Delta Air Lines and Northwest Airlines will go ahead with their planned merger - which, if approved, will create the world's second-largest carrier after Air France-KLM in terms of revenue and the world's largest in terms of global traffic - despite the admittedly high barriers, which range from labour to their very different fleets. A combined Delta/Northwest would bring in annual revenues of $31.7 billion, almost a third higher than that of what would be the world's third largest carrier by revenue, American Airlines (see table).
Under serious consideration since December 2007, the merger of Delta and Northwest - both of which 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, says Richard Anderson, the Delta chief executive who would lead the combined entity.
The two hopefuls hastened their way towards the altar despite the fact that a key player - the Northwest pilot group - is not on board, even though the two carriers promised no hub closures and no involuntary furloughs of front-line workers. Delta and Northwest have attempted to reassure investors and others that the combination was not a short-term response to rising fuel costs. As Anderson puts it: "The strategic basis is a sound strategy, whether fuel is at $60 or $100. Fuel wasn't forcing our hand, but surely it was an important factor."
|World top 10 airlines by revenue|
|Air France-KLM Group||32.8|
|Delta and Northwest||31.7|
|Japan Airlines Corp||17.1|
|US Airways Group||11.7|
Air France-KLM, which had previously offered to inject $750 million into a merged Delta/Northwest to facilitate the merger of its SkyTeam partners, has since decided that "the principles governing the merger no longer require additional funding through an exclusive capital increase from Air France-KLM". The Franco-Dutch carrier says it is "confident we can quickly build a global partnership between Delta, Northwest, KLM and Northwest in the form of a joint venture offering a network with extremely attractive multiple hubs".
|1||Delta and Northwest||14.0%|
|10||Korean Air Lines||2.6%|
Anderson is keen to point out the benefits that the transatlantic joint venture between the four SkyTeam carriers will bring. "This really is the first time that we have a carrier in the US that has a complete route network. When you think about what deregulation did, this is really the culmination of that," he says. "All four together [Air France plus Delta, KLM plus Northwest] have 27% of the transatlantic market. All 6,000 city pairs won antitrust immunity [in early April], and that is really good." Of the 1,000 city pairs in the combined networks of Delta and Northwest, only 12 have any overlap, and "there is virtually no overlap on overseas routes," says Steenland.
World traffic top 10 by RPK
|1||Delta and Northwest||284|
|3||Air France-KLM Group||206|
And JP Morgan's Jamie Baker points out that fuel prices are likely to outpace any revenue generation from the merger. "Unfortunately, by the time Delta and Northwest consummate their marriage - if at all - and potentially revisit their aversion to hub closures, industry losses are expected to have escalated and value destruction is likely to have continued unabated," he says.
|1||Delta and Northwest||19.9%|
And American Antitrust Institute vice-president and senior fellow Diana Moss has called for a new level of scrutiny at the US Department of Justice, saying that it should "account for possible adverse changes that would be compounded by a United/Continental merger or other mergers, if one or more were to occur".