Northwest Orient Airlines yesterday announced the biggest merger in U.S. civil aviation history -- an $884 million deal to acquire Republic Airlines.
If the transaction goes through, it will create the nation's third-largest airline -- one fully capable of battling United and American airlines, currently first and second in the industry. Eastern, in the throes of financial and labor strife, will be pushed to a struggling fourth place.
The merger of the two airlines, which are based in Minneapolis-St. Paul, must be approved by the Department of Transportation, which rules on such matters since the death of the Civil Aeronautics Board a year ago in the final phase of the Airline Deregulation Act of 1978.
The repercussions of deregulation still are being felt as the airline industry consolidates. Most Wall Street analysts expect the result to be three or four major carriers and a few small regional players. Northwest clearly intends to be one of the three or four.
The agreement between NWA Inc., the Northwest parent, and Republic Airlines Inc. is a friendly takeover approved yesterday by the boards of directors of both airlines. If Republic's stockholders endorse, NWA will pay them $17 cash per share. Republic's stock closed yesterday at $14, NWA's at $47 7/8.
The agreement includes options for shareholders designed to discourage other takeover bids for either Republic or Northwest.
The combined airlines will have 298 airplanes and more than 30,000 employes serving 100 cities in the United States, 4 in Canada, 2 in Mexico, 8 in Europe and 11 in Asia.
Transportation Secretary Elizabeth Hanford Dole recently approved what had been until then the biggest civil aviation deal, United's $715.5 million acquisition of Pan American World Airways' Pacific routes, planes and employes.
Northwest vigorously opposed that transaction, partly because of the power it would give United to feed its heavy domestic traffic into newly acquired Pacific routes. Northwest, through years of careful planning and controlled growth, has become the leading U.S. carrier across the Pacific, outdistancing Pan Am and trailing only Japan Air Lines.
Northwest's president and chief executive, Steven G. Rothmeier, said in an October interview that, if United's acquisition were approved, Northwest would "either have to retrench, withdraw, grow internally or merge to acquire that same mass."
He chose the final option, ending weeks of speculation in the industry about a merger partner. Rumors had identified as possible partners Washington-based USAir as well as two big southeastern carriers, Eastern and Delta.
Sen. David Durenberger (R-Minn.) learned about the agreement through a late-afternoon phone call from Rothmeier. On hearing the news, Durenberger jumped joyously out of his chair and said, "This is great for the Twin Cities." Hanging up the phone, he added, "As long as they keep their headquarters in Minneapolis."
Although Northwest and Republic are based in Minneapolis-St. Paul, the resemblance ends there. Northwest is primarily a long-haul, big-airplane operation flying transoceanic routes. Republic is almost exclusively a domestic airline featuring smaller planes and shorter routes. Thus, Northwest would acquire the type of fleet necessary to feed and protect its Pacific interests.
Republic is itself a child of deregulation. It was formed in 1979 as a merger between Southern and North Central, two regional carriers who took advantage of the easier merger rules provided by deregulation. In 1980, Republic acquired Hughes Airwest and over a few months became a major nationwide airline.
But Republic was unable to escape the economic problems that have plagued much of the industry. Stephen M. Wolf, Republic's president and chief executive, said yesterday that the merger with Northwest "addresses the needs of Republic's three constituencies -- shareholders, employes and customers." Wolf referred to 1984 agreements under which Republic's employes sacrificed considerable salary in exchange for stock and said, "The long-term personal security of our employes will be significantly enhanced by our association with Northwest."
Conversely, Northwest has remained financially strong. Even in the years of protective regulation, its management worked to keep costs under control and profits high. It consistently has kept its fleet young and Wall Street happy. Through the first nine months of last year, the airline reported net income of $75.1 million, an 11 percent drop from the same period a year earlier.
Republic has had an economic resurgence since it reached the employe agreements in 1984. Its net income through the first nine months was $163.8 million.
Northwest would not discuss how it plans to integrate Republic into its system. At the moment, there is considerable overlap. Both airlines have their major hubs in Minneapolis-St. Paul and strong secondary presences in Detroit. Northwest also is heavily represented in Seattle and Boston; Republic, in Memphis.
Yesterday, Rothmeier said, "It is our intent for the combined airline to utilize to the fullest extent possible these assets and employes to provide improved service to the traveling and shipping public."
Rothmeier added that the merger "will create an economic mass necessary to provide competitive service in this highly competitive industry."