Air Merger To Test Its Blue Sky on Hill Skeptics

By Del Quentin Wilber
Washington Post Staff Writer
Thursday, April 24, 2008

Since announcing their proposed merger last week, executives at Delta Air Lines and Northwest Airlines have been promising the world -- in more ways than one.

They have assured investors that the combined carrier, which would be the world's largest, will post healthy profits by generating massive amounts of revenue and benefiting from about $1 billion in cost savings.

Meanwhile, even as they battle sky-high fuel prices, the executives have pledged not to lay off employees, eliminate hubs or reduce flying more than they have already proposed.

This dual sales strategy, which will be on full display today during back-to-back hearings before the House and Senate Judiciary committees, is a key component of the executives' efforts to win regulatory approval, reduce the chances of congressional intervention and limit the potential for labor problems, according to a dozen interviews with analysts, lawmakers, former government officials and former airline executives.

So far, the strategy has met with limited success.

The bottom-line argument has taken a drubbing on Wall Street, where investors seem concerned about the limited cost-cutting in the carriers' plans, according to analysts. In the week after the merger announcement, Delta's stock dropped 22 percent and Northwest's fell 19 percent.

Though some carriers' stocks were up marginally yesterday, Northwest shares fell another 5 percent and Delta slumped 4 percent more, as investors reacted to more than $1 billion in losses by the nation's major carriers in the first quarter. Delta and Northwest announced that they posted combined losses of $465 million, excluding costs and charges associated with bankruptcy protection, which both carriers exited last year.

And the argument that the new carrier won't shed jobs or routes hasn't fared well on Capitol Hill.

Pro-labor Democrats have blasted the merger. Rep. James L. Oberstar (D-Minn.), an influential lawmaker on aviation issues, called the proposal "probably the worst development in the history of aviation since deregulation."

Even pro-business Republicans say they are dubious about the sales pitch. "Mark me down as skeptical," said Sen. Christopher S. Bond (R-Mo.), who cited the experiences of consumers and workers in St. Louis after the takeover of TWA by American Airlines in 2001. American had promised to keep up flights in St. Louis, where TWA was based, but later cut them substantially.

"In my experience, there are going to be some losers, and those are employees and consumers," Bond said. "How are they going to cut costs, based on my past experience, without significant disruptions" to consumers and workers?

Sen. Kay Bailey Hutchison (Tex.), the ranking Republican on the Senate aviation subcommittee, said she spoke with the airlines' leaders on Tuesday but still had concerns.

"I don't like having fewer airlines serving our consumers," Hutchinson said in an interview. "My instincts are just always against bigger-is-better in this type of industry. I like having more choices and competition."

Hutchinson and other lawmakers said they were worried about the broader implications of a Northwest-Delta deal and the possibility that it might trigger an industry-wide round of consolidation. The chief executive of United Airlines, Glenn Tilton, has said that he views mergers as a "necessary step" for the industry to return to profitability. United posted a loss of more than $500 million in the first quarter.

Although members of Congress have no official say over regulatory approval, Delta and Northwest executives are not taking any chances. They have been hustling across Capitol Hill, meeting with lawmakers on various committees and trying to convince them that their deal would not hurt employees or consumers. They say the enormous airline created by the merger would withstand high fuel costs and other economic pressures. That growth would also allow it to better serve small communities and boost customer service, they have said.

"The merged entity will be financially stronger than if the two airlines stay apart," Doug Steenland, Northwest's chief executive, said in an interview Tuesday. "This positions the merged entity to be in better financial shape and to be more secure."

The executives added that the airline industry currently is fragmented and competitive. Southwest Airlines, the low-cost behemoth, is the largest domestic airline, controlling about 20 percent of that market. Steenland and Delta's chief executive, Richard Anderson, said their combined airline's domestic traffic would not exceed Southwest's.

Their emphasis on building a larger airline that doesn't reduce flights is the opposite of the strategy pursued by US Airways executives in late 2006 when they announced a hostile takeover bid for Delta. That failed, in part, because lawmakers expressed public concern about US Airways' plans to have the combined airline reduce flying by 10 percent to lower costs.

In light of the beating US Airways executives took in Congress, outside experts said the leaders of Northwest and Delta were taking the right approach, even if it doesn't please investors in the short run.

"They can't come out and say they are going to close two hubs and not only get the congressional delegations upset but also the labor groups," said Patrick Murphy, an aviation consultant and a former senior Transportation Department official. "I would say that they have been on the light side of laying out some of the reductions in cost that they will strive for in services and routes in the long run."

Delta and Northwest executives will also have to counter arguments made by Delta's former chief executive against airline consolidation, according to Murphy and lawmakers.

At a Senate hearing in January 2007, then-chief executive Gerald Grinstein spent most of his time criticizing the details of US Airways' takeover plan, saying it hurt employees and travelers. But he also waxed poetic at times about broader implications for consumers and workers. (In an interview with The Post, he noted the industry's poor history with mergers.)

In his testimony, Grinstein pointed to the broken promises made by American Airlines in its takeover of TWA.

""There's no one to enforce" a no-layoffs pledge, Grinstein said. ". . . It's not a contract. It is: Believe me, trust me."

He also touched on concerns about what would happen if the industry went through a round of consolidation.

"In terms of service to small communities, are you better off with six network carriers or are you better off with three?" he said. "Are you better off with more hubs or fewer hubs? Are you better off having those network carriers fiercely competing with each other, trying to get into those markets? . . . If you approve this, and what you are approving sets such a low standard, how are you going to say no to Continental and United? How are you going to say no to Northwest and American? You will devolve into three network carriers. And once that happens, you won't get the same level of service."

Delta and Northwest executives said they respected Grinstein's opinion but note that times have changed. When Grinstein was testifying, jet fuel cost about $1.65 per gallon. It now costs more than $3.60 per gallon.

"The world we face today is a very different world than we faced a year ago," said Delta's Anderson. "Our responsibility is to our employees and shareholders and communities to make the right long-term decision to make sure these airlines stay viable and strong."

Staff researcher Richard Drezen contributed to this report.

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