Northwest Reworks Plan
For Merger With Delta
[FONT=Times New Roman,Times,Serif]Deal Could Give Pilots [/FONT]
[FONT=Times New Roman,Times,Serif]Less Generous Terms[/FONT]
[FONT=times new roman,times,serif][FONT=times new roman,times,serif]By SUSAN CAREY and PAULO PRADA[/FONT]
[FONT=times new roman,times,serif]March 28, 2008 3:28 p.m.[/FONT]
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Northwest Airlines Corp. executives have proposed that Delta Air Lines Inc. and Northwest proceed with their planned merger, said people familiar with the matter.
But a jump-started deal wouldn't include the terms of a combined pilot labor agreement and the salary enhancements previously foreseen, they said, because the pilots failed to reach agreement on other terms the companies sought to ease the merger.
While the idea may be unpopular with the pilots, there is nothing to prevent the carriers from taking that course. Delta still is pondering the idea, these people said. But both airlines know that if they are going to proceed, they need to move very quickly so the transaction can be scrutinized before current Justice Department officials leave office at the end of the year when the administration changes.
A Delta spokeswoman declined to confirm whether her company has received a proposal from Northwest to proceed without the support of the pilots. "Our board and senior management will continue to explore strategic options," she said.
The two carriers had an entire deal ready to go in February and required only the final approval of their boards. The terms included a share swap at near market values, with Northwest holders getting a small premium; a $750 million investment by their European marketing partner Air France-KLM SA; and a common pilot labor contract for their combined 11,000 pilots that would give all of them raises, with Northwest's 5,000 aviators getting heftier increases to bring them up to Delta levels.
The combined carrier, which would be the world's largest by traffic, was to keep the Delta name, remain based at Delta's Atlanta headquarters and be run by Richard Anderson, Delta's chief executive officer. Doug Steenland, Northwest's CEO, was expected to take a lesser role as a director or leave the combined enterprise altogether. When the original deal was conceived, the companies didn't foresee layoffs, hub closures or much capacity shrinkage, believing instead that combining would generate a big boost in revenue and some operational efficiencies.
hey held off, however, because they wanted their pilots to agree first on a method of building a single seniority list. Seniority is key to pilot career advancement and dictates what types of planes they fly, whether they are captains or first officers, when they get time off and whether they could be furloughed.
Such agreement isn't required by the pilots' union -- both groups are represented by branches of the Air Line Pilots Association -- or by law in cases of airline mergers. And it's never been done before. But Delta and Northwest figured they could minimize pilot infighting, expedite efficiencies by being able to meld the pilot ranks immediately once the deal was consummated, and win the support of the most powerful employee groups.
The savings generated by that immediate labor integration were to be shared with the pilots in the joint labor contract that was part of the original transaction. The cost to the merged airline, said one individual familiar with the matter, was "significant."
But the two pilot groups couldn't agree on a fair method for integrating their seniority lists. Despite repeated negotiations over many weeks, the discussions hit an impasse earlier this month. The Delta group felt the Northwest pilots were pushing for a system that would jeopardize the seniority and career expectations of Delta pilots. The Northwest group said it was willing to put the issue to a neutral arbitrator, a plan the Delta pilots rejected.
In the past couple of weeks, neither Delta nor Northwest declared the deal formally dead. But their slumping stock prices suggested some investors thought the deal was, which led some investors to press them to move forward without the pilots. At the same time, fuel prices hit historic highs, the economy weakened further and the outlook for the industry took a bearish turn. Delta announced plans to cut 2,000 jobs, ground some aircraft and reduce its domestic capacity. Northwest hinted it may take similar steps.
Against this backdrop, the merger looks even more compelling, said one person familiar with the matter. Combining would give the two a larger network, lower unit costs and a more efficient business, once integration expenses abated. But the risk is that doing the deal will eat up precious liquidity at a time when all airlines are trying to husband cash in case industry conditions deteriorate further.
Thus Northwest proposed that the two go forward on the basis of their earlier merger agreement, said people familiar with the situation. That would remove from the table the effort to obtain a new pilot agreement before consummation of the deal. Typically, those negotiations don't occur until well after the deal is closed and the pilots have hammered out a seniority list. Earlier assumptions that the two wouldn't close hubs, lay off employees or shrink capacity are no longer certain either, with fuel at current high levels, said one person.
If Delta agrees to proceed with the merger, Mr. Anderson, the CEO, would have some explaining to do to his pilots, having said he wouldn't move forward with a combination without protecting the seniority of Delta's employees.
However, Delta has continued to tell its workers it supports industry consolidation. In a memo to employees last week, Mr. Anderson and Ed Bastian, Delta's president and chief financial officer, said, "While the rise in fuel and the weakening economy present near-term challenges, our long-term view remains that consolidation may be the right course of action."
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