Delta-Northwest combination seen as a game-changer in aviation

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Delta CEO Richard Anderson put it succinctly when talking to analysts in late October about combining his airline and Northwest: “This merger is a game changer.”

While he might be expected to say that, it would be hard to find anyone in the industry who disagrees with his terse assessment.

Headlines trumpeting the successful deal had barely flashed across Internet sites before other airline executives, analysts and industry operatives started to describe the landscape-carving effects of the merger, which creates a combined worth of about $17.7 billion.

Other mergers, alliances and partnerships are likely to follow, they say, to combat, partner with or ride the wake of the merger.

Executives of Alaska Airlines are talking about the geographic benefits of hooking up with the new merged carrier. And even before the deal was approved, Southwest announced plans to raid Northwest’s Twin Cities stronghold.

Darin Lee of LECG said more mergers, alliances and other unions were just around the corner. “The trend is going to be toward more of this,” he said.

Analysts say that the merger should give the British Airways and American Airlines alliance better traction, and airlines that had pursued merger discussions before -- such as Continental, US Airways and United -- could start talking again.

That means more market battles. Service will expand along some routes and contract on others, meaning changes for competitors and partners alike.

Airfares, though, are likely to remain at their current high levels or even go higher.

“The consequences of antitrust approval of the … proposed merger will no doubt include higher business fares, disruptive customer service and diminished connectivity to important business centers for midsize communities as fleets and routes are rationalized,” said Kevin Mitchell, chairman of the Business Travel Coalition.

That was part of the concern of the Justice Department in reviewing the proposed Delta buyout of Northwest for an all-stock transaction valued at $2.8 billion. Those concerns were shared by a group of passengers who filed a suit in California to block the deal. Their lawyer, Joseph Alioto, said his clients settled the case on Oct. 24.

Though the terms of settlement are sealed, Alioto said, “The Justice Department never would have approved this unless we were out of the picture.”

In a statement, the DOJ said, “The proposed merger between Delta and Northwest is likely to produce substantial and credible efficiencies that will benefit U.S. consumers and is not likely to substantially lessen competition.”

There’s ample other competition on routes where Delta and Northwest compete with each other, the DOJ said, adding that passengers should benefit from cost savings on airport operations, technology and suppliers.

The merged airline plans to cut $2 billion annually. But first, they have to pay one-time integration costs of about $600 million spread over three years.

The new company will be named Delta, will be based in Atlanta and will answer to Anderson, who ran Northwest before being named CEO of Delta. New uniforms will be phased in next year, and Northwest’s planes will lose their red tails over the next two years.

The new board will consist of eight members from Delta’s board, including Anderson, and four from Northwest’s board. Other Delta members are Chairman Daniel Carp, John Brinzo, Eugene Davis, David Goode, Paula Rosput Reynolds, Kenneth Rogers and Kenneth Woodrow. Northwest additions are former Northwest CEO Doug Steenland, John Engler, Mickey Foret and Rodney Slater.

Northwest will temporarily become a subsidiary of Delta called NWA Inc. Ed Bastian, Delta’s president and chief financial officer, will serve as NWA’s president and CEO.

The airlines expect to be fully integrated in 18 months, but they have codesharing capability from day one, and they plan to operate as a single carrier immediately.

The pilot groups for both airlines have already ratified a four-year agreement, and the airlines had already worked out how to merge their respective credit-card processing and bank credit agreements after the deal closed.

A bigger question is: Who else stands to benefit now that the deal has closed?

Merrill Lynch analyst Michael Linenberg said during an October conference call, “Alaska will become an even more attractive partner. … It seems like SkyTeam is making this focus on Seattle. You have the French flying from Seattle to Paris, and you have Northwest with KLM at Amsterdam and, just recently, the Heathrow flights.”

Gregg Saretsky, Alaska Airlines’ executive vice president for flight and marketing, agreed. “Our geography plays well because of our strong position on the West Coast to feed Northwest’s existing network at Seattle, and more of that feed goes to Delta, frankly, at Los Angeles.”

In the meantime, Northwest is facing the incursion of Southwest, which is starting service to Chicago from the Twin Cities.  “We’re very excited about Minneapolis-St. Paul,” said Southwest’s CEO, Gary Kelly. “It is a very high-fare market. One-way fares are as high as $400, and it’s a short-haul market.”

The newly merged airline is not ready to yield that market. Anderson said Delta would not close any hubs, post-merger.

J. Timothy Griffin, Northwest’s executive vice president for marketing and distribution, said, “Our costs are largely competitive with Southwest now. We’ll have 10 or more trips to both Midway and O’Hare at competitive prices and featuring dual-class aircraft. … It’s a market we know well and a competitor we know well.”

Even so, the markets, competitors and partners all appear ready for a change.

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