Delta/Northwest may spark more airline mergers
Tuesday April 15, 6:13 pm ET
By Kyle Peterson
CHICAGO (Reuters) - The proposed merger of Delta Air Lines Inc (NYSE:DAL - News) and Northwest Airlines Corp (NYSE:NWA - News) is likely to spur other carriers to go after the cost savings and global brand recognition required to survive amid soaring fuel prices and a weak U.S. economy.
If the long-awaited consolidation wave were, in fact, at hand, the airlines most likely to follow suit would be UAL Corp's (NasdaqGS:UAUA - News) United Airlines and Continental Airlines Inc (NYSE:CAL - News), which reportedly have been in talks for months.
Continental said on Tuesday that it would review strategic alternatives. But pilots of both companies said they would not back a merger unless they approved of the terms.
With industry conditions increasingly hostile, and Delta potentially improving its competitive position, other legacy carriers might find themselves in desperate need of a merger.
"There will be a great deal more pressure on United and Continental to look at a combination facing the threat of a large Delta/Northwest merger," said Jim Feltman, aviation consultant for Mesirow Financial Consulting on Tuesday. "It's almost compelling as opposed to desirable."
The industry has been battered by hefty fuel bills, directly linked to the price of crude oil (CLc1), which notched a record high near $114 a barrel on Tuesday.
Those cost pressures combined with a weakening U.S. economy have put airlines in an increasingly awkward position that could lead to another steep downturn like the one triggered by the 2001 terror attacks on the United States.
In Tuesday trading, Delta shares fell 12.6 percent to $9.16 and Northwest shares closed down 8.4 percent at $10.28, both on the New York Stock Exchange.
BATTLING THE BEHEMOTH
Delta and Northwest on Monday announced a planned merger that would form a new Delta, the world's largest airline by traffic. The carriers said they would anticipate $1 billion in benefits once they combined operations.
Experts say other airlines would not be able to stand by while Delta built a stronger competitive position and lowered its costs. UAL's Chief Executive Glenn Tilton indicated on Tuesday that he agrees, but stopped short of saying that consolidation is the only path to stability.
"As the industry evolves, we will take the actions we need to strengthen our global competitiveness, and we will participate in consolidation when and if it is the right choice and provides the right benefits for employees, customers and shareholders," Tilton said in a recorded message to employees.
United and Continental are currently blocked from taking action to combine by Northwest's possession of a "golden share" in Continental that restricts that airline's merger prospects.
But, if Northwest merged with Delta, then Continental would be free to buy back the share for $100 and pursue a merger of its own.
"As we've said repeatedly for more than a year and a half, our preference has been to remain independent as long as the competitive landscape remained the same," said Continental Chief Executive Larry Kellner in a statement. "However, the landscape is changing."
Neither UAL nor Continental has confirmed merger discussions.
OTHER POSSIBILITIES
At least one expert believes that a UAL/Continental linkup is far from inevitable.
"I don't think this necessarily drives UAL into the hands of Continental," said Stuart Klaskin at KKC Aviation Consulting.
Klaskin said Continental may explore other options, such as merging with a low-cost airline like Alaska Air Group (NYSE:ALK - News). He said the same may be true for AMR Corp (NYSE:AMR - News), parent of American Airlines.
These carriers may feel the call to consolidate, but they also could see better opportunities to reduce capacity and head count by merging with smaller regional competitors, he said.
"It's fair to say that there's going to be a round of musical chairs, and it's unknown who's going to end up sitting next to whom," Klaskin said.
(Editing by Gerald E. McCormick and Tim Dobbyn)
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