Markets, politicians show skepticism about NWA, Delta deal
MPR Staff and Wire reports
Delta's acquisition of Northwest Airlines will jeopardize jobs and paralyze communities in the upper Midwest, as the "globe-straddling mega-carrier" smothers low-fare airlines like Mesaba, Pinnacle and Southwest.
So says Rep. James Oberstar, the powerful chairman of the House Transportation and Infrastructure Committee, who promised Tuesday to give the merger "rigorous scrutiny."
The Minnesota Democrat also said the committee would "marshall all the forces" necessary to ensure the U.S. Justice Department, which must review anti-trust issues, does the same.
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In an afternoon news briefing, Oberstar said the deal, which would create the world's largest airline, would leave other carriers no choice but to follow suit, creating a market where three huge companies control the skies.
He accused Northwest and Delta of trying to "stampede" the pilots unions into an agreement, "and should that occur, you'll see others moving [in the same direction]."
But the soon-to-be CEO of the world's largest airline says the Twin Cities don't have much to worry about when it comes to keeping jobs and air service.
Northwest is by far the leading airline in the Twin Cities, employing 12,000 Minnesotans, including 2,300 employees at the company's headquarters campus in Eagan.
Delta CEO Richard Anderson said the new airline is determined to maintain jobs and air service in the Twin Cities once Delta and Northwest air lines combine forces. Northwest CEO Doug Steenland went one better, telling MPR News there is potential for growth.
"By coming together we are going to be able generate over $1 billion of benefits that will help the bottom line and offset some of constant challenges that airlines have historically faced," Steenland said.
"Certainly people who have followed us in the twin cities know we've had no choice but to follow the survival playbook. And the goal here is to get well past survival and be in a position where we can prosper, we can grow, we can invest in our product, invest in our employees, bring in new airplanes, expand the airline And I think we will be successful."
Wall Street isn't buying it.
Shares of Delta and Northwest airlines fell sharply Tuesday on concerns the airlines have no immediate plans to cut domestic flights and fares, two moves analysts consider critical to profitability.
The upshot: The value of Northwest under the deal dropped $300 million less than a day after the deal was announced.
The share-swap agreement announced Monday calls for the combined airline to be named Delta, remain based in Atlanta, and be run by Anderson.
If the deal becomes final, the new Delta will be the biggest airline in the world with about $35 billion in annual revenue, some 1,000 jets and about 75,000 employees. Delta says there'll be no job cuts for most employees, including in Minnesota where Northwest has about 11,600 employees.
Delta shareholders will get a bigger company, while Northwest shareholders would get a 16.8 percent premium over Monday's closing stock prices. Based on those prices, the agreement valued Northwest at more than $3.6 billion.
However, shares of both companies fell Tuesday, reducing the deal's value of Northwest nearly $300 million. Northwest (NYSE: NWA) fell 94 cents or 8.38 percent, to $10.28 while Delta (NYSE: DAL) closed at $9.16, down $1.32, or 12.6 percent.
Both airlines previously announced domestic capacity cuts for this year, and while rising fuel prices could change the equation, Delta suggested no more are in the works.
That's good news for small airports like the one in Fargo.
Airport manager Shawn Dobberstein doesn't expect any changes in air service for at least a year, and believes in the long term air service may improve.
"The Fargo Moorhead market I think is a great exception around the country in terms of a strong business base that they're able to attract. Markets that do not have a strong business base or don't demand a lot of domestic or international traffic are probably going to maybe suffer under that."
Minnesota lawmakers aren't taking any chances. They've joined their Washington counterparts in calling for hearings -- and possibly a special session -- on Delta's acquisition of Northwest Airlines.
Minnesota Governor Tim Pawlenty promised to "closely scrutinize" the proposed transaction and to "strongly stand up for Minnesota's interests."
"They should make no mistake. We negotiated in good faith an agreement, and an understanding with Northwest Airlines that they would keep their hub here as well as their headquarters. We expect them to fulfill those commitments and if they don't they're either going to owe us a substantial amount of money or we will expect them to renegotiate those commitments in a way that's favorable to Minnesota," Pawlenty said.
State Sen. Richard Cohen, DFL-St. Paul, said he's not a fan of special sessions, but suggested one may be necessary to examine how the proposed merger will affect Minnesota's economy.
"You might execute this properly and not screw it up. But in the real world of these airlines in this kind of environment, there's a huge chance that it does get screwed up."
And Minnesota Senate President Jim Metzen, DFL-South St. Paul, has called for a hearing to address concerns about Northwest employees, especially those who work at the company's Eagan headquarters, which is located in his Senate district.
Metzen, who chairs the Senate Business, Industry and Jobs Committee, said his panel could hold a hearing on Delta's acquisition of Northwest within the next week. And when it does, airline leaders better come armed with some answers.
"We did help them at the beginning when we bailed them out, so to speak. And now in a sense they're bailing out of Minnesota, which disturbs a lot of us," Metzen said.
"It sounds kind of rosy, the stuff they're sending out today, but what's it going to look like a year from now?" Metzen said.
In reality, neither the state of Minnesota nor Congress much power to stop a transaction that antitrust experts expect to be approved this year. There's not much route overlap between the airlines, and therefore not much impact on competition, added aviation consultant Darryl Jenkins.
"I think this is going to breeze through the Department of Justice. Congress always throws a fit over anything that happens. But it's the Department of Justice that makes the final decision. And, I think, for them this will be a very easy decision," said Jenkins, who worked for a consulting firm that advised Delta on the transaction.
The same cannot be said for the pilots. The carriers spent months trying to get their pilots to agree on a joint contract, but failed over seniority disputes.
Delta made a deal with its pilots over the weekend, leaving the Northwest pilots to work something out later. On Monday, Northwest pilots declared their opposition to the combination "as it stands," perhaps leaving room for a deal later.
The Delta pilot agreement, which still needs rank-and-file ratification, extends the current contract through 2012 and gives Delta pilots 3.5 percent of the new company.
Northwest pilots are livid about Delta giving Delta pilots a new contract, and pay and benefits increases to win the Delta pilots support for the merger. There are no pay raises now for Northwest pilots, or other Northwest employees. Delta said they'll come down the road.
In a statement Monday night, the Northwest pilots union said Delta is following a "recipe for failure."
The Northwest pilots say Northwest would be better off remaining independent.
The pilots may be posturing, taking a hard-line position to try to maximize what they can extract from Delta. But consultant Hubert Horan said the Northwest-Delta merger could be much worse than the 1986 merger of Northwest and Republic airlines.
Horan also noted the union for Northwest's ground workers has also announced its opposition to the merger.
"Serious labor unrest means the chance of its being an operational and service mess, along the lines of what Northwest and Republic was for many years," Horan said.
Horan said it'll likely costs hundreds of millions of dollars to combine the airlines, and odds are pretty good that the costs will outweigh the benefits.
"You might execute this properly and not screw it up. But in the real world of these airlines in this kind of environment, there's a huge chance that it does get screwed up," Horan said.
