trend has shifted in recent years as more carriers, particularly Delta and Northwest, have sought to increase international service.

Under the terms of the Delta transaction, Northwest shareholders would receive 1.25 Delta shares for each Northwest share they own. The exchange ratio represents a premium to Northwest shareholders of 16.8 percent based on Monday's closing stock prices.

That values Northwest at almost $3.63 billion based on 277 million Northwest shares that the companies said are outstanding.

Delta Chairman Daniel Carp would become chairman of the new board and Northwest Chairman Roy Bostock vice chairman. Delta President and Chief Financial Officer Ed Bastian would retain his titles.

The new board would be made up of 13 members, seven of whom would come from Delta's board, including Anderson, and five from Northwest's board, including Bostock and Northwest CEO Steenland.

One director would come from the Air Line Pilots Association, the union that represents pilots from both carriers. Anderson told reporters it would be a Delta pilot holding the voting seat.

Information from AP reporter Joshua Freed in Minneapolis is included in this report.