Regional News

Delta, Northwest Merger Plan Met With Skepticism

CHICAGO - Market participants yesterday began digesting the news of Atlanta-based Delta Air Lines Inc. and Egan, Minn.-based Northwest Airlines Corp.'s agreement to merge - an announcement that was greeted with a mix of skepticism from several federal lawmakers, who will scrutinize the deal, and concern from credit analysts who believe the merger could negatively impact some airports.

The proposed merger, announced after months of negotiations, stands to have a dramatic effect on the sector's landscape. The two carriers, folded together in a $17.7 billion deal, would create the world's largest airline.

Aside from the impact of potential changes in its presence at airports across the country, the move is expected to prompt other airline unions as carriers seek to remain competitive. United Airlines and Continental Airlines Inc. are reportedly in talks.

"We said we would only enter into a consolidation transaction if it was right for all of our constituencies. Delta and Northwest are a perfect fit," Delta chief executive officer Richard Anderson said in a statement. Anderson would run the company.

The carriers sought the merger to improve liquidity and to offset the growing drain on revenues from skyrocketing fuel costs that has hammered the industry. The union would generate $1 billion in savings, the airlines said.

The combined airline would bear Delta's name, generate revenues of $32 billion, employ at least initially more than 80,000 - 55,000 from Delta and 32,000 from Northwest - and manage a fleet of 800 airplanes.

Though the airlines' boards signed off on the transaction late Monday, approval from federal regulators and shareholders is pending. Northwest's pilot union, which opposes the plan as it currently is structured, would also have to approve in order for the merger to go through. The airlines hope to close the deal by the end of the year, before a new presidential administration takes office. The Justice Department will review whether the merger runs afoul of federal antitrust rules.

Both Northwest and Delta filed for federal Chapter 11 bankruptcy protection in September 2005 and emerged as stronger reorganized companies last year after shedding debts and winning union concessions. Northwest's debts included $650 million in special facilities revenue bonds and interest in another $111 million.

Much of the debt was the subject of settlements or repaid as unsecured debt. Delta shed $1.2 billion of its special facilities revenue bond debt. The airline entered bankruptcy with $1.8 billion of tax-exempt municipal debt. The two now have about $15 billion total debt. Faced with rising fuel costs and a slowing economy both had recently announced some domestic flight cuts.

The merger elicited some of its staunchest criticism from both unions and federal lawmakers. Rep. James Oberstar, D-Minn., chairman of the House Transportation and Infrastructure Committee, yesterday called the proposed merger "the worst development in aviation history in the aftermath of deregulation of 1978," and vowed to hold hearings to rigorously scrutinize it and put together the data necessary to convince the Justice Department to oppose it.

During a hastily called press conference, Oberstar said, "If this merger goes forward, other carriers will follow and there will be cascade of mergers" and partnerships between airlines as they struggle to try to compete with the "global straddling mega-carrier."

The reduced competition will lead to higher fares and less service, particularly in non-hub areas, he warned.

Rep. Jerry F. Costello, D-Ill., chairman of the committee's aviation panel, agreed.

"This merger may be good news for the top executives, but I believe it's bad news for passengers and employees," he said.

Asked if the merger would not stave off bankruptcy for the two airlines, Oberstar said they've already tried bankruptcy and have also sought and received help from communities where their hubs are located.

Oberstar said the Justice Department "should take at least six months to evaluate" the merger proposal if the pilots from the two airlines can reach agreement. He said the committee will hold a series of hearings and build a record of data on mergers that have already occurred and had negative impacts on the flying public, with the aim of submitting the information to Justice for review.

The airlines' decision to maintain their existing hubs could help smooth over some concerns. Delta operates hubs at Atlanta's Hartfield-Jackson International Airport, Cincinnati/Northern Kentucky International Airport, and Salt Lake City International Airport with a secondary hub out of John F. Kennedy International Airport, while Northwest operates hubs at the Minneapolis-St. Paul International Airport, the Detroit-Metropolitan Wayne County Airport, and Memphis International Airport.

The Minnesota Metropolitan Airports Commission said it would hold the airlines' to the pledge to maintain those hubs.

Minnesota Gov. Tim Pawlenty issued a statement saying: "We will be closely scrutinizing the impact of the merger and will strongly stand up for Minnesota's interests during the review process. Our goal will be to maintain hub operations, related levels of flight service, and the maximum number of airline jobs in Minnesota."

