Delta Air Lines and Northwest Airlines to Merge : Create New Airline - Delta

Delta Air Lines and Northwest Airlines are to combine in an all-stock transaction with a combined enterprise value of $17.7 billion, creating one of the world's biggest airline groups. The new airline, which will be called Delta, will provide a more stable platform for future growth in the face of significant economic pressures from rising fuel costs and intense competition.

Delta CEO Richard Anderson will be chief executive officer of the combined company. Delta Chairman of the Board Daniel Carp will become chairman of the new Board of Directors and Northwest chairman Roy Bostock will become vice chairman. Ed Bastian will be president and chief financial officer. The board of directors will be made up of 13 members, seven of whom will come from Delta’s board, including Anderson, and five of whom will come from Northwest’s board, including Bostock and Doug Steenland, the current Northwest CEO. One director will come from the Air Line Pilots Association (ALPA).

Delta will have executive offices in Atlanta, Minneapolis/St. Paul and New York, and international executive offices in Amsterdam, Paris and Tokyo. The company’s world headquarters will be in Atlanta.

Combined, the company and its regional partners will provide access to more than 390 destinations in 67 countries. Delta and Northwest, together, will have more than $35 billion in aggregate annual revenues, operate a mainline fleet of nearly 800 aircraft and employ approximately 75,000 people worldwide.

In an industry where the U.S. network carriers have shed more than 150,000 jobs and lost more than $29 billion since 2001, the combination of Delta and Northwest creates a company with a more resilient business model that should be able to better withstand volatile fuel prices than either can on a standalone basis. Merging Delta and Northwest is an effective way to offset higher fuel prices and improve efficiencies, increase international presence and fund long-term investment in the business. 

The transaction is expected to generate more than $1 billion in annual revenue and cost synergies from more effective aircraft utilization, a more comprehensive and diversified route system and cost synergies from reduced overhead and improved operational efficiency. The company expects to incur one-time cash costs to not exceed $1 billion to integrate the two airlines. The combined company will have a stronger, more durable financial base and one of the strongest balance sheets in the industry, with expected liquidity of nearly $7 billion at closing.

Under the terms of the transaction, Northwest shareholders will receive 1.25 Delta shares for each Northwest share they own. This exchange ratio represents a premium to Northwest shareholders of 16.8 percent based on April 14 closing prices. The transaction is expected to be accretive to current Delta shareholders in year one excluding one-time costs. The merger is subject to the approval of Delta and Northwest shareholders and regulatory approvals. It is expected that the regulatory review period will be completed later this year.

Richard Anderson, Delta CEO, said, “We said we would only enter into a consolidation transaction if it was right for all of our constituencies; Delta and Northwest are a perfect fit. Today, we’re announcing a transaction that is about addition, not subtraction, and combines end-to-end networks that open a world of opportunities for our customers and employees. We believe by partnering with our employees, including providing equity to U.S.-based employees of Delta and Northwest, this combination is off to the right start. Together, we are creating America’s leading airline – an airline that is financially secure, able to invest in our employees and our customers, and built to thrive in an increasingly competitive marketplace.”

Doug Steenland, Northwest CEO, added, “The new carrier will offer superior route diversity across the U.S., Latin America, Europe and Asia and will be better able to overcome the industry’s boom-and-bust cycles. The airline will also be better able to match the right planes with the right routes, making transportation more efficient across our entire network. In short, combining the Northwest and Delta networks will allow the strengthened airline to realize its full global potential and invest in its future.”

The merged airline will maintain all hubs at Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, Salt Lake City, Amsterdam and Tokyo-Narita.

Delta customers will benefit from Northwest’s extensive service to Asian markets and Northwest’s customers will have access to Delta’s strengths across the Caribbean, Latin America, Europe, the Middle East and Africa.

Both airlines’ customers will benefit from a strengthened SkyTeam alliance that more closely aligns the combined airline with its respective trans-Atlantic partners Air France and KLM.

“Delta and Northwest are an excellent strategic fit, with complementary and geographically distinct route systems,” said Edward Bastian,  Delta president and chief financial officer. “Together, we will have a more robust platform for profitable international growth. Combining both carriers’ international and domestic strengths, with our worldwide SkyTeam partners, we are well positioned to lead the industry and deliver value to our shareholders.”

Record fuel prices have fundamentally changed the economics of the airline industry. Fuel is the highest single expense for Delta and Northwest, significantly eroding the financial benefits of restructuring and placing the airlines’ new found strength and stability at long-term risk. At the beginning of 2007, oil prices were approximately $55 a barrel. Now, oil prices have nearly doubled. This dramatic run-up in the price of oil makes the transaction even more compelling. 

The Delta-Northwest combination features little overlap in the nonstop routes the two airlines serve, with direct competitive service on only 12 of more than 1,000 nonstop city pair routes currently flown by both airlines.

Delta has also reached agreement with the company’s pilot leadership to extend its existing collective bargaining agreement through the end of 2012. The agreement, which is subject to pilot ratification, facilitates the realization of the revenue synergies of the combined companies once the transaction is completed. It also provides the Delta pilots a 3.5% equity stake in the new company and other enhancements to their current contract.

Frontline employees of both airlines will be provided seniority protection through a seniority integration process, as the airlines are combined. In addition, U.S.-based non-pilot employees of both companies will be provided a 4% equity stake in the new airline upon closing. The company also expects no involuntary furloughs of frontline employees as a result of this transaction and the existing pension plans for both companies’ employees will be protected. Additionally, all Delta and Northwest employees will enjoy reciprocal pass privileges on both airlines, beginning as soon as possible during the regulatory review process.

Financial advisers to Delta were Greenhill & Co. and Merrill Lynch & Co. and legal advisers were Wachtell, Lipton, Rosen & Katz and Hunton & Williams, LLP. Financial advisers to Northwest were Morgan Stanley and J.P. Morgan Securities and legal advisers were Simpson Thacher & Bartlett LLP and O'Melveny & Myers, LLP.

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