Delta, Northwest set to merge

By Charley Blaine and Elizabeth Strott

Two big airlines have announced a plan to become the world's biggest.

Hoping to ease the pressure of rising fuel costs and intense competition, Delta Air Lines (DAL, news, msgs) and Northwest Airlines (NWA, news, msgs) late Monday announced plans for a merger that would create the world's biggest airline.

Northwest shareholders would get 1.25 shares of Delta for each Northwest share owned, representing nearly a 17% premium to Northwest's closing price of $11.22 on Monday.

Shares of Delta were down 12.6% to $9.16 on the day. It had gained nearly 5% in trading on Monday amid rumors of an impending deal. Northwest shares fell 8.4% to $10.28 after adding 2.4% on Monday.

Delta said the combined enterprise would have a value of $17.7 billion and would be called Delta. It would be based in Atlanta and would have access to 390 destinations in 67 countries.

Surging oil costs

Airlines have been struggling to cope with soaring oil costs. Crude oil closed today at a new high of $113.79 a barrel, up $2.03, or 1.8%, from Monday after hitting a new intraday high of $113.99 a barrel. In response, the Amex Airline Index ($XAL.X) fell 4.3% to 24. The index is down 30% this year.

Other analysts suggested further consolidation for the struggling airlines -- with the next possible pairing to be UAL's (UAUA, news, msgs) United and Continental Airlines (CAL, news, msgs). United CEO Glenn Tilton told employees that the economic realities of the business make consolidation "more compelling than ever."

And Continental promised to review "strategic alternatives" to remain competitive. That's short-hand for "We're looking for a partner."

UAL was down 5.5% to $22.32 and is down 37% this year. Continental was down 7% to $20.36. It's off 8.5% on the year and more than 60% since January 2007.

But at least one observer suggested that the deals were at best a stopgap.

"A merger may make things less bad, but the whole industry is a losing bet," said Doug Sandler, chief equity officer at Riverfront Investment Group.

Airlines, especially older, so-called "legacy" carriers like Delta and Northwest, suffer from heavy fixed costs, with fuel costs the largest problem. They are now the biggest cost for the industry. Add to that a unionized labor force, high costs for planes and marketing, Sandler explained. "Revenues are variables (for airlines), which means they ride up and down on the economy. . . . Jet fuel is going up exponentially, and consumer spending is slowing already, and business spending is starting to slow."

"The airlines that are around are going to have to consolidate," he added. "But the big picture is that airlines are lousy investment. Mergers don't save them."

A turbulent deal?

Delta and Northwest have been trying to merge for months, but talks had stalled when unions representing the two groups of pilots couldn't agree on a plan that would integrate seniority systems. While Delta has reached a post-merger agreement with its pilots, seniority remains an issue for the Northwest pilots, who continue to voice objections to the deal.

"No pilot group is going to put up with this," Northwest pilots union Chairman Dave Stevens wrote in a memo late Monday, The Associated Press reported. "No amount of money can sustain a carrier which creates this level of discord."

Terms of the deal would provide the Air Line Pilots Association with a seat on the board of the merged airline. The remaining 12 board members would include seven from Delta's current board and five from Northwest's board. There would be some jobs eliminated with a merger, Delta said.

To be completed, the deal needs approval from shareholders and from the Department of Justice's antitrust department.

The merger follows a terrible week for AMR Corp.'s (AMR, news, msgs) American Airlines, which canceled more than 3,000 flights as it checked out the wiring in its MD-80 planes. The cancellations could cost American tens of millions, CEO Gerard Arpey said last week.

AMR was beaten up as well today, falling 8.2% to $8.57.