The airports commission several years ago negotiated a package that provided $240 million in financial relief for Northwest in exchange for the airline's agreement to keep its hub and headquarters in the Twin Cities, maintain two maintenance hangars, and continue making payment on $275 million of outstanding Northwest bonds that carry the commission's GO pledge.

Under the agreement, the airline is required to retire the bonds in the event it closes its hub or headquarters. The merged airline's headquarters would be in Atlanta, but Northwest officials in published reports said they believe they can renegotiate the terms and satisfy the spirit of the commitment to leave the debt in place.

Northwest accounts for about 78% of travel through the airport. The airport has $1.6 billion of outstanding senior and subordinate revenue bonds that carry ratings in the high single A to double-A category and $290 million of top-rated general obligation bonds. The airline employs more than 11,000 in the state.

Wayne County Airport Authority chief executive Lester Robinson yesterday offered a positive assessment of the announcement. "The proposed combination would create Detroit's largest airline and would transform the two carriers into a new, truly global airline. With fuel prices now at record levels, the combined new carrier will be in a better position to compete in the global marketplace and to expand its reach from Detroit - enabling Southeast Michigan to become an even stronger participant in the global economy," he said.

Northwest and its affiliates account for 76% of the airport's 18.1 million passengers in 2007. Northwest's enplanements dipped in 2005 and 2006 before increasing again in fiscal 2007 as the airline emerged from bankruptcy. The airport's enplanement trends are higher than national averages, and non-airline revenues account for just under 60% of the airport's total revenues in fiscal 2007.

Delta accounted for 85% of total passengers last year at Cincinnati/Northern Kentucky airport, according to spokesman Ted Bushelman. That is a decline from about 90% in 2006. In 2007, the airline cut back its flights at the airport as it went through bankruptcy, said Bushelman. Of the airport's 460 daily flights, Northwest flies about 12.

At Memphis International, Northwest and Delta have a long history of operations and accounted for 85% of passenger traffic last year. Memphis is the home of Federal Express, whose landings cover about 70% of airfield operations. That lowers operational costs for passenger carriers and keeps Memphis attractive as a transfer hub, said Larry Cox, chief executive officer of the Memphis-Shelby Airport Authority.

"We're very excited about the merger," Cox said." We're particularly excited because Memphis is a small market and profitable hub for Northwest and we, through our discussions with executives of both airlines, are convinced that Memphis will continue to play a historical role as a transfer hub for the expanded airline that will give us the opportunity to grow particularly in the international arena."

Cox said the merger comes at a good time because Memphis is in the early stages of creating a new, 20-year master plan. "This will give us and the airlines a new perspective when looking at the master plan and seeing what improvements need to be made to the airport to accommodate the new merged airline," he added.

Last year at Hartsfield, Delta recorded more than 50 million domestic and international passengers or a 56% market share. Northwest carried 890,067 domestic passengers for a market share of 1%. Delta also carried 215,173 tons of freight, or 30.08% of the market share last year, while Northwest carried 292 tons of freight, which was 0.04% of the market share.

The airport issued a statement saying: "Hartsfield-Jackson is pleased to hear the merger includes the commitment to keep Delta's global headquarters here in Atlanta. As a major creator of jobs in metro Atlanta and the Southeast region, Delta's success and Hartsfield-Jackson's are tied together."

Reaction from rating agencies was hesitant with analysts foreseeing potential for a negative impact on some credits on the horizon. Fitch Ratings'Peter Stettler said no immediate impact was seen and analysts would wait to see how the transaction unfolds and its impact on the carriers' networks. In the near-term, he said, "we see the circumstances facing the industry now including fuel costs and the economy having a greater impact" on airline routes and in turn airport credits.

Moody's Investors Service'sKurt Krummenacker said the key hubs would likely remain unscathed in the merger but as the airlines seek to cut costs, overlap and capacity the secondary hubs could take a hit. He cited Cincinnati/Northern Kentucky as one that could see a negative impact because of its location between the Atlanta and Detroit hubs and Delta's strong presence there. The agency will be looking closely at airports where there is overlap, have higher debt ratios and rely heavily on airline fees.

Standard & Poor's Joseph Pezzimenti said there's incentive to keep the main hubs strong, but in the effort to reduce overlap airports where there's a smaller, less profitable presence or overlap could see cuts. "We will be closely watching how this evolves," he said.

Lynn Hume, Caitlin Devitt, and Shelly Sigo contributed to this story.


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