Northwest May Be Best for Delta
By Ted Reed
TheStreet.com Staff Reporter
11/15/2007 5:14 PM
CHARLOTTE, N.C. -- If Delta (DAL - Cramer's Take - Stockpickr) wants to merge with someone, Northwest (NWA - Cramer's Take - Stockpickr) may be the most viable candidate.
On Wednesday, a hedge fund called for a merger between Delta and UAL's (UAUA - Cramer's Take - Stockpickr - Rating) United Airlines, and the Associated Press reported that the two carriers have discussed a deal that would put the combined company's headquarters in Chicago. Delta denied holding any talks.
In any case, "Northwest makes more sense," analyst Michael Derchin of FTN Midwest Securities said Thursday in a report. Additionally, a source said, past internal Delta studies have concluded that Continental (CAL - Cramer's Take - Stockpickr - Rating) and Northwest are good merger candidates, while United is not.
Those studies indicated that a pact between United and Delta, the nation's second- and third-largest airlines, would be unlikely to gain approval from antitrust regulators. Meanwhile, Northwest has the ability to limit Continental's maneuverability because it owns a stake in its fellow carrier and could block an acquisition.
Derchin wrote in his report that Northwest's Pacific routes are the primary lure. "It will take Delta 15 years to build an Asia/Pacific operation that is comparable to their current Atlantic and Latin American operations," he said. "A merger would get them there in one year." While United also has a strong Pacific operation, Derchin listed several reasons why Northwest is the preferred partner. A key is that integration of the carriers' international alliances would be smoother, namely one with Air France KLM (AKH - Cramer's Take - Stockpickr - Rating). That company has formed a joint venture with Delta, and the KLM division has a business venture with Northwest.
A merger with NWA closes this loop," Derchin said. United is a founder of the competing Star Alliance.
Additionally, Delta, which is rapidly expanding internationally, could benefit from Northwest's position as the U.S. launch customer for the Boeing 787, with orders or options for 68 deliveries. Anderson, a former Northwest executive, "knows where the bodies are buried," Derchin said.
While Northwest would have an advantage in gaining regulatory approval because it is smaller, a merger with United could also be cleared, he believes. FTN Midwest Securities makes a market in UAL's shares.
For its part, Northwest is among the airlines that has been noncommittal on consolidation. At an industry conference last week, CFO Dave Davis said that "consolidation has been a feature of this business for decades, and we think it's going to continue," but did not comment on what Northwest's role might be.
Meanwhile, the thought of a merger with United and a move of Delta's Atlanta headquarters troubled U.S. Rep Lynn Westmoreland, R-Ga., who questioned Delta CEO Richard Anderson Thursday at a House Aviation Subcommittee hearing on airlines' preparations for the holiday travel season. Westmoreland proclaimed his loyalty to Delta, saying that he represents many Delta employees and that he, his wife and daughter are former employees. He said he was disappointed to read of the merger talks, had also read Delta's denial, and wanted to hear from directly Anderson that there were no discussions.
I haven't talked to [United CEO] Glenn Tilton or any other executive at United since the last time I was in the industry four years ago," Anderson responded. "There are no discussions, there have been no discussions. I was as surprised at that AP article as you were."
Then Westmoreland declared Delta is "a southern company," adding "We don't want the family moving north. We want to keep the family in Atlanta." To which Anderson responded: "We couldn't agree with you more. It's a great airline with a great legacy that goes back to Monroe, Louisiana."
Westmoreland's comments recalled a statement by Sen. Trent Lott, R-Miss., in January, when US Airways (LCC - Cramer's Take - Stockpickr - Rating) CEO Doug Parker appeared before the Senate Commerce Committee to defend his proposed acquisition of Delta.
"I must say you are an aggressive suitor," Lott told Parker. "But the lady from the South -- Atlanta -- doesn't seem to want to be forced into this shotgun wedding."
In fact, that hearing provided a strong indication that while a US Airways and Delta merger may have had backing from Wall Street and from hedge funds, it wasn't popular with lawmakers. A week later, it collapsed. Perhaps Westmoreland's comments should serve as a reminder that Congress will get involved if airlines move to consolidate. Not to say there won't be mergers, but clearly regional loyalists and various opponents will have a chance to be heard.
