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Northwest merger rumors are flying

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Merger partners?
For about four years, Delta and Northwest have had a partnership in which they sell seats on each other's planes and integrate their frequent flier programs. Talk of the two airlines merging has heated up again this week.
Photo courtesy of Michael Carter

Merger talk has been in the air frequently during the past year, but it has gotten louder the past couple days.  On Wednesday, news broke that a top official in Delta's pilots union was alerting the rank and file members that "consolidation may be at our door." Then the Wall Street Journal Web site reported that Delta would push the merger envelope with its board.

Industry analysts were not especially surprised by the developments. Ray Neidl of Calyon Securities says it has been clear that Delta was interested in a combination and that Eagan-based Northwest and United were top picks.  Neidl says airlines have been enduring some hard times that would make a consolidation more likely.

"Airlines are under a lot of pressure.  Hundred dollar a barrel oil with threat of going into a recession is making  investors bid down the stock, and long-term investors are very upset about that. They see as their way out -- mergers -- where  you would have less fragmented industry and  the airlines would have greater control  over the pricing."

If a merger were to take place any time soon, many believe that it would have a better chance of getting approval from antitrust regulators under the Bush administration, so there is incentive to get a deal done soon.

But Neidl does not think there will be any slam dunks.

"I think it's still far from certain, one, whether it's gonna be Northwest or United, or two, whether anything's going to happen immediately anyway."

Last spring, both Delta and Northwest emerged from bankruptcy, during which time Delta fought off a hostile takeover bid from US Airways. But then Delta set up a special board committee to help it review its strategic options, including mergers.  

Northwest has often been portrayed as the most likely partner for Delta. A Northwest spokesman declined to comment on the merger speculation.  But Northwest CEO Doug Steenland has said industry consolidation is likely.  

Analysts say Northwest and Delta could merge nicely because some of their systems already talk to each other. They sell seats on each others flights and transfer luggage back and forth.  As John Ash at InterVISTAS-ga2  points out, Northwest would add a lot of service to Asia that Delta lacks. 

"Northwest is an ideal candidate, particularly for Delta, where it would, among other things, strengthen service over the Pacific."

On the other hand, Ash does not see the logic of a merger. He thinks that pairing is being pushed by a hedge fund that is heavily invested in both carriers.  But he thinks that combination will not pass regulatory muster because the combined carrier would have too much market share.

Airline analyst Mike Boyd is skeptical that any of these possible mergers is likely or a good idea.  And he thinks that the CEO of Northwest and the CEO of Delta, who happens to be a former Northwest executive, are both aware of the difficulties that could ensue, especially given that the airlines' fleets are quite different.

"You get Wall Street saying, 'just put 'em together and look at the great synergies.'  Those two CEO's know that it's not as easy as it looks."

Northwest's pilots union spokesman Wade Blaufuss  agrees that a merger could be a complicated affair.

"Just operating an airline on a good day. It's an operation that has several moving parts at all times. And trying to integrate two different airlines that have vast route systems and different types of aircraft and employee groups that have different benefits such as retirement, seniority, medical insurance, all these different things would have to be somehow put through the meat grinder to come out with a common product at the end."

Does it make sense for Northwest to pair up with another carrier?  Bill Hochmuth, an analyst with Thrivent Asset Management in Minneapolis says maybe. It depends on whether the combined company can reduce expenses and the number of seats in the air enough to raise prices.  And even that is not enough. Hochmuth says the additional revenue has to be enough to justify taking on the problems of combining carriers.

"It sounds like it may be a little closer this time than in past times, but we're still in inning one of a very long ballgame. And a lot needs to be accomplished before you could have two airlines come forth and say, 'we have a deal in place.'"

Shares of Delta, Northwest and United soared Thursday.  Northwest rose the most, 24 percent. The company is now valued at $3.7 billion.