Atlanta and Dallas - Delta Air Lines, one year removed from bankruptcy, has agreed to buy Northwest Airlines in a $3.63 billion (R28.5 billion) stock deal that would create the world's largest carrier and may unleash more industry consolidation.
The airline will keep Delta's name, its Atlanta headquarters and its chief executive, Richard Anderson. The purchase would lead to a total of $1 billion in new revenue and savings and would not shut any hubs, the firms said yesterday.
The merged carrier will control about 25 percent of the US air travel market, estimates Ray Neidl, an analyst at Calyon Securities in New York.
Delta, the third-biggest US airline by traffic, is betting that combining with Northwest, the fifth-largest, will help overcome a 74 percent increase in the cost of jet fuel over 12 months.
The move is likely to hasten merger talks among rivals, including United Airlines, to counter Delta's wider network.
"The assumptions are fairly optimistic," said George Hamlin, the managing director of New York-based consulting firm ACA Associates. "Given high fuel prices and going into a recession, it makes you wonder how things will improve."
Each Northwest share would be exchanged for 1.25 Delta shares, giving Northwest investors $13.10, or 16.8 percent more than Monday's closing price, the airlines said. The deal would include one-time cash costs of $1 billion.
Delta and Northwest and their regional partners carried 176 million people last year. The combined carrier would vault past AMR's American Airlines as the world's largest by traffic, and would have 800 aircraft and 75 000 employees.
Delta and Northwest shareholders will have to approve the transaction, which will also need clearance from federal antitrust regulators.
While Delta pilots will get a 3.5 percent equity stake in the airline and a board seat under a new contract, Northwest's pilots said they would "aggressively oppose" the tie-up.
With a bigger Delta reshaping the competitive landscape for US airlines, other carriers may renew their interest in finding a partner.
Continental Airlines, the fourth in the US by traffic, had held talks with UAL's United, the world's second-largest carrier, and had met with American, a person with knowledge of the matter said in February.
"Many airlines exist in the US and all are suffering from oil prices," said Laurent Vallee, a fund manager at Richelieu Finance in Paris. "The way to handle it is through mergers. Maybe others will follow."
The slowing US economy, which is starting to damp travel demand, is also weighing on the industry.
The eight largest US carriers might post a combined first-quarter loss of $1.4 billion, Merrill Lynch analyst Michael Linenberg wrote on Monday in a note to clients, before AMR leads off the airlines' earnings reports today.
As many as four small US airlines have filed for bankruptcy in the past month.
Delta's biggest contributions to the new carrier include transatlantic routes to Europe and a network in Latin America, while Northwest has Pacific routes, including access to the restricted Narita Airport in Tokyo. Adding overseas flying was part of each airline's strategy to return to profit after bankruptcy.
"With Delta and Northwest bulked up, they can compete globally," former Continental chief executive Gordon Bethune said this week in an interview. "They will have enough of the market that if they say, 'We need another $5 per ticket', they can get it."
Delta has US hubs in Atlanta, New York's Kennedy airport, Cincinnati and Salt Lake City. Northwest's are in Minneapolis, Detroit and Memphis. Northwest also operates hubs in Amsterdam and Tokyo.
The new Delta did not have any plans to further cut capacity as part of the tie-up, Anderson said on Monday.
The announcement came after the close of stock markets on Monday. Delta rose 4.7 percent to $10.48 in New York Stock Exchange composite trading, while Northwest lost 9.09 percent to $10.20 yesterday afternoon.
The deal caps five months of industry speculation about Delta's intentions, after it revealed on November 14 that it had created a board committee to study merger options.
Talks on the transaction stalled in February after pilots could not agree on how to mesh union seniority lists.
Delta and its 7 000 pilots broke the impasse in the past few days with a new labour agreement running through 2012 that includes the equity stake. Northwest's 5 000 pilots would be asked to join a unified contract before the deal closes.
Non-pilot employees of both companies in the US would be given a 4 percent equity stake when the deal closes, the two companies said, adding that they did not expect to make any layoffs.