Old 03-28-2008, 12:28 PM
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newKnow
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Default Just when you thought it was over, NWA tries to put it NWA/DAL together again.

Northwest Airlines Corp. executives have proposed that Delta Air Lines Inc. and Northwest proceed with their planned merger, but recut the deal to give less generous terms to their pilots, said people familiar with the matter.

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.

They 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 revise their earlier agreement, taking off the table the higher wages the pilots were going to receive to make up for the lack of operational savings that an upfront seniority agreement would provide, said one person familiar with the matter. 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 this person.

If Delta agrees to proceed with a revised merger agreement, Mr. Anderson, the CEO, is going to 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. Ditto for Northwest's Mr. Steenland, although his pilots, by saying they were willing to let an arbitrator decide the seniority issues, had seemed more amenable to a deal. A revised agreement that doesn't give Northwest pilots sizeable raises is certain to be greeted with unhappiness.

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."

Write to Susan Carey at [email protected] and Paulo Prada at [email protected]

Last edited by newKnow; 03-28-2008 at 12:45 PM.
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