Would a Northwest-Delta merger fly?

For years, airline CEOs have been saying there are too many airlines and consolidation is inevitable. But when Delta's Richard Anderson and Northwest's Doug Steenland once again made that observation, speculation about a merger of the two airlines spiked.

During a recent conference call with Wall Street analysts, Anderson said consolidation is a certainty.

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"All the major network carriers, are products of consolidation," said Anderson. "And we fully expect that this evolution toward a more consolidated industry will continue."

And then Steenland chimed in with his thoughts about airline mergers, addressing the issue at the start of a Northwest conference call with analysts last week.

"If it were possible to start with a clean slate today, one would likely conclude that six major domestic carriers are too many," he said.

Both Anderson and Steenland later downplayed their remarks.

But the fact Anderson was once Northwest's CEO and worked closely with Steenland has fueled the speculation about a Northwest-Delta merger. Both airlines are solidly profitable, thanks largely to deep pay and benefit cuts made in bankruptcy.

If it were possible to start with a clean slate today, one would likely conclude that six major domestic carriers are too many.

The two airlines also fit together nicely geographically. Jon Ash, president of InterVistas-GA2, a Washington-based consulting firm, notes there's not much overlap between the two carriers' route networks.

"Delta is very large in the southeast part of the country and they are very large on the Atlantic," says Ash. "And Northwest is very strong in the Upper Midwest and in the Pacific. There are a lot of synergies there."

Ash also expects federal antitrust regulators would more inclined to approve a Northwest-Delta union than a number of other possible airline combinations.

And for about four years, Delta and Northwest have had a partnership called a code-share agreement. They sell seats on each other's planes and integrate their frequent flier programs.

But Calyon Securities airline industry analyst Ray Neidl says the alliance doesn't mean much for a possible merger.

"Just a code-share, that's all it is," he says. "It has nothing to do with merger possibilities."

Neidl says the airline industry would benefit from mergers. But he doesn't see any happening soon.

Airline analyst Michael Boyd says a merger can be more trouble than it's worth, anyway.

"You got to put the airplanes together," he says. "The fleets are totally different. The labor groups are totally different. It can be a very tricky and messy situation."

Especially on the labor front, as airlines struggle to sort out issues such as seniority and differing wage scales. Not to mention job cuts, if they're part of a deal.

Many Northwest employees and customers still remember the service woes and labor strife that arose after Northwest merged with Republic back in 1986.

Boyd suggests Northwest would be better off forgetting about a merger. He says Northwest could help itself more by expanding its alliance with Delta, which also includes Continental Airlines.

"There you get the benefit of merger but none of the brain damage and the expense of a merger," says Boyd.

Northwest won't say how much revenue it gets out of its alliance with Delta. But when it was launched back in 2003, Northwest indicated the relationship could bring in as much as $200 million in revenue each year. In 2006, Northwest had $12.6 billion in revenue.

Boyd doesn't expect merger talk to die anytime soon, even if mergers aren't in the best interests of airlines. That's largely because many of the biggest holders of airline stocks these days are investors eager for quick profits. "Remember," says Boyd, "the people on Wall Street who push these things are the people who make the money on the deal." About half of Northwest's 20 largest shareholders are hedge funds or private equity firms. And both groups tend to want big profits pretty fast. Overall, they have about a 30 percent stake in the airline.

History suggests that airlines merge when at least one carrier is in dire financial straits. That's not the case now with Northwest or Delta. But the question hanging over the two airlines is: Will impatient investors force a merger?

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