By Ted Reed
TheStreet.com Staff Reporter
11/15/2007 5:14 PM
CHARLOTTE, N.C. -- If Delta (DAL - Cramer's Take - Stockpickr) wants to merge with someone, Northwest (NWA - Cramer's Take - Stockpickr) may be the most viable candidate.
On Wednesday, a hedge fund called for a merger between Delta and UAL's (UAUA - Cramer's Take - Stockpickr - Rating) United Airlines, and the Associated Press reported that the two carriers have discussed a deal that would put the combined company's headquarters in Chicago. Delta denied holding any talks.
In any case, "Northwest makes more sense," analyst Michael Derchin of FTN Midwest Securities said Thursday in a report. Additionally, a source said, past internal Delta studies have concluded that Continental (CAL - Cramer's Take - Stockpickr - Rating) and Northwest are good merger candidates, while United is not.
Those studies indicated that a pact between United and Delta, the nation's second- and third-largest airlines, would be unlikely to gain approval from antitrust regulators. Meanwhile, Northwest has the ability to limit Continental's maneuverability because it owns a stake in its fellow carrier and could block an acquisition.
Derchin wrote in his report that Northwest's Pacific routes are the primary lure. "It will take Delta 15 years to build an Asia/Pacific operation that is comparable to their current Atlantic and Latin American operations," he said. "A merger would get them there in one year." While United also has a strong Pacific operation, Derchin listed several reasons why Northwest is the preferred partner. A key is that integration of the carriers' international alliances would be smoother, namely one with Air France KLM (AKH - Cramer's Take - Stockpickr - Rating). That company has formed a joint venture with Delta, and the KLM division has a business venture with Northwest.
A merger with NWA closes this loop," Derchin said. United is a founder of the competing Star Alliance.
Additionally, Delta, which is rapidly expanding internationally, could benefit from Northwest's position as the U.S. launch customer for the Boeing 787, with orders or options for 68 deliveries. Anderson, a former Northwest executive, "knows where the bodies are buried," Derchin said.
While Northwest would have an advantage in gaining regulatory approval because it is smaller, a merger with United could also be cleared, he believes. FTN Midwest Securities makes a market in UAL's shares.
For its part, Northwest is among the airlines that has been noncommittal on consolidation. At an industry conference last week, CFO Dave Davis said that "consolidation has been a feature of this business for decades, and we think it's going to continue," but did not comment on what Northwest's role might be.
Meanwhile, the thought of a merger with United and a move of Delta's Atlanta headquarters troubled U.S. Rep Lynn Westmoreland, R-Ga., who questioned Delta CEO Richard Anderson Thursday at a House Aviation Subcommittee hearing on airlines' preparations for the holiday travel season. Westmoreland proclaimed his loyalty to Delta, saying that he represents many Delta employees and that he, his wife and daughter are former employees. He said he was disappointed to read of the merger talks, had also read Delta's denial, and wanted to hear from directly Anderson that there were no discussions.
I haven't talked to [United CEO] Glenn Tilton or any other executive at United since the last time I was in the industry four years ago," Anderson responded. "There are no discussions, there have been no discussions. I was as surprised at that AP article as you were."
Then Westmoreland declared Delta is "a southern company," adding "We don't want the family moving north. We want to keep the family in Atlanta." To which Anderson responded: "We couldn't agree with you more. It's a great airline with a great legacy that goes back to Monroe, Louisiana."
Westmoreland's comments recalled a statement by Sen. Trent Lott, R-Miss., in January, when US Airways (LCC - Cramer's Take - Stockpickr - Rating) CEO Doug Parker appeared before the Senate Commerce Committee to defend his proposed acquisition of Delta.
"I must say you are an aggressive suitor," Lott told Parker. "But the lady from the South -- Atlanta -- doesn't seem to want to be forced into this shotgun wedding."
In fact, that hearing provided a strong indication that while a US Airways and Delta merger may have had backing from Wall Street and from hedge funds, it wasn't popular with lawmakers. A week later, it collapsed. Perhaps Westmoreland's comments should serve as a reminder that Congress will get involved if airlines move to consolidate. Not to say there won't be mergers, but clearly regional loyalists and various opponents will have a chance to be heard.
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