Pilot Issues Called Critical to Delta-Northwest Talks

By Frank Ahrens
Washington Post Staff Writer
Wednesday, February 20, 2008

The Northwest Airlines and Delta Air Lines boards could meet as soon as today to approve a merger that would create the world's largest carrier, if pilots for the two airlines agree, according to people familiar with the talks.

However, key issues were unresolved last night, including how the pilots would be merged into one fleet.

With rising fuel costs and increased competition from smaller, more efficient regional airlines, big carriers such as Northwest and Delta are turning to mergers to improve their balance sheets and stock prices.

A Northwest-Delta merger would create the world's largest airline by number of passengers, surpassing American Airlines. By revenue, Air France-KLM is the largest. The French-Dutch airline said last week that it would consider investing in a merged Northwest-Delta.

Critical to a Northwest-Delta merger would be buy-in from the unionized pilots of the two airlines. As of last night, the pilots had not agreed, said one source, who spoke on the condition of anonymity because no deal had been announced. The pilots' approval is not required, but neither airline wants to force disagreeable terms on them.

Northwest, based in Detroit, has 4,500 pilots among its 30,000 employees. Delta, based in Atlanta, has 6,000 pilots among a workforce of 50,000. Delta is the world's third-largest carrier; Northwest is No. 6.

Neither carrier is dominant at Washington area airports.

Delta and Northwest trail US Airways and American, respectively, at Reagan National Airport, combining for about 18 percent of the daily traffic in November, according to the U.S. Bureau of Transportation Statistics. At Dulles International Airport, neither Delta nor Northwest is among the top five carriers.

If a merger is struck, passenger frequent-flier programs would be unaffected for at least the duration of a federal regulatory review.

Airline mergers have often led to employee layoffs, closing or paring down of regional hubs and reductions in routes. Northwest and Delta have said privately that no reductions in flights were planned.

"Based on our capacity study, it seems pretty clear to us that whatever merger synergies are announced, they will likely be greater and take longer to ultimately achieve than the airlines announce," Credit Suisse analyst Daniel McKenzie wrote in a research note yesterday. "That's because no airline wants to announce they're getting rid of a hub and laying off thousands."

Shares of Delta fell 55 cents, to $16.77, yesterday. Shares of Northwest fell 23 cents, to $16.97.

The biggest obstacle to winning the support of the pilots is devising an acceptable system for determining their seniority once a merger is completed. In the airline industry, pilot seniority affects not only salaries, but also schedules, routes and the planes pilots fly. Senior pilots fly newer planes and get more desirable routes, such as overseas hauls on the Boeing 777.

Neither Northwest nor Delta would comment yesterday. The pilots' union, the Air Line Pilots Association, said pilot seniority integration in airline mergers is handled by the pilots themselves.

"The two pilot groups raise their own funds for their own independent merger attorneys, which provide advice to groups, which make their own decisions," said Pete Janhunen, a union spokesman.

A Northwest-Delta merger could trigger a reactive merger between Continental and United, as well as others, airline analysts said. As part of an ownership stake in Continental, Northwest holds a "golden share" in the company, giving it the ability to block any deal involving Continental.

"We are of the view, that the timing couldn't be better for the industry to pursue" mergers and acquisitions, Merrill Lynch analyst Michael Linenberg wrote in a research note yesterday. Because of the high price of oil, he wrote, "we think sustainable profitability is an elusive industry goal without meaningful structural change."

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