Tough economic climate drives Delta/Northwest merger

Philadelphia
Source: Flightglobal.com
This story is sourced from Flightglobal.com

Producing a more stable, profitable company that is better able to handle US economic problems and sky-high fuel costs is a major driver behind the merger decision of SkyTeam alliance members Delta Air Lines and Northwest Airlines, which over the last year have seen the gains of their restructuring efforts eroded.

Under serious consideration since December 2007, the merger of Delta and Northwest – which each exited Chapter 11 bankruptcy protection last year – will produce a combined cash balance of $7 billion upon consummation, the best cost structure and debt-to-income ratio in the industry, and access to financial markets, said Delta CEO Richard Anderson during a conference call this morning.

“As we all painfully know”, either at the gas pump or paying for fuel at home, fuel prices “have fundamentally changed” in this and other industries, says Anderson.

Building “an airline with a resilient business model better able to withstand the volatility of fuel and manage effectively” through the ups and downs of industry cycles is crucial to the two carriers’ merger strategy, he adds.

Operating under the Delta brand, with headquarters in Atlanta and executive offices in Minneapolis/St Paul, the combined airline’s fleet will comprise 800 mainline aircraft and 600 regional aircraft.

It will be the largest operator of Airbus A330s, Boeing 757s and Boeing 767s, a balance of Airbus and Boeing widebodies that is expected to continue going forward, says Anderson, noting that a vast majority of their approximately 80 aircraft on order over the next five years have backstop financing.

Additional aircraft orders will not be made unless it makes fiscal sense, he says. But he stresses that the merger is “about addition, not subtraction” and “is not predicated” on hub closures, involuntary furloughs or big capacity reductions.

Delta on a standalone basis is already pulling down any unprofitable flying. Domestic capacity this year will be down 10% over 2007. Northwest, on the other hand, will cut roughly 5% in capacity in 2008.

The new combined operator will continue to rationalize its network domestically, and tailor the business plan if fuel continues its unprecedented rise or the US economic situation worsens.

For example, optimization of regional feeders will occur. Delta owns Comair, while Northwest owns Compass Airlines and Mesaba. “Our goal over the long run is to have our margins in that business to have the equivalent to the margins in the mainline business,” says Anderson.

Under the deal announced last night, Northwest shareholders will receive 1.25 Delta shares for each Northwest share they own. Executives are hopeful the transaction will close in about eight months after all regulatory requirements are met.