Date: February 19, 2008
Source: Wall St. Journal
Authors: Susan Carey and Paulo Prada

Boards Are Ready to Meet, Yet Agreement With Pilots Remains to Be Worked Out

Delta Air Lines Inc. and Northwest Airlines Corp. are in the final push toward a merger agreement that would create the world's largest airline by traffic.

But they haven't reached accord with their unionized pilots on all aspects of a plan to achieve a common contract, a method for blending the pilots' seniority systems, and the amount of equity the aviators would receive, people familiar with the matter said.

The pilots don't have formal veto over a deal, yet failure to win their support might make it more difficult to pull one off.

Both boards are expected to meet tomorrow to vote on the transaction, which originally was expected to be a share swap at near market rates. It is possible the deal might include some premium for Northwest shareholders, one person with knowledge of the plan said, but that wasn't certain. If the pilot deal isn't ready, the board meetings will amount to little more than updates, these people said.

The combination would be the biggest airline merger, eclipsing the attempted 2000 combination of United Airlines parent UAL Corp. and US Airways Group Inc., and Air France SA's 2004 acquisition of KLM Royal Dutch Airlines. The United deal met regulatory opposition but predated the current environment, in which carriers hope to mitigate high fuel prices by grabbing greater market power.

Both Delta and Northwest are committed to reaching an accord with their pilots before a deal announcement, people familiar with the situation said. That would help them combine operations quickly and smoothly. Failure to involve pilots ahead of time led to poor morale and wrangling over seniority at US Airways, which merged with America West Airlines in 2005.

If Delta and Northwest reach deals with 11,000 pilots represented by two branches of the Air Line Pilots Association, those accords would need to be approved by the respective union leadership councils by tomorrow. If so, a transaction could be announced as early as late tomorrow or Thursday, these people said. While the pilots and their employers haven't agreed on equity yet, a board seat for the group is planned.

Still up in the air is how much equity, or perhaps cash, other employees would receive. The idea is to make certain all employees get something, one person said, even Delta's predominantly nonunion workers.

Also not certain is the size of the equity stake Air France-KLM is to take. Air France said last week that it would invest, without specifying how much. People familiar with the matter said the investment might be around $750 million, not the nearly $1 billion previously foreseen, with the carrier buying the stake at market prices.

Including about a quarter of the company's total stock that will be distributed once remaining bankruptcy claims get settled, Delta has a market capitalization of about $6.7 billion at present. Northwest's total market value is just over $4 billion.

The two carriers currently have a code-sharing marketing arrangement domestically and cooperate across the Atlantic -- Delta with Air France, Northwest with KLM. The four also belong to the global Skyteam marketing group.

Delta is the world's No. 3 airline by traffic. Northwest ranks sixth globally and is fifth in the U.S. The combined airline would keep the Delta name, be headquartered in Atlanta and be run by Richard Anderson, Delta's chief executive. Doug Steenland, Northwest's CEO, wouldn't have an executive management position but might take a board seat, these people said.

The "new" Delta doesn't expect a lot of job losses or much reduction in capacity. No hubs will be dropped even though Northwest's smallest hub, in Memphis, Tenn., is relatively close to Delta's big Atlanta hub, and Delta's Cincinnati hub is near Northwest's No. 1 hub, in Detroit. Some cost savings are expected through integration, but the deal's appeal is predicated on increasing revenue by having a larger network, people familiar with the matter said.

Shareholders will be able to vote on the transaction. Northwest's annual meeting, scheduled for April, probably will be postponed. Delta still plans to hold its annual shareholder meeting June 3, according to people familiar with the plan.

Some Northwest shareholders have complained privately because they think they wouldn't get a premium for their shares and because capacity won't be cut, the classic way for airlines to reduce costs and raise fares. They also say they fear that employees' equity stake would dilute their holdings and that the new pilot accord would raise labor costs. Some industry executives have worried privately how zero capacity reductions and higher labor rates would hurt the rest of the industry.

It couldn't be learned whether Delta shareholders, some still disappointed that the company didn't accept a $9.5 billion hostile takeover bid by US Airways early last year, might be in line for some sort of sweetener.

A Delta-Northwest deal is expected to intensify discussions between UAL Corp.'s United Airlines and Continental Airlines Inc. about a potential merger of their own, a combination that would be even larger by traffic. United and Continental have held exploratory talks recently.

Continental also has had exploratory discussions with AMR Corp.'s American Airlines in recent weeks, a person familiar with the matter said.

The prospect of a Delta-Northwest tie-up has raised expectations that a merger wave is coming, so all of the big airlines are evaluating their options and putting out feelers to competitors.